Foreign mortgage gain
Having taken out a joint mortgage with her husband to purchase their home, Shirley must also deal with the US tax rules governing mortgage debt denominated in foreign (non-US) currencies, when she sells her home. Under US rules, Shirley is deemed to transact in US dollars, consequently, any foreign currency transaction is always deemed a ‘trade’ for US purposes.
In other words, paying off her UK mortgage could trigger a gain or loss when the mortgage is relinquished. Shirley and her husband re-mortgaged in 2012, and unfortunately, since then the US dollar has risen against the pound, leaving her with an exchange rate gain of $36,833 on the relinquishment of her mortgage. This may result in a potential tax bill of $7,377. Fortunately for Shirley, she had enough excess tax credits to offset this on her return and reduce the liability to nil.