Foreign Mortgage Repayment and Exchange Rate Gain
Americans who have non-US dollar mortgages may not realise that there may be US tax consequences when they change mortgage providers, change the terms of their mortgage or make capital repayment on their mortgages. The IRS views such transactions as a taxable event for US tax purposes and may result in a taxable foreign exchange gain.
To illustrate this we have set out two examples that show where this can be an issue:
Remortgage
The US taxpayer has a mortgage with lender “A” and decides to move to lender “B” because the mortgage rates are more beneficial.
Capital Repayment
The US taxpayer decides to pay off a lump sum of the mortgage so that they have little or no debt on their property.
In both circumstances, from a US tax perspective, consideration should be given to the value of the mortgage, in US dollars, on the date the mortgage commenced and the value of the mortgage, in US dollars, at the time of the remortgage or repayment of capital is made.
This can be summarised as follows:
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.
The IRS view is that the individual took out a debt of $150,000 (£100,000 x $1.50) but only had to repay $120,000 (£100,000 x $1.20). The $30,000 of debt no longer owed is regarded as gain and is taxed as ordinary income. If we reverse the situation, i.e. assume the individual took out a mortgage for £100,000 and the exchange rate is £1 to $1.20 on the date it was taken out, and at the time of redemption or capital repayment the exchange rate is £1 to $1.50, the result is a US dollar loss of $30,000. Unfortunately, this loss is a “personal” loss and personal losses are not deductible.The recent change in the US/UK exchange rate is likely to increase the number of US taxpayers caught by this
The recent change in the US/UK exchange rate is likely to increase the number of US taxpayers caught by this little-known tax trap. If you are considering remortgaging or making a capital repayment on your mortgage, please contact us prior to doing so.