# Better to sell UK house before or after expatriating from US?



## ukuscapgain (Apr 10, 2018)

Hi all,

I'm a US citizen by birth but have lived and worked in the UK all my life. I'm a dual UK/US citizen. I'm in a civil partnership with a UK citizen.

I've not ever submitted US tax returns, and don't have an SSN, but I'm planning to expatriate as it's getting too fiddly with potential US tax liabilities hanging over my head.

I don't think I'll be a 'covered' expatriate, and my tax over the last few years is fairly straightforward - I think the vast majority will be covered under the US-UK tax treaty with only a very small remaining liability.

So that all seems straightforward enough, but have hit a snag. We're in the middle of selling our flat and it's gained a lot of value since we've bought it. I expect the capital again to be around $1m.

It's entirely covered for UK tax by the primary residence exemption, but it seems like it could be an issue in US tax.

If I understand right, my half of the gain ~$500k will be taxable. There's only a $250k exemption I think, and so the remaining $250k would be taxable (not sure how the rate is decided).

However, if I don't sell until after I expatriate - then I think things are very different. There's an exit tax that I think could include the capital appreciation - but there the exemption is $700k so should easily cover my half of the capital appreciation.

If I've understood all that it's fairly clear I should delay any sale until after I expatriate. Have I got that right, and is there any other angle I should be looking at?

And is it definitely the case that the share of the capital gain held by my UK citizen civil partner is out of scope for US tax? I appreciate that's probably pretty small print stuff...

Thanks


----------



## JustLurking (Mar 25, 2015)

ukuscapgain said:


> If I've understood all that it's fairly clear I should delay any sale until after I expatriate. Have I got that right, and is there any other angle I should be looking at?


I think you have it exactly right. The exit tax exemption is much larger than the primary residence exception, and is large enough to include your current gain, whereas the primary residence exception is not. So time your sale to use the first one rather than the second.

The only wrinkle I can see personally would be if this property was in the US, in which case you would probably tangle with FIRPTA if you sold after expatriation (as you would then be an evil foreigner). From what you wrote though, it seems pretty clear that this is a UK property.



ukuscapgain said:


> And is it definitely the case that the share of the capital gain held by my UK citizen civil partner is out of scope for US tax?


Absolutely. No reason whatsoever to drag them into this IRS quagmire. They will certainly not thank you if you do.


----------



## JustLurking (Mar 25, 2015)

ukuscapgain said:


> I don't think I'll be a 'covered' expatriate, ...


One other thought here, since from the sound of things you think you might be 'covered'. If that's the case, you need to understand thoroughly how the exit tax operates before renouncing.

For example, know that pensions fall outside the $700k exemption and can be fully taxed immediately as if distributed entirely the day you renounce (even though, of course, they are not, and this lead to double-tax when you do eventually draw on them). And that gifts and bequests to US citizens from covered expats are taxed to the _recipients_ at the highest estate tax rate in existence.

So if you think you will be 'covered', there are several things that you can do _before_ renouncing to escape that status. You can work to obtain 'convenient' valuations on your assets. You can give away large amounts of money -- this might involve filing a US gift tax return, but you'll only be using up a US lifetime gift allowance here, something you will have absolutely no future need for after you have renounced. You could even 'temporarily' sign over your half of the house to your partner.

And ultimately, of course, you can simply either not file an 8854 at all, or file a... err... 'minimal' one that won't present you with any exit tax liability.

I cannot imagine that this appalling US tax reaps any benefits at all for the US. In no conceivable universe would any sane truly covered expatriate sign this form and send the US one third of their non-US retirement savings in exchange for nothing whatsoever.

In fact, this has to be a net loser for the US. It discourages successful immigrants from moving to the US, encourages successful ones already in the US to move out soon and before hitting the asset and/or duration limits for it, and motivates folks such as yourself to renounce US citizenship before the door closes.

Truly, truly bizarre.


----------



## ukuscapgain (Apr 10, 2018)

Thanks for the replies, really helpful and thorough.

I'm pretty sure I'm not covered actually, once I've got my IRS filings up to date.

The one other thing I was wondering about was whether I can transfer the property to my partner in advance of the sale to avoid the capital gain, without ending up with a gift tax bill? I've heard the IRS don't approve of that sort of thing, but I'm not sure how they'd find out I ever owned a UK property (don't think I need to disclose this, even for expatriation, if I'm not covered)


----------



## JustLurking (Mar 25, 2015)

ukuscapgain said:


> I'm pretty sure I'm not covered actually, once I've got my IRS filings up to date.


Probably all the more reason to go ahead without delaying overmuch then, to avoid the possibility of reaching the asset limit for 'covered' in future. Or congress worsening the rules yet again, for that matter.

The $2,350 fee is not cheap, but in time you may come to regard it as the best $2,350 you have ever spent.



ukuscapgain said:


> The one other thing I was wondering about was whether I can transfer the property to my partner in advance of the sale to avoid the capital gain, without ending up with a gift tax bill?


You probably cannot transfer it without incurring the requirement to file a US gift tax _return_, but that is not the same as a US gift tax _liability_.

By exceeding whatever the US gift tax annual limit is to non-US citizen civil partners -- no idea on what it might be, but I will bet it is under $500k -- you get the joy of having to file a form 709 return, but crucially, there is no actual US tax to pay until you have burned through your entire lifetime estate basic exclusion amount, which you probably have not (otherwise you would know about it).

Burning through this would bring you closer to a US estate tax liability if you were to die a US citizen, but since your aim is not to do that, the erosion of your US estate tax buffer here is completely immaterial to you and (presumably) your heirs.

So yes, this appears to be an option also, though you might want to double-check that there are no possible UK tax issues here. Not my area.


----------



## Bevdeforges (Nov 16, 2007)

Just a caveat - I'd be careful about transferring your interest in the house to your partner. That's the sort of transaction that could attract the attention of the IRS in connection with your final tax returns and all. Not a dead certainty by any means, but just something to consider.

And be aware that the gift tax limits for non-citizen "partners" (and spouses, as it turns out) tend to be much lower than for US citizens - so that may very well draw attention to your shifting of assets just prior to renouncing. It would be safer to renounce first and sell the house sometime after the dust has cleared from that transaction, though I realize that might be impractical for you if the sale is ready to go.

A friend of mine is renouncing and it's pretty clear that there is quite a bit of dragging of feet on issuing her CLN, which she needs in order to take German nationality. Technically, she has been "stateless" for a good 4 months now (though there are provisions for this). Part of it is simply the backlog of processing, but even before renunciation became so popular there were reports of long delays in issuing the CLNs.
Cheers,
Bev


----------



## JustLurking (Mar 25, 2015)

Bevdeforges said:


> A friend of mine is renouncing and it's pretty clear that there is quite a bit of dragging of feet on issuing her CLN, which she needs in order to take German nationality. Technically, she has been "stateless" for a good 4 months now (though there are provisions for this). Part of it is simply the backlog of processing, but even before renunciation became so popular there were reports of long delays in issuing the CLNs.


Yeah. With its requirement that you renounce other citizenships first, Germany is a bit of an outlier when it comes to naturalising German citizenship. Most countries don't have this restriction. And of course, people who are already dual US/other citizens don't have to contend with these types of barriers at all.

The good news is that all US _tax_ connections cease on the _date you renounce_ and are not at all connected with the date of receipt of CLN, so State foot-dragging delays don't increase any tax headaches. The only problem case might be where the US refuses to accept a renunciation, but realistically the only grounds they might have for doing so would be that a person was never a US citizen in the first place (so arguably an improvement in circumstances there, then!).

It's not clear what State is spending the $2,350 renunciation fee on. They claim that this is the full 'cost of service', but none of it seems to be going towards increasing efficiency. For the most part, CLN delays have only lengthened with the fee increases from $0 to $450 to now $2,350.



ukuscapgain said:


> I'm a US citizen by birth but have lived and worked in the UK all my life. I'm a dual UK/US citizen.


Oh, and one important exception to the US exit tax that I haven't mentioned so far, and really should have -- there is an exception to it if you have been a dual citizen _from birth_ and have not lived in the US recently. You don't say how you became a UK citizen, but if you were born one then this might help you further.

Arguably, this exception breaks tax treaty 'non-discrimination' clauses. But then, the US does not appear to be particularly interested in living up to its tax treaties at the moment anyway -- exhibit A being form W-8CE that requires a covered expat to "voluntarily" (yeah, right!) waive their tax treaty rights, and exhibit B the latest GILTI and transitional tax nonsense -- so no real surprise there.


----------

