Foreign Mortgage Gain

This article is only relevant if you are a US taxpayer and you have a non-US Dollar denominated mortgage . For example, you are a US citizen living in London and you have a UK mortgage in Pound Sterling. If you are considering repaying this loan then you should be aware of foreign exchange gains (FX Gains), how they occur and what options are available to you.

What is it? – In short, a foreign exchange gain arises when you repay a foreign currency loan at a lower USD figure, based on the change in exchange rate from the day you took out the loan to the date of repayment.  

To put things into perspective, let’s assume you borrowed £100,000 in Jan 2014 and repaid this loan in full in Oct 2023. The calculation would look a little something like this:

 GBPBank of England Exchange Rate  USD  
Borrowed Jan 2014£100,0001.6$160,000 
Paid off Oct 2023£100,0001.2$120,000 
The Gain£0 $40,000  

Although you have not realised a gain in the UK, you are a US taxpayer and must use USD as your functional currency. You are deemed to have repaid a lower amount in USD which has resulted in an FX gain of $40,000!

When does this occur? – You do not only have to physically repay the loan for an FX gain to occur. Any of the following events may result in a gain being realised:

  • Refinancing; effectively paying off the original loan and taking out a new loan
  • Capital Repayment; a lump sum payment outside of your regular monthly re-payments.
  • Sale of property; any remaining mortgage being paid back to the lender – see here for more info on US tax implications of selling property 

These events are not designed to benefit from the fluctuation in exchange rate, especially if you are living in a foreign country, but they will still be caught by these rules.

What is the tax rate? – This gain is subject to US income tax rates, which could be as much as 37%. Furthermore, Net Investment Income Tax (NIIT) is also applicable, increasing the tax by 3.8% if your adjusted gross income exceeds the NIIT threshold.

Any more bad news? – Unfortunately, yes:

  • If you were to realise a foreign exchange loss, there is no facility to utilise or carry this forward on your US tax return
  • This is an income gain and cannot be offset by other capital losses

Any good news? Not really, but here are a few options:

  • If the mortgage is in joint names with your spouse who is a non-US individual (Non-Resident Alien) and your filing status is married filing separately then you only need to report your half of the gain
  • If your spouse is a non-US person, then it may be possible to restructure your ownership of the property and the mortgage to minimize your exposure to an income tax charge. There are gift tax considerations and we recommend speaking to us for more specific advice.

CAUTION! The fluctuation in exchange rates may also affect the realised gain or loss on any sale of non-US assets. For example, you sold some stock in a UK company. You must convert the purchase price to USD at the exchange rate on the date of purchase and convert the proceeds to USD on the date of sale. This can have a significant impact on the size of the gain. A GBP loss could result in a USD gain.