Issues to be aware of when buying property

Hi all,

I am a dual UK/US citizen living and working in the UK with a British wife, who is off the US system - I file separately.

I am now thinking about buying a flat in the UK. I am a first time buyer and would be taking a mortgage.

Are there any tax implications from a US perspective to be aware of? We are not sure yet if the property+mortgage would be in joint names or in my name only. Does anyone have recent (ie post FACTA) information on implications for getting a UK mortgage as a US citizen?

If I was to receive help from my parents for a deposit, what would the implications be of that? I guess it would be subject to gift tax unless they formally (ie with paperwork) obtained an interest in the property? I have one US parent and one non-US parent - does that make any difference (or would gift tax be payable regardless of who it comes from).

Would it be better to give up citizenship before attempting to get on the housing ladder in the UK? This is something I would very much prefer not to do, but at the same time I have to be able to get on with my life!

Thanks for any help!

Would it be possible for your wife to be the owner of the flat, not you? That would save you having to pay capital gains tax to the US when it comes time to sell it.

Would it be possible for your wife to be the owner of the flat, not you? That would save you having to pay capital gains tax to the US when it comes time to sell it.

She doesn't have a regular income at the moment so I think it would be difficult - the mortgage would be based on my income alone so I think they would require me being the owner.

In that case you are opening yourself up for considerable heartache further down the road when you come to sell it. I would not advise anyone with US citizenship to buy a home or flat in the UK to use as their primary residence, unless you don't mind paying capital gains. I would recommend you at least put it in both your names. But I am no expert.

If the house is the primary residence there should only be exposure to capital gains (unless the $ value of the house exceeds IRS limits).

In that case you are opening yourself up for considerable heartache further down the road when you come to sell it. I would not advise anyone with US citizenship to buy a home or flat in the UK to use as their primary residence, unless you don't mind paying capital gains. I would recommend you at least put it in both your names. But I am no expert.

Thanks - that is the sort of information I was after. But what is the alternative? We would put it in both our names if possible based on the mortgage provider.
Of course I would prefer not to pay capital gains, but is that really a reason to avoid property ownership? (considering the sort of apartments we are looking at are around £100 a month more to rent at the moment than mortgage + maintenance fees)

You are only taxed on the gains right? So surely it is still preferable to be paying down a mortgage than paying rent so one day you can end up owning it.

Also I thought there was some primary residence exemption:

Under 26 U.S.C. §121[25] an individual can exclude, from his or her gross income, up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. T

so given that we would be looking at a relatively modest property and would plan to live in it at least two years, I thought this wasn't too bad. I guess maybe in 10-20 years it could possibly start to reach that threshold, but presumably by then the limit would also be increased. This gave me the impression that someone with modest income levels living in a normal property (outside london) maybe didn't have so much to worry about?

Capital gains would only be payable on selling the property right? Or would any increase in value be taxable every year?

Yes, capital gains tax is due only when selling the property.

And you've convinced me with your other reasoning. I was imagining a more expensive property and it being held for a longer time. House prices in London are said to double every 12 years - so just be careful!

There are no immediate consequences for the USC in buying a home in the UK. If you are in a position, in the UK, similar to a position in the US where you would purchase a property, then there are no reasons not to buy in the UK from a practical point of view.

Having said that, there are any number of issues that will arise which need consideration.

Are you sure you will be staying in the UK for the foreseeable future? Selling the home in a state of needing to offload it quickly in order to move back to the US (or another country) can create an uncomfortable situation. No surprises there. Owning a home can be a burden anywhere given difficult situations, like the loss of employment. No difference if in the US or the UK; but selling a UK home from the US or elsewhere is a challenge (but not insurmountable).

There are two types of ownership in the UK - Joint Tenants or Tenants in Common. There may be US tax consequences and US inheritance consequences depending on the type of ownership. You need to investigate those consequences.

https://www.gov.uk/joint-property-ownership

Since all USCs are treated as if they are resident in the US, the US treatment of gains, deductible expenses, and periods required for living in the home (occupation) apply for US tax purposes.

http://www.irs.gov/pub/irs-pdf/p523.pdf

You also need to be aware of the consequences of having a foreign mortgage. There are rules pertaining to foreign financial gains made on repaying the mortgage. You will need to be aware of this. A competent, UK/US conservative tax advisor will want to calculate this. You have a 50/50 chance of making a gain depending on exchange rates. Currently, the IRS may not be overly concerned about this (IMHO - and I may be wrong), but it is the law according to the tax code. Proceed with caution (and awareness of the situation). If the current war waged on US expats by Congress/IRS continues, it could become a very important issue (or IS an important issue, depending on your point of view).

As for the UK, there are two tax consequences. You are responsible for local Council Tax, and you will be responsible for Stamp Duty, depending on the price of the property.

https://www.gov.uk/stamp-duty-land-tax-rates

An additional UK tax possibility will again relate to your occupation (or length of) of the property. There are, at present, no capital gains due on a property you sell if you meet the occupation period requirements, IE it's your main home.

http://www.hmrc.gov.uk/cgt/property/basics.htm

The last difficulty you need to be aware of (which is very different to the US) when purchasing a property in England is the right of the seller to back out of the deal at the last minute, with no adverse consequences. You will learn the meaning of "chains". You make an offer on a property; you sign an intention to buy it; the realtor may ask for a minimal deposit; you have a full survey done on the property; you enrol the services of a solicitor; if you own a property, you may have agreed to sell it to a potential buyer; you pack all your belongings; and a week before completion (the exchange of contracts between your and the sellers solicitors) the seller decides they don't want to sell the property. Tough luck. You then have the pleasure of informing the purchaser of your property that you have decided not to sell. Their tough luck. The "chain" collapses.

In Scotland, the situation is much more similar to the US (you make an offer, you sign an intent, pay some money, and basically you've bought the home and the seller has sold the home).

I'm sure it's possible I may have some of these points wrong, and it's quite possible others will be along to correct or disagree with me (especially concerning the gain on the mortgage), or make additions.



 

 





 

In relation to my previous post, we should also look at what could be disadvantages to buying a home outside of the US for a USC. There are 4 issues worth considering.

1) The average price of all homes sold in all of the UK according to the latest statistics is £187,188 (or $303,188 @ 1:1.62). The average price includes new builds as well as existing homes.

The average price of all homes sold in all of the US according to the latest statistics is $175,000.

2) The capricious exchange rate comes into play. If one purchases a home when the rate is 1:1.10, and sells the home when the rate is 1:1.90, there is a very likely possibility the taxpayer will have a substantial 'phantom gain' in terms of a US tax obligation.

Of course, the converse may be true (little chance of a gain) if the exchange rate at time purchase and sale are exactly the opposite to the above example.

3) The current tax free (exclusions) of $250,000 and $500,000 were established in 1997(?). They have not changed since, and with the current average value of homes in the US, they are unlikely to change in the foreseeable future.

Therefore, when purchasing a home outside of the US, and based on the rule that all USCs are treated as if they were residents of the US (CBT), one always faces the possibility that a swing in exchange rates over a given period of time WILL have adverse US tax consequences. Then again, they may not. Since the USC expat has no control over future exchange rates, one must ask the question "Are you feeling lucky"?

Or perhaps it's better to just get on with one's life and damn the US taxes and exchange rates over which you have no control. This is where the variations of ownership, or having an NRA spouse own the home solely come into play. But, that can be a gamble also.

4) And the 4th, inheritance in both the US and UK may come into play, along with an issue arising if the USC should ever want to renounce US citizenship (the exit tax).   

If buying a home is the right thing for you right now.......then do it. You should consider taxes, but don't let them rule your life.

There are no immediate US tax concerns. When you sell you'll have to take capital gains and exchange rate gains/losses into consideration, but as long as you are selling your primary residence you'll get a big fat capital gains exclusion.

So go ahead and life your life.

If buying a home is the right thing for you right now.......then do it. You should consider taxes, but don't let them rule your life.

There are no immediate US tax concerns. When you sell you'll have to take capital gains and exchange rate gains/losses into consideration, but as long as you are selling your primary residence you'll get a big fat capital gains exclusion.

So go ahead and life your life.

This.   

one must ask the question "Are you feeling lucky"? 

the crux

There's only one way to start in the property market, get on board the housing ladder and build equity, and that is to buy a property. One can never have any influence on the economy, or indeed exchange rates. But, whether in the UK or the US, even in the safest of times, there is always a degree of gambling involved.

By all means, do your homework, but if you never start you will never reap the rewards.

Great comments above.

You can take itemized deductions on your US tax return for mortgage interest and council tax, although the way the deduction is calculated, you may not get much benefit.

You can add the costs of Stamp Duty Land Tax and most home improvements to the purchase price of the property for capital gains purposes, reducing your gain when you sell.

Thanks for all the replies - lots of useful information!

I hadn't thought at all about the exchange rate issue... thats really annoying but good to have it in mind.

Does anyone have any information about the issue of receiving support from parents for some of the deposit? Is it liable for gift tax - would there be any exemptions or any workarounds for the case of property?