Whilst the US tax system can frequently surprise us in its broad nature, one of the least expected complexities can be foreign currency gains.
We'll follow on from our last article on loans, and today briefly discuss mortgage repayments.
As many of us will have noticed, we are currently in a period of falling interest rates, and as a result, many are now remortgaging their homes from the high interest rates we’ve seen in the last 3-4 years.
As we know, US citizens are considered to be tax residents of the US, regardless of where they reside in the world. This does mean that US tax considerations need to be made when financial decisions are made, even when living in New Zealand.
The US NZ double tax treaty is effective at preventing double taxation on the most part, but not every form of income is covered.
Despite, being little known as a form of taxation, refinancing a foreign currency (ie NZD) mortgage can indeed be a taxable US event.
Due to the complexity of the area, we’ll discuss this only briefly below. However, if this is something which may affect you, reach out to us for specialist US tax advice.
Are there US tax implications of refinancing a mortgage?
When a mortgage is denominated in a currency other than USD, then there can indeed be tax implications of refinancing.
You might now be scratching your head at how refinancing a loan could possibly result in taxable income in the US return.
The answer lays in the fluctuation between the foreign currency exchange rate, and the US dollar.
We’ll use below a very basic example of how a foreign currency gain can occur:
Mortgage taken out for $1,000,000 NZD – equivalent USD as of the date the mortgage was taken - $600,000USD
Mortgage paid off in lump sum at a later date - $1,000,000 NZD now equivalent to $550,000USD.
This means that the USD amount of the mortgage paid off was $50,000 less than originally planned, and thus we have a $50,000 foreign currency gain.
This foreign currency gain of $50,000USD can then be taxable as income in the US.
Can other foreign currency gains create a US tax liability?
Indeed, many other foreign (ie non-US) debt instruments or futures contracts can result in foreign currency gains, and are addressed through Section 988 of the US Tax Code.
Summary
As you can see above, US taxation is broad, and can at times be complex. It can be difficult to keep track of so many different aspects of taxation, and obtaining quality US tax specialist advice is essential to prevent falling into any tax traps.
If you’re looking for US tax advice in NZ, contact us today – info@usatax.nz