Tax on international property sale

[pilgrim576]

Hi. Situation is the following: Husband is US Citizen, wife is duel, US & UK. Wife still owns a flat in UK that she rents out. Its in her name only. UK tax advisor saying that were she to sell today she would owe zero taxes on gain. Reason being she lived in it for many years and only when she moved to the US, did she take on a renter in the flat. So to UK tax authority, there is zero UK tax because her initial INTENT was just to live there herself--ie, not an investment property. The fact that it "converted" to an investment property later doesn't seem to bother them. She bought and lived in the flat for about 2.5yrs, '97 thru mid '99, when she moved to the US. They married 2001.


Now they are thinking of selling and bringing the money into the US and the basis is low so would be a sizeable gain.

I'm guessing US would tax this gain as global income, in spite of what UK tax says? Seems that if US wants to tax this as global capital gains they'd only do it from the time they were married and started filing jointly? So would have to figure what was the basis from 2001???

Any thoughts? Thanks

[erchess]

Tax Treaties

The US has Tax Treaties with most countries with which we have friendly relations, and that certainly includes the UK. So the first place to look is at the relevant treaties. But I think you are going to find that for Federal tax purposes the sale might as well have been in the US and that for State tax purposes it might as well have been in their state of residence at the time of the sale.

[pilgrim576]

Erchess, Thank you for replying. I figured that was the situation (property might as well be in the US).

Is there no "credit" given for period in which property was wifes primary residence?
It "converted" to an investment prop after she'd been living there for about 2.5yrs. Or, is the cost basis assumed from when she first moved in and not when it "converted"? So, her occupying it as her primary residence has zero bearing here? She might as well have been renting it out from day one, as far as cap gains are concerned?

[erchess]

Hi

I responded mainly to move your OP higher up on the list where more people would see it, hoping you would get a more informed response than I can give. I can only make two points.

1. I still think you need to check the tax treaties in your research software or with whatever service (maybe one provided by a professional association) you use. There could be something odd that matters and this is precisely the sort of information that your clients rightly expect you to check on because they are not able to do so conveniently.

2. If there is nothing in the tax treaties to change things, then I believe the normal US Sale of Home Rules would apply and you can find those in TTB as easily as I can. I think the bottom line is that she could claim at least a partial exclusion but I haven't had a client who sold a residence since 2000 and this is the sort of thing I have to look up anew every time it happens to me.

[ED SMITH]

What have they

been doing since 99. Have they been reporting the rental income and taking depreciation?

[pilgrim576]

Yes, they have, but only on her UK tax, her as individual. So, US returns, jointly since '01, will have to be amended to incorporate the UK property...however, because of expenses and depreciation, the rental income is offset every year in the UK, so effect on amended US returns deminimus...its the big gain on the contemplated sale that concerns them more. Given they want the money back in the US and 1031 cross border not allowed, they will as I see it have to pay cap gains as well as state tax