What Taxes Do Americans Owe on Their U.K. Rental Income?

Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.

Q. I live in New York and I have rental properties in London. Do I owe any U.S. taxes on my foreign rentals?

A. U.S. citizens and residents are required to report all worldwide income for taxation, which means income earned abroad, like foreign rentals, gains from the sales of properties and distributions received from the property are subject to being taxed, said Mike Kosnitzky, a partner at Pillsbury Winthrop Shaw Pittman in New York.

If someone primarily lives in New York but has rental properties in London, they also owe U.K. taxes (not to mention state tax on top of U.S. federal taxes). But the U.S. has a treaty with the U.K. that allows U.S. residents to claim a tax credit, to avoid paying taxes twice, said Mr. Kosnitzky, who also co-leads his firm’s private wealth practice.

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“You have to structure things properly in order to make sure that you can take advantage of the foreign tax credit for taxes in the U.K., so that you don’t double pay,” he said.

Most high-net-worth individuals don’t own real estate directly but through a type of company—such as an LLC—that works best for their particular circumstances. U.K. corporations are subject to a lower tax rate than individuals—19% for corporations compared to a max of 45% for individuals—which is creditable in the U.S., Mr. Kosnitzky said.

But there are other taxes to take into account. If there are mortgages on the property, there are special U.S. tax rules that come into play when the property is sold if the debt is denominated in foreign currency called a foreign mortgage gain.

“Any foreign currency transaction is treated as if you traded a currency,” Mr. Kosnitzky said. “That’s usually another little quirk.”

And in the U.K., there is a stamp duty land tax, which is a progressive tax on the purchase of U.K. properties. There’s no such tax on properties less than £125,000 and reaches a max of 12% for properties £1.5 million and over.

And this tax has its own particular wrinkle for U.S. residents.

“It’s not based upon income, so you don’t get a foreign tax credit for that,” Mr. Kosnitzky said.

Email your questions to editors@mansionglobal.com. Check for answers weekly at mansionglobal.com.

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