Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I'm a British citizen trying to buy a property in the U.S., and although I could pay cash, I am considering taking out a mortgage there so as to keep my assets liquid. What are the tax advantages to getting bank financing?
"There aren’t any particular U.K. tax advantages" if you, as a U.K. domiciliary, buy property for your own use, said Mark Summers, partner at Charles Russell Speechlys AG in Zurich.
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But if you purchase property as a rental investment, you can offset the mortgage interest against the rent for income tax purposes, but can only deduct up to the U.K.’s basic rate level of 20% tax, he said. "It’s not very generous and not a big tax advantage." In the past, taxpayers at a higher rate were able to deduct up to 45%.
In the United States, the property would be subject to estate tax, which is similar to inheritance tax in the U.K., said Michael W. Galligan, partner in the Trusts & Estates Department of Phillips Nizer LLP in New York City.
If the property has a non-recourse mortgage, in which the lender can seize only the house and no other assets in case of default, the estate can deduct the entire value of the mortgage against the value of the property, he said. This could "significantly" reduce the exposure to estate tax, which, for non-U.S. decedents, kicks in at $60,000 of value, Mr. Galligan noted. Under the U.S.-U.K. Estate and Gift Tax Treaty, which prevents double taxation, the U.S. estate tax would be credited against the U.K. inheritance tax, he said.
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"But, in many cases, because the U.K. [inheritance] tax is at the same 40% rate as the U.S. estate tax, the benefits of extensive planning to avoid the U.S. estate tax on purchases of U.S. property by non-U.S. persons are not as dramatic as, say, they are for purchasers from China or India, which don’t have estate or inheritance taxes," Mr. Galligan said. Email your questions to editors@mansionglobal.com. Check for answers weekly at www.mansionglobal.com.