Does income and mortgage interest on UK real estate count on income taxes for a US citizen living in the US?
I just moved back to the US after being in the UK for 10 years. I still own a home in the UK which is now being rented out. I just bought a home in the US, so now have two mortgages. (This was NOT the original plan) I have some dollars that I'd like to pay down some of this debt, but I'm not sure which mortgage is best to reduce. Is my rental income in the UK going to be taxable in the US (or UK?). Likewise, is the UK mortgage interest deductible in the US? Where should I put my extra funds?
Public Comments
- As a US tax resident, you are subject to tax on worldwide income. So the rental income you are receiving on your house in the UK is subject to tax here in the US. However, the mortgage interest you are paying on that house in the UK is deductible against the rental income you received. You can also claim a depreciation deduction on the home over a useful life of 27.5 years. Any furniture or appliances that you have left in the home and are being used by your tenants can be depreciated over a 7 year life. The biggest problem in dealing with foreign mortgages is the exchange rate. Say for example you have a 50,000 pound sterling mortgage on the property. The mortgage is an interest only loan so you are only paying the interest on the mortgage and the principal balance remains at 50k. Assume the exchange rate at the time you took the mortgage out was 2, so the USD equivalent on that mortgage was USD 100,000. Now assume that you won the lottery tomorrow and decided to pay off the mortgage. However, because the value of the British pound has fallen, assume that the exchange rate on the date you paid off the mortgage was 1.5, so the USD equivalent was USD 75,000. You have just realized a USD 25,000 foreign exchange gain and that gain is taxable to you in the year that you paid off the mortgage. Also, if the foreign exchange rate swung the other way and it cost you more USD to pay off the mortgage, then that is a foreign exchange loss and that loss is a nondeductible personal loss.
