American Expats in the UK and Sec. 988 Gains and Losses Due to Brexit
It was a little over a year ago when the shocking Brexit outcome was decided and the UK began the planning process of exiting the European Union. Since then, attempting to understand the full impact of such a move has been tricky, as best. An immediate result of the decision was the British Pound (GBP) falling to its lowest value in 30 years – which can impact American expats in the UK.
GBP Decrease to US Dollar Increase
A big impact of the Brexit decision was the dramatic decrease in GBP valuation – which in turn caused the US dollar to appreciate in value. This has the potential to lead to big tax consequences for American expats in the UK, especially for those who have acquired property abroad.
Impact of Selling a Home
For American expats in the UK, selling domestic or foreign property triggers a reporting requirement on US taxes, since worldwide income must be reported. There are two sections that address foreign exchange gains and losses – Sec. 988 and 1256. Trades taxed under Sec. 988 are to be taxed at ordinary income, no matter whether the trade resulted in a gain or loss.
Because of the volatility of the GBP due to Brexit, Americans in the UK who are considered selling their foreign property may face an economic loss on the property that is not deductible – however, may find that they are required to pay US tax on the foreign currency gain related to the payoff of the foreign mortgage.
Impact of Renting a Home
Americans working overseas will also find that foreign rental property income must be reported the same as domestic properties – reflected on Schedule E and taxed at ordinary rates. You can claim the same type of expenses (utilities, mortgage interest, management fees, etc.) as you would for domestic properties, and you can claim taxes paid to a foreign country as a foreign tax credit on Passive Form 1116.
It’s important to note, though, that foreign residential rental properties will be depreciated over the course of 40 years rather than the 27.5 years allocated to domestic properties. When you choose to sell your foreign rental property, you must report the gain or loss on your US Tax Return.
- Property held for more than a year? It will be taxed at long-term capital gain rates.
- Property held for less than a year? It will be taxed at short-term (ordinary) rates.
Impact on the Sale of Foreign Securities
The sale of securities – whether foreign or domestic – is governed by the Securities and Exchange Commission (SEC). While it is difficult to directly purchase stock in foreign corporations, if done successfully, the income resulting from such ownership will be treated in the same manner as ownership in domestic corporations. This means that dividends will be reported on Schedule B and taxed at the applicable rate, and sales of foreign stock will be reported on Schedule D and taxed at long-term or short-term rates (depending on how long the stock was held). Any foreign tax credit attributable to the foreign corporation will be claimed on Passive Form 1116.
As you can imagine, economic events (such as Brexit) that occur outside the US have the potential to cause a significant impact when it comes to gains or losses reported on US expat taxes. For American expats in the UK, it’s a good idea to consult with an expat tax professional to discuss your situation before making a decision to sell foreign property or securities to ensure you take the necessary steps to minimize the consequences.
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