# Phantom losses and gains on remortgage



## Lalalandaustralia22 (5 mo ago)

I have recently found out about phantom gains and losses. I’m an American citizen in Australia as a PR.

if 1 aud = .74usd when Itook out the mortgage and now at the time of refinance 1aud= .68usd, will I have a reportable gain or loss? This is so confusing to me.
thanks!


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## Moulard (Feb 3, 2017)

There is no capital gains tax liability due when the property is remortgaged. CGT is only due when the property is sold or transferred.

However you are right, that phantom currency gains caused by fluctations in the exchange rate are taxable if they exceed $200.

Technically every mortgage payment you made was potentially resulted in a taxable gain, but we will set that aside for the moment.

If you were ever audited (and the chance of that is exceedingly close to zero if you remain in Australia) the the position of the IRS would be that that there were two events.. one paying out the old debt instrument and a second creating the new debt instrument and thus the refinance created a currency transaction.

So lets say for example you initially borrowed 750k AUD using your numbers then you borrowed $555k USD
Now lets say you had paid back $250k of the principal over the course of the loan and thus owed $500k AUD at the time you refinanced (340kUSD)
That 500k AUD cost you $370kUSD but you only had to pay back $340k, and thus you made phantom gain of 30k USD

And to make matters worst, it would be treated as ordinary income and not a capital gain. and thus taxed at the higher ordinary income rate.

Or, you could be like virtually every other US person with a mortgage in a foreign currency and ignore it.


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## Lalalandaustralia22 (5 mo ago)

Thanks for the reply.
yeah I’m really curious how they even know that a remortgage happens . Do the Australian banks actually share all the information with them? Or is it going to be seen on my
Fbar next year when I report my offset accounts that are “ new”

why is it virtually impossible to be audited if I remain in Australia? I had an American living in australia in another forum tell me he got hit with a 5 figure fx gain upon sale or a property they had. Haven’t actually heard oF one with a remortgage. 
I have heard that you can use ftc to offset the capital gain, is that true? I have been using the feie for the last 5 years because I have nothing to claim but starting next year I’m going to have to start reporting rental income from the house so I wonder if that could make them curious


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## Moulard (Feb 3, 2017)

> Do the Australian banks actually share all the information with them?


With the IRS, no. With the ATO yes (under FATCA enabling legislation) and then the ATO shares it with the IRS (under the IGA)
Whether the IRS can use the information, or reconcile it with a tax return is an entirely different matter.



Lalalandaustralia22 said:


> I have heard that you can use ftc to offset the capital gain, is that true?


Yes. With limits
If for example, you sold your primary residence, which is CGT free in Australia you would have nothing to offset the US tax on it, and as an ordinary human, you would not likely to have sufficient carried over tax credits to offset it. Additionally the IRS requires you to compartmentalise tax credits so that you can only use taxes on the same category of income to offset taxes on that same category of income.
So you could not for example use Australian taxes on your wages (general income) to offset taxes on your capital gains (passive income)


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## Lalalandaustralia22 (5 mo ago)

Moulard said:


> With the IRS, no. With the ATO yes (under FATCA enabling legislation) and then the ATO shares it with the IRS (under the IGA)
> Whether the IRS can use the information, or reconcile it with a tax return is an entirely different matter.
> 
> 
> ...


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## Lalalandaustralia22 (5 mo ago)

So I have a question : what did you mean when you said
Or you could be like every other person with a mortgage in a foreign country and ignore it.
Im not interested in cheating the system but if it’s something that is “triggered” when a mortgage is paid off then how do people get awaywith not paying the gains? I’m not going to lie either, my expat accountant has told me that I don’t have to register a remortgage on my tax return. Then other people have told me he’s wrong. 🤷‍♀️


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## Harry Moles (11 mo ago)

The suggestion was that you "cheat the system" and not report the remortgage or the currency gain. There is nothing triggered as such, there is nothing reported except year-end account balances under FATCA (by banks) and annual high balances under FBAR (by individuals). The IRS does not proactively look at these numbers. There is no chance they'd figure out you owed it money for a currency gain on refinance. For that matter it's very unlikely they'd figure out you'd sold a place and failed to declare a capital gain in excess of the exemption. Of the small percentage of non-resident US citizens who file anything at all, even fewer seem to be aware of the currency gain rule, which is pretty obscure. So it's widely ignored.

As for risk, the IRS cannot collect penalties from you in Australia. If you have US assets that's a different story, and for as long as you only have a US passport, that's an additional incentive to play by the rules.


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