US and UK taxation of your US rental property
If you rent out your US property, and you are domiciled in the UK, the rental income is subject to both US and UK income tax.
In the US, there are tax-free allowances for depreciation and personal exemptions as well as the expected deductions for real estate tax, insurance, and mortgage interest. These adjustments will reduce the tax to zero for most people owning one property. For people owning two or more properties, the tax will usually work out to 15% of the net income after expenses. To file in the US, you file a Form 1040NR (1040 if you are a US citizen or greencard holder). If you don’t have a US Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), you must apply for an ITIN/
In the UK, there is no break for depreciation, so you will probably owe UK income tax each year. You may subtract from your UK income tax any US tax paid. UK income tax will be at your highest rate, so if you have a nonworking spouse, it may make more sense to have your spouse purchase the property rather than you.
When you sell your house, you will again owe US tax and UK tax.
In the US, there is an automatic withholding of 10% of the gross sales price as a tax. This can be reduced to 20% of the net gain if you have an ITIN at the time of sale. Withholding isn’t the same as the tax you owe. The tax you owe will be a lot less than 10% of the gross sales price, and a little less than 20% of the net gain.
In the UK, you will owe tax at a rate of 18% of the net gain. As with income, you can subtract any US tax paid. Because the UK rate of 18% is less than the US of 20%, and they have a generous £9000 tax-free allowance, there should be no additional UK tax due.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
All of the above information has been provided by Liz Zitzow of British American Tax whose details can be found on our Partners page.
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