I bought a house in the UK in 1996, a year before I moved to the US
(New York). I have decided to sell the house in the UK and purchase a
house in New York State sometime this year. I expect the gains on the
sale to be in the region of $300K. I have investigated my capital
gains liability in the UK and, as I have been out of the country for
over five years I am not liable for UK capital gains. I am not clear
however, what my US liability is. I understand that Uncle sam wants a
portion of my worldwide income but how much Federal and State Tax
should I be expecting to pay?

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Request for Question Clarification by richard-ga on 07 Apr 2005 11:53 PDT

Can I assume that you're a US citizen or green card holder?

And did you use the UK house as your principal residence in 1996-1997?

Thanks

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Clarification of Question by cpete-ga on 07 Apr 2005 12:27 PDT

Yes it was my principal residence and i have been a green card holder since 2002.
Thanks.

Hello and thank you for your question.

My inquiry about the use of your home was in hopes of avoiding tax on
the gain under the exclusion for sale of a principal residence.  But
on review it turns out that since the UK property has not been your
personal residence within the past five years, you are not eligible
for that relief.
Ownership and Use Tests
http://www.irs.gov/publications/p523/ar02.html#d0e1959

As you may already know, "If you are a resident alien [a green card
holder], you must report all interest, dividends, wages, or other
compensation for services, income from rental property or royalties,
and other types of income on your U.S. tax return. You must report
these amounts whether from sources within or outside the United
States."
http://www.irs.gov/businesses/small/international/article/0,,id=96493,00.html

I still had hopes of your avoiding the gain under the rule that
individuals who are treated as residents of the United States under an
income tax treaty will be entitled to treaty benefits.
http://www.irs.gov/publications/p519/ch09.html#d0e10352

But unfortunately, while if you are not UK resident then you are not
liable to UK capital gains tax, as a US resident, the gain would be
reportable for US tax purposes.
http://www.taxationweb.co.uk/forum/discuss.php?id=869

See also
http://www.us.kpmg.com/microsite/tax/ies/2003_Flash_Alerts/fa03-071.pdf
[page 5]

So you will be required to report your capital gain on your US income tax return.

Search terms used:
"green card" residence foreign site:irs.gov
"resident alien" residence proceeds publication 523   site:irs.gov
"capital gains" us uk march 2003 real property

Sincerely,
Google Answers Researcher
Richard-ga

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Request for Answer Clarification by cpete-ga on 07 Apr 2005 20:10 PDT

Richard,

Thanks for the help. It would seem that for tax purposes I should just
treat this as if it were a sale of a US property. Just as a point of
clarification however: Would I be entitled to any exemptions on
Capital Gains tax given that it was my 'principal home' for the whole
of the last five year period even though I didn't live there?
http://www.irs.gov/faqs/faq-kw113.html

If this is the case and based on the $250K gain for reporting purposes
I am a little confused on what my liability would be. For example, if
my gain was $260K would I pay tax on the full $260K or just the $10K
over the $250K.

Thanks again,

Peter

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Clarification of Answer by richard-ga on 07 Apr 2005 21:40 PDT

Hello again.

As to the first point, the requirement is that you lived in the home
as your principal residence in two of the past five years.  I
understood your question to say that you've lived in America since
leaving the UK in 1997.

What have you used as your address on US income tax returns that
you've filed during these years?  If you've persisted in using the UK
address you might be able to qualify yourself, but if you've been
showing the US address it's unlikely.

As to the second, capital gains tax only applies to the excess of the
amount realized on the sale over the tax basis, which in this case
will be cost when originally purchased plus the cost of capital
improvements.  So if you bought the residence for 250, make no capital
improvements and sell it for 260, the tax only applies to the 10
increase.  Your cost from 1996 will be the dollar equivalent of the UK
price you paid at 1996 exchange rates, and the proceeds will be the
dollar equivalent of the proceeds at 2005 exchange rates.  Given how
the dollar has fallen that may increase your gain and hence the tax.

-R

The matter is subject to the US/UK double taxation agreement.  I have
not found  - nor tried very hard -  to find something applicable.
As a general rule, real estate taxation under double taxation
agreements is left to the country where the property is, but you must
check this.  The US/UK agreement was last revised in 2001, I believe.
There is a certain logic behind this:  the other country has no way of
knowing what the capital gain would be, so you may be in luck.
I hope so, but check.  As you can read from the disclaimer below, this
is no professional advice.

I stand correct.

That should have been, of course,   "I stand corrected."

Hi
Did this subject get resolved?

I have been researching the exact same problem for a few months now. I
have filed an extention to buy some time. I also had a property in the
Uk sold last year and made a gain. I've lived here in USA for 5 years
and now want to use the money to buy a larger home here (primary). The
property in UK was my second home. Can you avoid CGT if you use the
money to reinvest into a primary property?
Thanks
David

You may have to investigate this further but I believe the answer to
your question is no.

The exemption you would generally be given is that the first $250K of
the profit from the sale for an individual ($500k for a couple) is tax
free. Unfortunately, and here's the kicker, as you have failed the
ownership and use test (lived in the property for two of the last five
years) you are not eligible for that exemption and so, I think, liable
for tax on all the profits from the sale of the house.

Let me know if you hear anything else, I'm praying that I've
misunderstood the rules.

Regards,

Peter

it is possible to treat your presence in US as temporary if, for
instance,  you was a student. then even you was not living in UK -
there were your clothes and other things - it might be treated as a
primary residence.
since you got grean card in 2002, it may be additional evidence that
you was in US temporary.
please consult tax advisor.

Ok so my options are to pay or not. As the money is stored in an off
shore account, if i used it as planned and transfered it to the title
company on purchase of new home, will it show up on the radar? If i
pay will that open an oppotunity for it to be looked at in more detail
and examin the gain?

That's a question for a tax specialist I'm afraid. Of course any
amount over $10K that is brought into the US will automatically be
reported to the IRS by the recieving bank so there really is no way of
getting the money in under the radar without providing some sort of
explanation on where the money came from.