Foreign Currency Mortgage Gains
A foreign currency gain, sometimes referred to as a phantom currency gain, is a potential pitfall that can impact US taxpayers residing abroad, who take out loans in a foreign currency. The most common type is the foreign currency mortgage gain. This occurs where a foreign mortgage is significantly paid down or refinanced, when the exchange rate has shifted between the date the mortgage originated and the date of the payment/refinancing, to a point that less money in US dollar terms is required to repay the original amount of the loan. This can give rise to a significant taxable event in the US, even though no gain is realized in the foreign currency. Conversely, foreign currency mortgage losses cannot be deducted.
For example: you take out a GBP mortgage on your UK home for £1 million. The USD/GBP exchange rate at the time is 1.5, meaning your mortgage is taken out for $1.5 million in US dollar terms. Later, you switch mortgage providers and refinance the mortgage for the full £1 million – effectively paying it off in full and taking out a new loan for the same amount – but the USD/GBP exchange rate has shifted to 1.25. In practice, while you took out a GBP mortgage for £1 million and repaid it for £1 million, in USD terms you took out a $1.5 million mortgage and repaid it for only $1.25 million; in the eyes of the IRS, you have experienced a $250,000 taxable gain, which may be taxed at the top ordinary income tax rate of 37%.
The foreign currency mortgage gain presents an obvious problem for unassuming US taxpayers, but can be managed with careful tax planning. For more information on how Jaffe & Co can assist with foreign currency gains, please get in touch and we will be glad to see if we can help.
For example: you take out a GBP mortgage on your UK home for £1 million. The USD/GBP exchange rate at the time is 1.5, meaning your mortgage is taken out for $1.5 million in US dollar terms. Later, you switch mortgage providers and refinance the mortgage for the full £1 million – effectively paying it off in full and taking out a new loan for the same amount – but the USD/GBP exchange rate has shifted to 1.25. In practice, while you took out a GBP mortgage for £1 million and repaid it for £1 million, in USD terms you took out a $1.5 million mortgage and repaid it for only $1.25 million; in the eyes of the IRS, you have experienced a $250,000 taxable gain, which may be taxed at the top ordinary income tax rate of 37%.
The foreign currency mortgage gain presents an obvious problem for unassuming US taxpayers, but can be managed with careful tax planning. For more information on how Jaffe & Co can assist with foreign currency gains, please get in touch and we will be glad to see if we can help.
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