sale of US house and capital gains tax

Question for you:

We are renting out our house while we are here in the UK. Is there any point in selling it? If we are in the UK for 5 years?

Right now we are renting the house out and using a property manager and breaking even on the house, although we are taxed on the rental income.

My understanding is that if we sell the house, we must pay a capital gains tax on the house to both the fed and state.

But what if we bring that money over to the UK to buy a UK house? Would we be taxed yet again on that money?

We haven't made any move to sell in the US as we want to first research these matters to see what advantage there would be to selling in the US.

My initial thought is that there is zero incentive for us to sell our house in the USA if we plan to return to the USA after 10 years.

Also, my-in-laws told me that the gov gives a one time exemption on the capital gains tax-- that we don't have to pay the tax once - is this true?

Before you do anything drastic, talk to a mortgage broker and see what your options are in the UK.  If you don't have Indefinite Leave to Remain, you may find you are unable to get a UK mortgage.

That is correct that there is an exclusion from capital gains when selling your personal residence (250K for a single filer and 500K for married joint filers). However, in order to qualify for that exclusion, you must have lived in the home for at least the last two out of five years. As such, depending on how long you have lived in the UK, you may no longer qualify for the gain exclusion.

This article provides even more details: http://www.greenbacktaxservices.com/blog/overseas-tax-return-capital-gains/

Hope this helps!

Your question is well worded; US focused tax advice will be of no assistance to you at all unless you also consider the UK position.

To figure out the UK position you'd need to look for PPR relief based on time occupied as your PPR plus any periods of deemed occupation.

I believe the rule for capital gains tax exclusion for primary residence is that you have to have lived in the house for at least 2 of the 5 years prior to the sale of the house - but not necessarily the LAST two of those 5 years. The two years don't even have to be consecutive. This is something that's keeping me awake at night as my US home still hasn't sold, and I will have been in the UK for 2 years this summer - damn the sluggish housing market where I used to live!!

http://www.irs.gov/taxtopics/tc701.html (ftp://http://www.irs.gov/taxtopics/tc701.html)

If this isn't correct, could someone please post a link to an IRS article citing the "last two years" requirement?

That is correct that there is an exclusion from capital gains when selling your personal residence (250K for a single filer and 500K for married joint filers). However, in order to qualify for that exclusion, you must have lived in the home for at least the last two out of five years. As such, depending on how long you have lived in the UK, you may no longer qualify for the gain exclusion.

Hope this helps!

This comment contains an incorrect but common misconception, as the rule remains two out of the past five years. The UK rule is actual occupation plus deemed occupation periods make the gain exempt.

Thanks everyone. This is really helpful.

Okay, if it is the case that we must have lived in the house as our primary residence in 2 of the last 5 years, then I think we qualify. Based on Alitaly's post, I understand that the clocking of time is from the date the house is sold.

Guya, I didn't understand your post about the UK tax law: Are you referring to the sale of the USA house and Whether or not these funds would be taxed in England as capital gains? I would be interested in knowing what is meant by deemed occupation.

My sense is that we may not want to be encumbered by owning a house in the UK and 'moving' large sums of money between the US and the UK. So we are not necessarily interested in buying a house in the UK.

Is there any way to avoid being taxed on this money in the UK? Is it best to rent here in the UK, and to just keep the money from the sale of the US house in a tax-deferred shelter until we return? We hope to return to the US in 6-10 years and would like to use the money for a down payment on a house in the USA.

Thanks in advance.

Are you paying UK tax on the arising basis or the remittance basis?

Hi Guya,
We haven't filed any taxes yet in the UK. We only have taxes deducted from our pay. (PAYE).
How would I determine whether we pay arising or remittance based taxes?

Because you have relevant foreign income you need to register for self-assessment with HMRC and decide this as part of the process of filing your 2013/UK tax return.

at least the last two out of five years.

Yes, sorry about that typo.... As the article details, it is any any two years out of the last five.

I will confess to being confused about arising basis and remittance basis, so please forgive my ignorance on that matter as I ask this question.   

We will be moving to the UK this summer or fall (depending on when the Tier 2 visa for my spouse comes through).   We hope to sell our house here and buy a house there, which I understand is doable if you can put down at least 40% on a mortgage.   

Once we are in the UK all of our income will be from UK sources (my spouse from a salary and me from online self-employment which I intend to report to HRMC and pay tax on).   

If our house in the US doesn't sell before we move, and the proceeds are transferred to the UK subsequently (but within a couple of months of the move), will we be liable for UK tax on the funds transfer?   I can't seem to get my head around that issue.

As always, thanks in advance for any guidance on this.

I have since learned that our house is not going to be a capital gains situation for us, since it hasn't appreciated more than what we paid the renovations since our purchase of it less than 10 years ago.

So, we won't have a capital gain problem at all, but, as the last poster, agiliteve, queried, would we need to pay taxes on the money from the sale of the house here in the UK?

 

Hello!  Your question caught my eye as we are planning on moving in December.  Have you moved, yet?  What did you decide on your US house.  Were you able to get a UK mortgage?  What bank are you using or tax planner?  I don't know where to start   I wish someone had a step by step blog or moving to UK for Dummies book that I could study!

Kind regards,
Kim

Good topic.  I'm going to have a capital gains prob. when the time comes as I "bought" our house from my mother for $1 when she was in the nursing home.  The lawyer advised that would be safer as I was living in it at the time.