UK matrimonial home
Michael and Jane wanted to know the tax implications on the sale of their UK matrimonial home. With a disposition, we helped both parties to understand that Jane would not be subject to UK tax as the Principal Private Residence Relief covered the gain. However Michael would need to pay US Federal tax of up to 20%, Net Investment Income Tax (NIIT) of 3.8% and New York State Income Tax.
In this case, Michael had owned and lived in the property for two out of the last five years before sale, and therefore could benefit from a $250,000 exclusion to reduce the taxable gain in the US. The US tax above the exclusion is something Michael could not avoid in his circumstances, but in understanding this, Michael and Jane could come to an amicable split in terms of the transfer of sale proceeds from the property.
Michael was also subject to US income tax of up to 39.6%* on his foreign mortgage exchange rate gain as well as a 3.8% NIIT charge. Michael and Jane had a GBP denominated mortgage and as it cost fewer dollars to pay off the mortgage than it cost to acquire the liability, Michael had a foreign mortgage exchange rate gain. However, Michael was able to utilise his excess foreign tax credits and reduce the US tax liability by $20,000. However, foreign tax credits could not reduce the New York State income tax charge or the NIIT charge.
*(This was the previous top rate, which has been reduced to 37% from 2018.)