UK domicile / US rentall income

[reevesp]

We are looking to purchase a property in Sarasota circa $220,000. We need to cover off our investment by having rental income and for a number of reasons have decided that long-term (most likely US domestic) rental is the route to go.

However we are unsure of the tax liability on the money made. We can get the purchase money in one of 3 ways:
1) Remortgage our UK property and do a straight cash purchase
2) Get a separate UK buy-to-let mortgage to cover this purchase
3) Apply for a local US mortgage

Our preferred and most simple route is option 1) but this may not be the smartest way because of tax liability. So this leads me onto my next question - will we be liable to pay income tax in the States and in UK on the income earned, how much is this and how do we go about claiming it back, if we can. Plus if you have to demonstrate costs (including mortgage payments), what is the best way to do this? We would look to put the property in the name of my wife who is not currently working and I believe that in the UK this would allow us certain tax exemptions but how this works with rental from the US I am unsure.

Thanks for your help

Paul Reeves

[Geoff2ey]

I am a private individual so these comments are offered based on my own experiences only. Looking at your options in reverse order:

3)Unless you have US assets and a current US income you are most unlikely to qualify for a conventional US mortgage without a "FICO" credit score. A non-working UK wife will never qualify for a loan for a US property in her sole name, and many states have community property laws which will stop you doing this anyway. Unless you put the property in joint names, forget US lenders. Avoid "promises" of finance from the developer. Don't go into escrow without formal written mortgage offer or you will lose lots of money.

2)UK lenders on foreign assets that they cannot place a UK legal charge on will be rare indeed.

1)This is the practical route. But the risk is all yours, your UK lender will not care if the US property burns down. Insurances will have to be purchased in the US, and rental homes insurance is not cheap.

Tax: Yes there will be a requirement for filing US tax returns even if you make no profit. As soon as you let it, you have declarable income, same as here. Unless you are non-UK domicile you will also have to declare the US income on your UK tax return.The non-resident IRS forms are many and various and you will need paid advice and aassistance the first couple of years. The tax liability that ensues from a profitable letting may be offset against your UK tax liability so that you don't pay twice. This is due to "dual-tax" agreemnets between the two countries. US tax rates are generally lower so my experience is there is no extra or "net" tax over the UK portion, but you have the hassle of working out the US portion for your US return, and paying the US authorities( they get first claim). As stated above you will not physically reclaim any US tax paid, but you can offset it against the UK tax man's demands based on your UK returns.

Hope this helps

Geoff Davies