US Tax on UK remortgage loan

Hello,

Hubby (USC) and I (UKC) will be relocating to the US with our UK-born toddler. Our plan was to either rent out our house, or sell our house and use part of the profit to buy a smaller rental property, and bank the rest to cover expenses etc relating to the move. We don't want to sell up completely, because the UK housing market is continuing to grow and should be a pretty lucrative investment.

HOWEVER.

I recently stumbled across a post on another forum, where the poster had been informed by their tax company that when their remortgage date rolls around, if they are able to arrange something from the US (which I understand to be difficult but not impossible), they will be liable to pay tax on the difference in loan value depending on the exchange rate. I.e. if they took out a £250k/$220k loan on the property, then when remortgaging, still had to borrow £250k but it only came out at $200k because of the fluctuating exchange rate, that would be seen as a $20k income, and they would be liable for the tax on it. This seems crazy to me, but several other posters corroborated the truth in this situation.

I have been trying to find out more about the specific situation but so far have come up blank. As far as we've been able to find out, property as an asset isn't required on the FBAR, PFIC or 1040 tax forms, so I'm baffled as to where it would even come up for you to file, for the IRS to claim tax against. Where would we need to tell them about the value of our loan? Since when is negative equity taxed, even a decrease in negative equity? Would the same apply for a remortgage with a different LTV% due to paying off more of the mortgage? Would we need to file it as a deductible line on the 1040? Confused!!

Any advice (even just the name of the form, so I have something more solid to look up!) would be so, so gratefully received. I'm incredibly concerned about inadvertently leaving this out and getting hit by a crazy tax bill that we don't have the money to pay, because the 'income' isn't real.

Thanks in advance,
Vicky

Never heard of this scenario. The (supposed) gain due to Fx fluctuations can occur when you sell a property, but you are not doing that.

Some tax-savvy person will no doubt jump in to clarify.

Hubby (USC) and I (UKC) will be relocating to the US with our UK-born toddler. Our plan was to either rent out our house, or sell our house and use part of the profit to buy a smaller rental property, and bank the rest to cover expenses etc relating to the move. We don't want to sell up completely, because the UK housing market is continuing to grow and should be a pretty lucrative investment.

The complication you are referencing (a gain on a foreign mortgage) does indeed exist: Section 988 foreign currency transactions on a foreign mortgage.

https://www.taxadvisorypartnership.com/blog/us-tax/foreign-mortgage-exchange-rate-gain/

Since your husband is a USC, any mortgage he becomes a party to might be subject to Section 988 rules - forever. If you become a US Person (subject to US tax rules), then you too might be subject to 988 during that period.

When foreign, personal residence property with a foreign mortgage is involved there are two separate parts to any sale. First, the capital gains on the property resulting from the sale, if applicable. This sale is subject to Section 121 rules. And second, any gains on repayment of the foreign mortgage (due to currency fluctuations) may be subject to tax, Section 988.

It's critical to understand the difference between the two, and at what point they may apply. Your decision as to how you proceed - sell personal residence A and purchase rental property B, or rent personal residence A whilst you are away for a limited period - have different outcomes. At this point, prior to the move, it may well be worth while to consult a qualified and knowledgeable (of 988 transactions) tax advisor.

 

 

I obviously didn't read the entire post correctly - blame that on a hot sleepless night :-).