What taxes do Americans owe on their rental income in the UK?

Every week, Mansion Global asks a tax question to an estate tax attorney. Here is this week’s question.

Q: I live in New York and have rental properties in London. Do I owe any US taxes on my foreign rents?

Citizens and residents of Australia are required to report all income worldwide for tax, which means that income earned abroad, such as foreign rents, gains from property sales and distributions received from property are subject to tax, said Mike Kosnitsky, partner at Pillsbury Winthrop Shaw Pittman. in New York.

If someone lives in the first place New York But they have properties to rent in London, and they also owe UK taxes (not to mention state tax on US federal taxes). But Kuznetsky, who also co-led his company’s private wealth practices, said the US has a treaty with the UK that allows US residents to claim a tax credit, to avoid paying taxes twice.

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He said: “You have to organize things properly in order to make sure that you can take advantage of the foreign tax credit for taxes in the UK, so that you do not double repayment.”

Most high net worth individuals do not own real estate directly but through some type of corporation – such as an LLC – that works best for their particular circumstances. UK businesses are subject to a lower tax rate than individuals – 19% for companies compared to a maximum of 45% for individuals – which is trustworthy in the US, Mr Kosnitzky said.

But there are other taxes to consider. If there is a mortgage on the property, there are special US tax rules that go into effect when the property is sold if the debt is denominated in a foreign currency called foreign mortgage gain.

“Any foreign currency transaction is treated as if you were trading a currency,” said Mr. Kosnitzky. “This is usually another strange thing.”

And in the UK, there is a land stamp tax, which is a progressive tax on the purchase of property in the UK. There is no such tax for properties of less than £125,000 and up to a maximum of 12% for properties of £1.5 million and above.

This tax has its own wrinkle for US residents.

“It doesn’t depend on income, so you don’t get foreign tax credit for that,” Kosnitsky said.

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