rental property losses/us-uk taxes

This isn't very complicated... 

 I am a US citizen, never lived abroad. Unmarried partner is Canadian citizen who has worked in the US for the last several years and is a UK citizen. We are moving together from the US to the UK.

We own property together in the US which will be let out; the depreciation combined with the mortgage and the taxes results in a net loss for us, which we can deduct against our other earned income (each of our salaries respectively). This makes a huge difference to us, as otherwise we would be significantly cash-flow negative each month on the rental property.

So here's the question: we both move to the UK. How is that loss treated? Do we lose the value of it since we have no other US income to offset it against? I hope that makes sense...

Say for example, we have a $2000 mortgage and $400 in RE taxes each month and $200 in other expenses, for a total expense of $2600 per month. We only rent it for $2000, resulting in a loss of $600/month or $7200/year. We can also take a depreciation of the improvement (house) at $12,000 per year, resulting in a net writeoff of $19,200 per year (or $1600/month). Currently, if we were in the 30% tax bracket in the US, we'd be able to realize a tax savings of $480 a month by adjusting our witholding appropriately. (Thus making our effective cash flow only negative by $120). But what happens to that loss when we move to the UK and have no other US income? Do we lose that?

-B

I believe that the US rental income is going to considered "foreign income."  I think you can only offset losses in one category with gains from the same category, so you would need some other type of foreign income.  If it is not considered foreign income and just plain old rental income (Sch A), you still can only offset losses with Sch A gains.  Also, something important to note, in the UK, you don't get a deduction for depreciation. 

Hi Baylor

During the years that you will be in the UK, your earnings will be foreign source and subjet to foreign earned income exclusion of $80,000 per year (per person). Therefore if you have no US source income to offset against your rental losses, these losses get carried over to future years until utilised against future year rental income or other US source income. Alternatively, these losses are released in the year of the sale and utilised againt your gain.

I hope this answers your question.

Helen

p.s. Sara Smile - US rental income is never considered "Foreign income"!!! Also rental income and expenses are reported on Sch E.

Brilliant, thanks Helen!

Sara, thanks too for the help. I'm a bit confused as to your response re: Sch E losses vs. Sch E gains... the net loss/gain from the Sch E is added to/subtracted from your AGI? Perhaps I confused it by using the word "offset".

Another couple of related questions... since my partner is not a US national/green card holder, he isn't required to file US returns, but I am. Can we sort it out so that everything goes on my return, as long as we don't double-dip, etc? Also, if we had a third business partner as part of the enterprise (on the deed of trust and the mortgage), could he just take all the income/loss on his taxes (as he'll have other US income and could use the benefit)?

Finally, how much and how long could we carryover the losses? Is it all the loss we can carryover from year to year? And is there a time limit?

Thanks so much.
-gabe