UK rental property on a US return: income, depreciation and the sale

A let property in the UK means a return in both countries every year and a coordinated calculation when it is sold. Done properly the Foreign Tax Credit usually removes double tax; the traps are depreciation, currency and the different reliefs on sale.

US side: Schedule E

Rental income and expenses go on Schedule E in dollars, usually at the yearly average rate. Deductible: letting agent fees, insurance, repairs, mortgage interest in full (no UK-style restriction), professional fees, council tax and utilities you pay. Capital improvements are added to basis, not deducted.

Depreciation is required. The building element (not land) of foreign residential property placed in service after 2017 is depreciated over 30 years under the Alternative Depreciation System (40 years for earlier years). You must take it; the recapture on sale applies whether you claimed it or not.

Passive activity rules. Net losses are generally passive; up to US$25,000 a year can offset other income if you actively participate and your modified AGI is under US$100,000, phasing out by US$150,000. Unused losses carry forward and release on sale.

UK side

Non-resident landlords are inside the Non-Resident Landlord scheme: 20% withholding by the agent or tenant unless HMRC approves gross payment (form NRL1). Income is reported on Self Assessment (SA105) with the UK deductions, including the restriction of finance costs to a 20% basic-rate credit. UK residents report it on the property pages in the normal way.

Making the credit work

UK tax on the rental profit is creditable in the passive basket. Because UK and US rules compute the profit differently (depreciation, interest), the credited amount rarely matches exactly and the excess carries forward. Timing matters: UK tax paid in January relates to a tax year that straddles two US years, so a consistent apportionment or an accrual election is needed.

Currency on the mortgage

Repaying or remortgaging a sterling loan after the pound has fallen against the dollar produces a taxable exchange gain for US purposes (a loss is personal and not deductible). It is separate from the property gain and routinely missed.

When you sell

• US gain = dollar proceeds less dollar adjusted basis (cost plus improvements less depreciation), each converted at the rate on its own date. Currency movement is part of the gain.
• Depreciation recapture: the depreciation taken is taxed at up to 25% (unrecaptured section 1250 gain); the rest at 0%, 15% or 20% plus 3.8% NIIT where applicable.
• Section 121: if it was your main home for two of the last five years, up to US$250,000 (US$500,000 joint) of gain can be excluded, reduced for periods of non-qualified use and never covering the depreciation.
• UK CGT at 18% or 24% on residential property, with Private Residence Relief for periods it was your home, reported and paid within 60 days of completion where tax is due. The UK tax is creditable against the US tax on the sale in the passive basket.

Property held through a UK company

A UK property company owned by a US person is a CFC: Form 5471 every year, rental income as Subpart F income taxed as it arises, and dividend treatment on extraction. The UK corporation tax benefit rarely survives the US cost; take advice before incorporating.

Frequently asked questions

I live in the UK. Do I still report the UK rent to the IRS?

Yes. Worldwide income, with the Foreign Tax Credit for UK tax paid.

Which exchange rate?

Yearly average for income and expenses; the rate on the transaction date for purchase, improvements and sale. Keep the method consistent.

I never reported the rental on US returns. What now?

Amended returns or Streamlined depending on the wider position, with depreciation computed from the start. The Foreign Offshore route carries no penalty if you lived abroad; the 5% penalty applies only to the Domestic route.