US Tax Spotlight

What are the US Tax implications for US Citizens selling their main residence?

Nicola Dunn, Senior Tax Advisor & Resident US/UK Tax Specialist at LK & Associates, outlines one of the main issues faced by US citizens where the US and UK tax treatment do not align.

Case study – Chuck

Chuck moved to the UK from Boston in 1996 with his investment bank employer. He was only intending to stay for two years but found he loved living here and decided to stay longer. He married a British woman and bought a house in Oxshott in October 2000 for £580,000.

Chuck would now like to sell the house and buy a new one with a bigger garden in preparation for him winding down at work and having more free time. His house is now worth £1.6m. He understands that the gain is tax- free in the UK as it has always been his main residence, but he asked us for advice about the US tax implications.

Calculation of US tax

In the US only the first $250,000 of gain on the sale of your main residence is tax-free. Based on the above facts, the US tax due could be in excess of $235,000 at 23.8% including the Net Investment Income Tax.

What can Chuck do about this tax?

There are some planning options available to Chuck. He could reduce or eliminate the tax by gifting half or all the property into his wife’s name, using his US Gift Tax Exemption as she is outside the US tax net, if they have not previously elected to file jointly.

Chuck might also consider giving up his US citizenship in conjunction with gifting. This would keep any future gains outside if the tax net; however, there is an exit tax for US citizens expatriating when their net worth is more than $2m. Legal/ immigration advice should be taken when considering these options, as well as tax advice.

Other property related traps

If there is a non-US$ mortgage on a property held by a US citizen, there can be tax implications when paying down or redeeming the loan. Any exchange rate gain on the repayment should be calculated and is taxable on the US return. As sterling has weakened against the dollar recently, this means on repayment of a mortgage, the dollar amount of the loan may be smaller than when originally taken out, leading to an exchange rate gain. This may seem unreasonable but is the way that the US tax rules work.

HOW WE CAN HELP

At LK & Associates we understand the complex interaction between the US and UK tax systems so that your worldwide position is optimised, and you will not pay more tax than you need to. Based in Thames Ditton, our highly qualified and experienced advisors prepare US and UK tax returns in the same team so you can be sure everything has been considered. We pride ourselves on the personal, cost-effective service we can offer you as a small, local firm.

Call us now on 020 3915 8585 to discuss how we can help you.