Exchange rate to use for UK house sale

Hey guys,

I sold a house in UK in which I have not lived for more than 5 years. I understand I need to recapture depreciation, and pay capital gains on the profit.

What exchange rate do I use? I assume the depreciation recapture will be the actual $ amount I used on previous years taxes - but what about the sale price? What rate do I use to convert that to $. Average for the year, end of year, date sold?

Is this (the rate used) declared anywhere? I know for the FBAR, 8893 etc. I use the official end of year rate. By the way - when are these rates typically published? My sale took place in 2016.

Thanks

A

Great set of questions; can you ask your accountant and let us know what he or she thinks are the answers, as it would be useful to know. Presumably you are paying the CGT to HMRC by 31 December 2016.

Hi again,

Not UK tax resident long before the house sold, so no UK CGT. It just needed reporting, apparently, and I was late doing that so paid a small penalty.

If I can choose the exchange rate I will use end of year or average as pound plummeted as we all know following Brexit (and my house sale) - meaning much higher $ (1.5 to pound or so) when actually sold versus now  (1.25) or so.

A

Hi again,

Not UK tax resident long before the house sold, so no UK CGT. It just needed reporting, apparently, and I was late doing that so paid a small penalty.

If I can choose the exchange rate I will use end of year or average as pound plummeted as we all know following Brexit (and my house sale) - meaning much higher $ (1.5 to pound or so) when actually sold versus now  (1.25) or so.

A

That's a mystery. The UK charges CGT on gains on sales of residential property for both UK residents & non-residents. Which exemptions are you using in the UK?  What does your accountant say you should use for US tax? Was it a QBU, for example?

That's a good question. I don't have my correspondence with my UK accountant handy, but I believe that this rule of paying CGT for non-UK residents only came into place in April 2015, and one pays UK CGT on gains since April 2015 only. I can show a valuation of the property from before April 2015 which was actually higher than I eventually sold it for in 2016. I should have reported this within 30 days of the sale, apparently. I didn't, and was charged a small penalty for not doing so.

In the US it's another story, of course. I have a ton of depreciation to recapture at 25%, I believe, and CGT probably of 20% + 3.5% "Obamacare" tax.

Of course I might have this all wrong, but that's my understanding.

What exchange rate do I use?

Use the date of sale rate.

Unless the rental was a QBU.

If I argue it was a QBU - and how would I make that determination (of course I kept separate accounts…) - would I use the average rate for the year on sale? Depreciation of course and coast basis already in US$ as it was depreciated for 5 years.

Thanks

A

I think you would use the average rate for the year until your QBU terminated, and then you would compute the QBU 987 gain or loss on the distribution(s) out of the QBU.  New 987 regulations just came.  They are a few hundred pages long.  Good luck.

Life is too short for all this. 100s of pages....!  I'll make a decision on the rate, pay the small fortune I owe them (c$80K) and if I get audited I'll tell them what rate I used. If I get it wrong I will pay either more or less....

Thanks anyway

A

Life is too short for all this. 100s of pages....!  I'll make a decision on the rate, pay the small fortune I owe them (c$80K) and if I get audited I'll tell them what rate I used. If I get it wrong I will pay either more or less....

Thanks anyway

A

Which basket is the gain in? Are you using all of your excess FTC in that basket from the past 10 years?

The rate is complex question; it requires a good adviser (who would charge you a lot less than USD80,000) to get the optimum result.

Guya,

Can I find my excess FTC in a cumulative value on a recent tax returns? Or do I have to go back through each return individually? There's depreciation recapture of about $170K - rest is profit on sale. I'm assuming it's the profit based on the purchase price not the price when I put it into service (I lived in its long time before putting it into service) but not any of the 5 years before sale so don't get the 250K exclusion.

I have unused depreciation carried forward of about 10K. This $80K bill was a rough calculation done by a CPA assuming 20% CGT (plus 3.5% I assume), and my same income as last year. It's in my interest to use the average or end of year exchange rate as a pound now is about $1.26 - whereas more like $1.5 on date of sale.

Thanks

A

What substantial authority are you relying on for your choice of exchange rate?

I'm not….just messages I have seen here and an old accountant who said to use the date of sale. MInd you the old accountant did;t tell me about FBAR, FATCA, or 5471s so I take his opinion with a grain of salt...

This one:

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

while not specifically mentioning real estate transactions seems to imply to use the average rate. It also says this:

<<The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.>>
I will be using end or year rates for FBAR, 8893, maybe I could argue that using the end of year rate will be consistent?!!

This:

https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

says

<<Use the exchange rate prevailing when you receive, pay, or accrue the item. >>

What about when I sell it?!

I read another thread which was RE an English couple selling a house in UK and they went as far as a court case to decide the rate to use. It seemed pretty clear to use the rate at the date of purchase and the date of sale.

I'd rather be consistent and use the end of year rate for the sale. Take that position and if I am audited and it was wrong say sorry and pay them more…


A

Preparing a return without substantial authority carries the significant possibility of negligence penalties. While IRS commentary is not law; the view of the IRS expressed here is rather different than yours and I think a more accurate interpretation of US law: https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates