# US Expat Abroad - Selling a Hous



## Stuart1111

I am all in order with all my US tax stuff, and I want to keep it that way, but I don't know how the following works.

A few years ago, I bought a house with my partner. We are now getting divorced and my partner is going to buy me out.

1. Because I am being bought out and it will take a while to find somewhere new, I will have the buy out payment sitting...somewhere. I am concerned about having a significant amount of cash - which would not normally be reported because it was part of a house - having to be reported in an FBAR. I think even FACTA might be triggered. I am worried of any consequences from this, since this money was never sitting in an account before. Is there anything I can do to avoid this or make it easier on myself?

2. I am not sure how to report this house sale and how this will all work. Do I need to do anything? The market around here has effectively crashed. We both pumped in loads of money in terms of getting extra land, making mortgage overpayments, etc., so I am just about breaking even if I compare what I am getting out vs what I put in for the down payment + mortgage overpayments + land we bought this year. If I factor in monthly mortgage payments, I am making a loss. Purely on paper however, the house is being sold at a valuation of 20k above what we paid (obviously with only half being actually sold) - but it is a loss given the renovations and added land. Obviously I don't know how exchange rates will factor into this either. 

I have never previously reported anything house related as I never had taxes that I needed to offset with mortgage payments or any of that sort of thing.

Any advice or tips on how to do this without creating any sort of issue (and more importantly, any sort of tax liability on a house I am losing money on)?

I don't know if the fact I am being bought out vs selling on the market impacts on anything either.

Thank you!


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## Moulard

Pub 504 covers the transfer of property as a result of divorce or separation. 
https://www.irs.gov/pub/irs-pdf/p504.pdf


I wouldn't be too worried about suddenly reporting large balances on FBAR and 8938 as the result of the sale will trigger any closer inspection of your return.


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## Bevdeforges

OK, it's not as daunting as you may think. LOTS of people wind up having a big chunk of money sitting in a bank account after selling a house. If it's in a "foreign" (i.e. non-US) bank account, just report it on your FBAR. It really shouldn't trigger anything.

You may want to take a look at IRS publication 523 on the sale of a principal residence. (In addition to the pub 504 already recommended.) If you have pumped money into the house for renovations, etc., it's very likely that those can be added to the "basis" cost of the house and will reduce your eventual gain. 

Then, don't forget that you have a $250,000 exemption on the gain from a personal residence. (Twice that if you're married, but in this case I think the single exemption is going to apply.) So the 20K gain you're talking about should negate any tax event. Check pub 523, but last I knew, if the sale of your personal residence doesn't generate taxable income, you may not even have to bother reporting it. (That's how it was a few years back - and I don't believe things have changed, but best to be certain.)

The threshold for FATCA for someone living overseas is $200,000 (i.e. not the $50,000 for US residents), so you may well not have to file an 8938, either. Even if you do hit the threshold, the cash sitting in a bank just requires a simple entry - to indicate the amount, plus if there is any interest from the bank account, indicating that you included that amount when reporting your bank interest. If you're not receiving interest on your stash, then just enter N/A and be done with it.
Cheers,
Bev


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## JustLurking

As for how currency effects come into all of this, the ever-reliable Phil Hodgen has an article on the topic here.

In summary, it is (of course!) not as simple as computing your gain in GBP and then converting that gain figure to USD. You have to factor in the exchange rate when you purchased as well as the exchange rate when you sell. If currencies move against you while you own the house you can make a GBP loss that nevertheless becomes a taxable USD gain. Any foreign mortgage repayment is treated as a taxable short-term currency trade.


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## Stuart1111

Right, this all makes sense, but the two parts of the currency exchange stuff as detailed in that article confuses me a bit.

Half the mortgage when I took it out converts to 165,708 USD. I have just used the exchange of the day.

Half the mortgage that is left at today's exchange (obviously it will depend on when it officially becomes my partner's) is 72394 USD.

93000 USD or so then is the cash amount I am getting in the bank when this is done - about 10k more in USD terms than I am actually getting, but no big deal. 

However - I put in about 50500 USD as a deposit, and then maybe a year later 12,720, and this year 18,300 USD. I would need to check the exact amounts and the dates, but this gives about 81,520 USD in cash payments. This is NOT counting the monthly mortgage payments over the past 6 years during my ownership of the house.

1. In terms of the house sale itself, do I list it as a "profit" of 90k - even though I have paid in about that amount, and far more if I factor in mortgage payments?
2. I guess it doesn't matter anyway since it is under 250k? (We will still be legally married during this year - just separated.)
3. Do I even need to list anything at all given I have made no money?
4. I have NO idea how to treat the currency side of things, in terms of a foreign exchange gain/loss - especially since I am not actually paying a mortgage back but just getting a cash payment for the 60k GBP from my partner (for my half) and he's taking over the mortgage.

Maybe I have made myself more confused than I need to be, but I am really not sure how to approach this now.

Thanks!


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## Bevdeforges

Why are you figuring in mortgage payments at all? Your mortgage payments consist each month of a part that goes toward the interest and a part that pays off the principle. The interest payments are lost. When you settle on the house, the bank should be able to tell you the outstanding principle balance on the mortgage and any funds you're receiving go first toward that. But the net amount you receive doesn't really figure into the tax calculations.

You need to work up the basis of the property - which is what you paid for it, plus the value of all improvements added over time. Then, you take the sales value of the property at the date of the sale and subtract the basis you've calculated. That is the gain on the sale. 

As far as converting from pounds to dollars, you "should" use the exchange rates on the dates of the various transactions - but you can certainly use the IRS published annual average exchange rates for the years that the various transactions took place.

The mortgage is only relevant in determining how much cash actually changes hands. But that number isn't at all relevant for tax purposes.
Cheers,
Bev


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## JustLurking

Bevdeforges said:


> The mortgage is only relevant in determining how much cash actually changes hands. But that number isn't at all relevant for tax purposes.


The IRS apparently views redemption, rearrangement, or capital repayment of a foreign mortgage as 'section 988' transaction that can result in a USD taxable gain. It is a particular problem just now because the GBP weakened after the Brexit vote.

This article from a US tax specialist based in the UK sums up the situation:


> IRC section 988 covers the US taxation of foreign currency transactions resulting in foreign exchange gains and losses. These transactions include foreign currency cash, time deposits and fiduciary deposits held with banks as you might expect but also, crucially, debt transactions such as a mortgage. Foreign exchange gains are taxed as income and assessed at marginal income tax rates as well as the Net Investment Income Tax.
> ...
> So a transaction, that is a nothing for UK tax purposes, generating no real profit for the taxpayer and no proceeds, has generated a potential US tax liability. It is not hard to see why any US person caught in this situation finds it to be particularly gouging and inequitable and we have a lot of sympathy for that view.


Personally I would find that _so_ inequitable that I would, er... "forget" about it. But apparently the fact remains that entirely separately from the _capital gain_ on the house itself, technically a whole heap of mortgage repayments might need to be taken into account here as forming a _currency gain_. Perhaps even should have been annually, but I can't tell for sure.

The whole thing is completely murky even by the low standards one expects of US tax law. And of course, it makes no logical sense.


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## Bevdeforges

Oh, I agree it makes no logical sense. But given that the amounts involved are relatively small, I would opt for a simple "good faith" effort in reporting and settling the US tax side of the transaction. And if the IRS has questions they can come back and ask them. But if the amounts involved are relatively small, it's very unlikely that they will.
Cheers,
Bev


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## Stuart1111

So effectively we are saying the IRS would want 40% of around 75k USD or whatever it might work out as. 

If I report the house sale accurately but don't report the currency exchange stuff, wouldn't they know that is missing and come after it?

Honestly, why do I bother keeping this passport, as it gives me nothing but grief and stress. I try my best to stay compliant then a new stage in life appears and you come across some other crap like this.


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## Stuart1111

I've just done a rough calculation and I should, thankfully, be under FATCA, so that part is fine at least.


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## Stuart1111

Also: do I have to add in all the improvements over the years to the value of the house? That'll result in a massive loss overall, but I wouldn't even know where to begin in finding all these figures.


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## Stuart1111

So I was laying sleepless in bed last night over all this, when it clicked: this isn't actually a house sale. 

I've been considering it this, but all that is actually happening is that they are removing my name from the mortgage, and my partner, whom I am still married to for another year, is giving me cash for what the two of us have deemed a fair figure to remove my name.

The mortgage itself is still there and nothing is happening to it. The house purchase was never reported as it didn't need to be, so as far as the US is concerned, nothing has happened over the last few years and nothing is happening now.

All that is happening is I am receiving a spousal gift.

I can report that cash on FBAR, FACTA if I cross the line, and report the gift if I need to (need to check the amounts etc).

Legally, it seems that this is what is actually happening on paper, and so it is what I need to report.

Does this sound ok to you guys?

All this does make me want to look into renouncing, though. I should not have sleepless nights when I try my best to stick to the tax law of a country I have not lived in for over a decade and have no plans on returning to.


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## Bevdeforges

Precisely! The US tax system is one of "self-assessment" which means that you are able to present your situation as you see fit (within the rules of course). Particularly from overseas as you are, they aren't really going to bother you unless you present them with something that "looks funny" and even if they object to how you have handled a transaction, they have little or no ability to check things out for themselves, or to pursue you for any serious delinquencies. As long as what you file "looks reasonable" you should do just fine.

I do know what you mean about wanting to ditch the nationality, but just be aware that that will cost you $2,350 and require one or two trips in to the US Consulate in London. Tempting, of course, but you need to consider carefully what remaining ties you have (or could have in the future) back to the Old Country. Renouncing may affect your ability to return there (to live or just to visit) and could subject you to the non-resident tax rules (if you have any financial assets or income derived from the US). 
Cheers,
Bev


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## JustLurking

Stuart1111 said:


> All that is happening is I am receiving a spousal gift.


Aren't you also 'gifting' your share of the house to your spouse at the same time?



Stuart1111 said:


> I can report that cash on FBAR, FACTA if I cross the line, and report the gift if I need to (need to check the amounts etc).


It looks to be over FBAR but under FATCA. There is a form 3520 to report 'foreign' gifts, and filing starts at $100k so on numbers given you should be under that. You would have a US gift tax filing requirement if any 'gift' to your non-US citizen spouse exceeds around $149k, so again it looks like you could duck under that.



Stuart1111 said:


> Legally, it seems that this is what is actually happening on paper, and so it is what I need to report. Does this sound ok to you guys?


A gift has to be given "without expecting to receive something of at least equal value in return", and it seems like your partner gifting you some cash and you gifting them your share of a property aren't really gifts. I'm too lazy to look it up, but I'll bet there is some IRS case law on this.

However, suppose you do the paperwork _this year_ to 'gift' your property share to your (non-US?) spouse? It's a common arrangement for the non-US spouse in a partnership to officially own any non-US home or property, purely because it keeps all the ugly mess that the IRS causes out of things. Many US tax specialists recommend this, so nothing untoward about it. No US gift tax return required.

And suppose _next year_ your spouse 'gifted' you some cash and you separated? Also seemingly perfectly normal. No US foreign gift receipt return required.

Are these two 'gifts' necessarily connected? Surely they are _completely separate_ things...



Stuart1111 said:


> All this does make me want to look into renouncing, though. I should not have sleepless nights when I try my best to stick to the tax law of a country I have not lived in for over a decade and have no plans on returning to.


You and many others.


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## Stuart1111

JustLurking said:


> Aren't you also 'gifting' your share of the house to your spouse at the same time?
> 
> 
> It looks to be over FBAR but under FATCA. There is a form 3520 to report 'foreign' gifts, and filing starts at $100k so on numbers given you should be under that. You would have a US gift tax filing requirement if any 'gift' to your non-US citizen spouse exceeds around $149k, so again it looks like you could duck under that.
> 
> 
> A gift has to be given "without expecting to receive something of at least equal value in return", and it seems like your partner gifting you some cash and you gifting them your share of a property aren't really gifts. I'm too lazy to look it up, but I'll bet there is some IRS case law on this.
> 
> However, suppose you do the paperwork _this year_ to 'gift' your property share to your (non-US?) spouse? It's a common arrangement for the non-US spouse in a partnership to officially own any non-US home or property, purely because it keeps all the ugly mess that the IRS causes out of things. Many US tax specialists recommend this, so nothing untoward about it. No US gift tax return required.
> 
> And suppose _next year_ your spouse 'gifted' you some cash and you separated? Also seemingly perfectly normal. No US foreign gift receipt return required.
> 
> Are these two 'gifts' necessarily connected? Surely they are _completely separate_ things...
> 
> 
> You and many others.



Right, ok - bit more complicated than I had hoped then.

1. Yes, it is definitely well under 100k, so that part is fine.
2. If I manage the paperwork for the house finished before this year, and ask for the payment to be arranged in January - since we are so close to the end of the year anyway - then this would be fine under this scenario, and I wouldn't have to file gift tax stuff for anything?

We are separated as it stands just now, and have come up with a financial agreement to cover both of us (which talks about the house etc), but we will only legally divorce autumn 2018.

3. If the house stuff doesn't finish before 1 January (which is annoyingly likely given it is only a month away and there's Christmas etc in the way), could I still go down this gift option? Would the paperwork starting (but not completing) before the end of the year be good enough, if the payment follows on a week or two later or something in January? We'll probably start the paperwork this week or next hopefully. And as mentioned, the divorce itself will be in the autumn.

I'd probably live in the house until mid or end Jan, before going elsewhere, not that this really matters to the IRS I guess.

Obviously all of these arrangements are in our financial agreement for the separation, which mentions buying out rather than gifts, so hopefully that doesn't impact negatively -the IRS wouldn't be receiving it anyway.

Thanks for the help again.


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## JustLurking

Stuart1111 said:


> ... the IRS wouldn't be receiving it anyway.


And that, of course, is the bottom line. They cannot know about any of this unless you tell them. And the situation is sufficiently inequitable and unreasonable that it seems to me entirely valid for you to avoid the technicalities and substitute an alternative reality that -- absent any ability for them to read your mind! -- fits the facts.

My suggestion to split it across years was just a way to perhaps bolster the presentation of that alternative reality. You could do things the other way around; receive the gift from your spouse this year, and split up the house next. But unless there are US gift tax returns or form 3520 issues, it shouldn't matter either way or even neither way; the IRS has no visibility on this.

It is all a royal PITA though, isn't it?

At some point in the future you may want to buy your own home in the UK, and this issue will rear its ugly head again. There are ways to mitigate it, for example holding ownership entirely by a non-US spouse or partner. And then there are issues such as inability to use ISAs, problems saving into UK pensions, being stuck with US domiciled mutual funds to avoid PFIC problems, US capital gains taxes on UK tax-free disposals, no unlimited spousal gifts or bequests, and on and on and on.

Maybe treat this experience as a wake-up call to evaluate your own US tax position going forwards. There is currently a big push to eradicate citizenship-based taxation in this year's proposed US tax reform, but I doubt much will change (or if it does, only for the _worse_ for US expats). Renunciation is the one sure way to make this go away now.

As Bev already noted, renunciation is not without considerable cost, both emotional and financial, including a potential US 'exit tax' for the "privilege" of leaving the Land of the Free. But then, neither is retaining a US citizenship if it has no present or future value to you.


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## Stuart1111

I am not sure if logistically, it will be possible to actually hav any sort of time distance between when the money is sent to me and when the transfer is done, since that will be up to the UK legal system and solicitors.

But given there is no trace of anything, my 'sale' is a loss, and the only 'gain' is this non-existent currency one, I think I will approach it as if it were a gift in the way we described (even if the dates match), and then effectively, all I report is the money on the FBAR - and nothing else, right? Does this sound ok? The amounts mean no forms (FACTA or gift tax) will be needed. And then just leave things be, and hope for the best. It's not like the US Govt is losing a single penny on anything - I'm losing on this 'sale' anyway!

It is all SO ridiculous.


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## Bevdeforges

Or you can treat the whole transaction as the "sale" of your half ownership interest in what has been your personal residence for long enough to qualify for that treatment. As long as the gain (however calculated) is less than $250,000 you can simply exclude it from your return. In this case "exclude" means simply to skip it altogether - skip reporting it. 

Sure, you report the bank balance that results from the transaction on your FBAR. But that's it. There is nothing taxable about the whole transaction and (better yet) nothing reportable except the cash in the bank. 

Yes, it's ridiculous. But the IRS isn't interested in wasting their time or effort on pursuing something where there is obviously nothing to be gained for them, either. 
Cheers,
Bev


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## JustLurking

Bevdeforges said:


> Yes, it's ridiculous. But the IRS isn't interested in wasting their time or effort on pursuing something where there is obviously nothing to be gained for them, either.


Unfortunately, Bev, due largely to GBP devaluation post-Brexit the IRS may well think that there _is_ something in this for them. Or could if they had the full details, that is. The _capital gain_ is exempt if below $250k, but the separate -- and largely _phantom_ -- _currency gain_ is not. And worse, is taxable at income tax rates. There is nothing "however calculated" about it.

That argues for turning this into 'gifts'. Of course, where nothing has to be reported to the IRS in either case, one could consider this transaction to be a quantum state -- no need to collapse it into either paired 'gifts' or a real sale until required, if ever.

And honestly, it's ridiculous that anyone should even have to spend time considering nonsense such as this. Every time I encounter something along these lines it reinforces the gratitude I feel for not having taken out US citizenship when I had the chance. I am sure I personally could not function under these restrictions.


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## Bevdeforges

You're preaching to the choir on this one. Yes, it's incredibly stupid, and time consuming and annoying and aggravating. But as far as what further investigation the IRS will do for a situation like this is based entirely on the amounts involved and how they are presented. The more "vanilla" you can make the whole thing look, especially if you demonstrate that there is no potential for recovery of taxes for them, the less time and effort they are going to spend on it. 

But gift, or just "gain too small to have to report" - if you're contending that the event is not reportable, then it's not reportable and there is little or no likelihood that any questions will ever be asked. You only make sure to note down your thinking/position in the off chance that a question may come back later. But having a position you can explain is probably the best insurance that the question will never come up.

What you don't want to do is to poke the bear.
Cheers,
Bev


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## Stuart1111

JustLurking - do you think it'd be safe enough to go the gift route even if the payment/house exchange happen fairly close to each other in the same tax year? I will try my best to avoid that but I am not sure, they could both end up happening in Dec or Jan. And then I keep my mouth shut and report nothing given the gift value is far under what I need to report...

My worry about reporting it as a sale, as Bev suggested, would be that it would then bring all this to light, whereas the gift stuff would keep it out of their sight altogether - with a justification. In the gift scenario, the only reportable thing would be under FBAR, which I would of course do.

What frustrates me is that fairly soon after (ie within a few months) I was wanting to buy a new house, and now suddenly I feel like I can't without getting myself into a new mess. So, so ridiculous.

I have no plans of ever returning to the US but would like to keep the option open, which is why I've never renounced. But new 'discoveries' like this bringing about new panic every couple years makes mew wonder if it is worth it.


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## JustLurking

Stuart1111 said:


> Do you think it'd be safe enough to go the gift route even if the payment/house exchange happen fairly close to each other in the same tax year?


I would think so. That's what I would do if in your shoes, anyway.

As noted already by Bev, the IRS can only really query the details of what you tell them (or HMRC tells them, under the FATCA IGA, but that won't include details of UK house sales by US persons, let alone 'gifts' between folk in the UK one of whom is a US citizen). If you can construct a reality in which there is nothing to tell them, they have nothing to question later on.

Worth remembering that of the nearly countless forms that the IRS uses to bludgeon US citizens living outside the US, the FBAR is *not* a _tax_ form. It's a FinCEN form administered by the IRS, and it doesn't take a genius to recognise that a _completed_ FinCEN form 114, aka FBAR, is worthless -- the only one with any value is the one _that is not filed_. If this is the only new form you would have to complete next year, then, there's no ready way for anyone to tie that to elements of a tax return. 

Urban legend has it that until this form went electronic-filing-only there were containers full of unprocessed paper ones just sitting around in a railway siding somewhere in the midwest, quietly mouldering away. Probably exaggeration, but it's easy to imagine that the IRS receives so much 'informational' reporting stuff now that FATCA is in full swing that the deluge of data overloads their capacity to sift and process it effectively. And I know of not one single case where anybody got dinged for an FBAR fault alone. They only ever appear when larded on top of huge and usually genuine tax evasion cases.


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## Stuart1111

I file an FBAR each year, so it's not even a new bank account (well maybe, depends where I'll keep this money) - it is just extra cash to report compared to other years.


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## Bevdeforges

The extra cash shouldn't make any difference. Depending how much you're talking about, it could come from having sold anything - a car, a house or a bunch of furniture. Even for those folks who transfer a big sum between two different accounts during the year (and thus wind up counting the same amount in the "maximum balance" twice) I've never seen a one-time jump in a bank balance generate a question or a problem. 

I honestly think it's more the other way around. If they see something "funny" on your tax returns, they may take a look at your FBAR to see if it logically supports whatever the tax return reports. But even then, only if there is a potential for a large return for the IRS.
Cheers,
Bev


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