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To Buy or Not To Buy


The benefi ts and pitfalls of holding a mortgage as a US person living in the UK, explained by Andrea Solana


to your fi nancial aff airs is easy. The consequences of seemingly simple decisions - such as how to pay for a new home or purchase a mutual fund - may create unneces- sary tax charges and complexi- ties. There are a number of key milestones that occur, from the time you arrive in the UK to the time you potentially approach and eventually reach retirement. Many of these changes will impact the appropriate wealth manage- ment strategies for American expats. Understanding how rules will change for you over time will allow you to plan ahead and make prudent fi nancial decisions. In this edition we will explore some of the benefi ts and potential drawbacks of holding a mortgage as a US person in the UK. As most people know, the US


A


allows a mortgage interest deduc- tion on an individual’s tax return if the debt is secured by a qualifi ed


16 The American


s an American living in the UK, almost nothing related


home. A qualifi ed home is gener- ally defi ned as your main home or second home. Mortgage inter- est is generally deductible on (1) mortgages taken out to buy, build or improve your home (otherwise known as home acquisition debt) in the amount of $1 million or less ($500,000 or less if married fi ling separately) and (2) mortgages taken out other than to buy, build or improve your home (known as home equity debt) in the amount of $100,000 or less ($50,000 or less if married fi ling separately). If the deductible mortgage inter- est, along with other allowable itemised deductions (such as real estate taxes, personal property taxes, state income taxes, charitable contributions, etc.) are higher than the applicable standard deduction for the year, then it will generally be benefi cial to itemise deductions for the year. The UK doesn’t have a similar


mortgage interest deduction allow- able for non-investment properties.


As such, it is a common question as to whether mortgage interest is deductible on a foreign residence. In general, the answer is that it may be deductible. The rules around foreign mortgage interest deduc- tions are the same as the rules outlined above for a US property. So, holding a mortgage on your UK residence may provide a benefi t from a US perspective if you have taxable income in the US that is not off -settable by foreign tax credits. Not only can you potentially reduce your US taxable income further but you can sometimes receive a fi nan- cial benefi t if you are able to invest available capital and earn a return above that of the after-tax interest rate you pay on the mortgage loan itself.


One very important area to


be aware of as a potential draw- back of holding a mortgage on a foreign property is around foreign currency. Most people know that if, at the time of sale, the property qualifi es as the individual’s principal


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