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I have been living in the UK all my life and my husband is now being relocated to the USA to LA with work. We have decided to move out there and live in the States for a couple of years. All the VISA issues are sorted so no problems there.
I own a UK property and am going to rent it out here in the UK in order to part finance renting a property over there for us to live in.
I am not sure what my tax liability will be?
Do i pay tax on the rental income in the UK as that is where the property is?
Do i pay tax to both (greedy) governments?
Do i just pay tax to the US government?
I have been told of tax treaties that will negate the need to pay tax twice.
I have read up alot on this but can get no conclusive answer. Direction to each of the government's websites (Internal Revenue Service) and (HM Revenue & Customs: Home Page) really does nothing except confuse me as they are all so complex.
My understanding is that only the US and Belarus tax people on their worldwide income regardless of residency. Nice company that we're in...
I'd consult a tax lawyer, but my gut feeling is that since you're not going to be resident in the UK, you won't have tax liability there. You'll probably have to file some paperwork to prove this, but there shouldn't be tax liability there. You'll definitely have U.S. tax liability on this income.
Can you claim residency in another state besides California? If so, I'd consider filing there to avoid paying high CA taxes on this income.
I think what will happen is that i will pay tax in the UK and offset that amount as a tax credit against any liability in the US.
File a Schedule 'E'.
On it you will list all expenses. And separately the rental income. On the schedule 'E' they are subtracted from each other.
Using a schedule 'E' allows you to reduce it by many factors before it becomes a taxable income.
Rent or income is reported. Then Agent fees, insurance, garbage fees, electric bills, repairs, maintenance, postage fees, transfer fees, everything that you had to spend gets listed.
Also remember that in the US you are required to depreciate. The initial cost of the property becomes what is called the "cost-basis". That cost-basis drops in a straight-line manner over the projected life of the property. For rental real estate it's projected life is 27.5 years. So 1/27.5 times the cost-basis is how much it depreciated last year.
The depreciation is a physical loss [wear and tear] on the property and is another of the write-offs, that you must take. It is then listed on the Schedule 'E'.
If you keep the Net amount from rental real estate high then it will bump up your tax bracket. If you keep it low, or negative then it will lower your AGI, and keep your tax bracket low.
The Net amount from your schedule 'E' is then transferred onto the 1040, where it is combined with all of your other income streams. They merge, so they are not taxed independently. If one or more income streams are negative numbers for example they will lower your over-all AGI, and therefore your tax obligation.
There is no way to estimate your overall tax obligation from only your Schedule 'E'.
It's Net [either negative or positive] is merged with your salary incomes, and other investment incomes to form your AGI.
So long as you maintain an active role in managing your rental properties. It is an 'active' income stream and can be reported in this manner. So it does pay to stay active with your investments. If you take a hands-off approach and stay completely out of the process, then it may become a 'passive' income, and you will see higher taxes.
Thanks for that, that's really interesting about the depreciation and I will mention this to the tax advisor I am going to see this week. However, I'm hoping I'm not going to be paying 2 lots of tax as I know I definitely will have to pay UK tax on the income that is earned in the UK. What exactly do you mean by keeping active in the management though and how would you show this on your return?
Can you claim residency in another state besides California? If so, I'd consider filing there to avoid paying high CA taxes on this income.
How would i go about doing this? My parents do own a condo in Florida and I have worked (and I think filed tax for a Summer job) under that address many years ago. Would that help?
Thanks for that, that's really interesting about the depreciation and I will mention this to the tax advisor I am going to see this week. However, I'm hoping I'm not going to be paying 2 lots of tax as I know I definitely will have to pay UK tax on the income that is earned in the UK.
I understand.
UK taxes are another matter entirely.
California should only be taxing you on your income streams from California.
For example; I have claimed California as my 'home of record' during all of my Naval career. Though during my Naval career I never did live 'in' California.
The only income streams that I had to file with California was rental property that I held in California. I gained 'income' from within California, so that income was taxed by California.
My Federal income was not taxed by California, so long as I stayed out of California.
I have had rental property in Washington and I had to pay Washington State taxes on that income.
I now live in Maine. I have Maine income streams and I have rental income from a property in Connecticut.
I file with Maine concerning my Maine income streams, and I file with Connecticut concerning my Connecticut income streams.
As a US citizen, the US is concerned about your worldwide income. So file US Federal income taxes.
Your rental income from properties outside of California are not California's concern.
Just as my Connecticut rental properties are not the concern of Maine. though all of my income streams are documented on my US Federal Income tax filings.
Quote:
... What exactly do you mean by keeping active in the management though and how would you show this on your return?
If you gave money to a third party. That third party operated a business, and gave you back a portion of the 'profit'. Your role in this 'business' is purely passive, so your 'profits' are completely taxable. You had no active involvement with the business, so you can not subtract business operating costs.
If you maintain an active role in the operation of a business, then you get to subtract the costs of doing business from the income. Which opens up the possibility of your business being a loss. When operated at a loss a business lowers your remaining taxable incomes.
How would i go about doing this? My parents do own a condo in Florida and I have worked (and I think filed tax for a Summer job) under that address many years ago. Would that help?
I do not see how.
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