Gain on Foreign Mortgage

[atif1040]

Hello Everyone. 

Hope you all are having a good easter. 

A quick question, I have a client who is living in the UK and took the mortgage in 2011 and now selling his house and have gain of $500k plus due to the interest rate. My question is, where and how can I report this gain. I was thinking online 21 as other income, any suggestions, please. Additionally, I was reading that this is also subject to net investment tax, how can I make this subject to this tax as well in the system. 

Thank you in advance!

[George4Tacks]

Was this their personal residence? US Citizen living in UK? I think you did your question too quickly and did not give enough information. I am pretty sure that line 21 is not the place to report this, but I have been wrong before. 

[Just-Lisa-Now-]

took a mortgage in 2011...when did he buy the house?   what does interest rate have to do with the gain?  Im confused.

[atif1040]

Yes, it was their personal residence. They are US citizens. 

[atif1040]

House bought in 2011. I never mentioned the interest rate in my post. My questions is how and where would I report the gain due to the foreign exchange rate. 

[atif1040]

Sorry, my mistake, not the interest rate, due to the foreign exchange rate. Thank you for pointing it out. 

[Just-Lisa-Now-]

Does a foreign sale differ from a US sale when reporting a sale of personal residence? 

(I dont have any clients with foreign anything).....if not, it gets reported on the Sch D  (homesale worksheet is in proseries, sorry, I edited it)

[itonewbie]

There is no gain to be recognized for "interest rate".  Even if your client had a mortgage below market rate (which is unlikely), §7872 does not work this way, although it may trigger a reporting and information return filing requirement under §6039F.

There may, however, be a foreign currency gain that needs to be recognized pursuant to §988 on a foreign-currency denominated mortgage.  This gain is computed with each principal repayment and not only at the sale of the home.  This must also be figured separately from any gain the taxpayer may need to recognize for the sale of home and §121 does not differentiate whether a home is in the US or a foreign country.

Foreign currency gain is reported on Line 21 whereas the sale of home is reported on F.8949.

See also these two threads for discussions about foreign currency gain on mortgage.

https://proconnect.intuit.com/community/tax-talk/discussion/re-foreign-exchange-gains/01/76964#M2452

https://proconnect.intuit.com/community/tax-talk/discussion/re-foreign-exchange-gains/01/77459#M2501

[itonewbie]

Something doesn't seem right if $500k is all foreign currency gain.

Gain on sale of home, as I explained, is computed separately and is determined based on spot rates.

[atif1040]

Hi itonewbie

Can you please confirm if I am doing it right: 

Mortgage at the beginning at April 2011	1,129,685.00	0.6432	1,756,351.06
Mortgage at the closing at 31 dec 2019	793,065.25	0.784	1,011,562.82
Gain on Foreign Mortgage				744,788.24

 I would report $744,788 on line 21, is this correct? Is this also subject to NIIT Form 8960? if yes, on which line? the last question, do I need to calculate the gain on his monthly payments he made in all these years? 

[itonewbie]

No, it is not right.  I don't think you can rationalize to yourself (or to your client) this is what he/she has for foreign currency gain.  You may like to do a bit more research.

For NIIT, the answer you need is right in the regs for 1411.

As for the answer to your question about monthly payment, it's in my original response and the threads I cited.  You don't seem to have read these before responding.

[George4Tacks]

I think you are thinking too hard (and possibly too quickly) on this quick question. Forget the mortgage! How much was paid for the personal residence in US Dollars. How much was the personal residence sold for in US Dollars. Report the gain(loss) on the sale of the personal residence.  https://www.irs.gov/taxtopics/tc701

[itonewbie]

@George4TacksUnfortunately, he cannot forget about the mortgage.  Foreign currency-denominated mortgage is subject to §988 and courts have consistently ruled that it is separate and distinct from any gain/loss a taxpayer may have on the sale of the underlying property.

[atif1040]

I have read this in your original reply "This gain is computed with each principal repayment and not only at the sale of the home."

So I need to go back and calculate the gain in each month on the principal amount  (not interest) and calculate gain to add in the total gain. as the loss is not allowable anyway. right? 

No, it is not right.  I don't think you can rationalize to yourself (or to your client) this is what he/she has for foreign currency gain.  You may like to do a bit more research. 

I have read on about 10 different places and they have calculated the gain same way I showed in my calculation. If you think it is wrong, could you please explain specifically what is wrong with this calculation and how can I calculate it correctly? 

[BobKamman · Accepted solution]

No, you should compare the £793,065 he paid off at the lower exchange rate, to the value of that same amount, £793,065 when he borrowed them. That comes out to about $221,437. The rest of the gain, if any, came mostly since 2014, because the pound traded mostly higher from 2011 until then (so he was losing money).

[itonewbie]

The gain needs to be recognized in the year it is realized.  If those gains were missed in prior years, you can't fix it by catching up on the 2019 return.

If this is a personal residence, any loss is personal and not deductible.

Yes, it is wrong.  Question is how do you rationalize your numbers.  If you can explain it and reason it, I can then point you in the right direction.

[itonewbie]

Agree.  If that is the amount of principal that was paid off in 2019.

[atif1040]

So the taxable gain on the foreign mortgage would be $221,436.64. Which i would report on line 21. Correct?

£793,065.25	0.6432	$       1,232,999.46
£793,065.25	0.784	$       1,011,562.82
		$          221,436.64

[itonewbie]

Yes, if that is the amount of principal that was paid off during 2019 and on one single day (given only one spot rate is presented here).

[atif1040]

Perfect, thank you. Finally, came to the conclusion.