A US citizen who lets a flat in the UK reports the rent and expenses on Schedule E (opens the official IRS page in a new tab) of the US return, converted to dollars, and depreciates the building over the longer recovery period the IRS sets for property used outside the United States. The UK taxes the same rent under its own rules, and the US then gives a foreign tax credit for the UK tax, usually in the passive category.
This post is for Americans who let a UK property while living in Britain, and for those who moved back to the US and kept the flat. It goes further than the rental paragraph of our guide to avoiding US-UK double taxation. It covers the dollar figures on Schedule E, US depreciation, the deductions that differ between the two systems, the UK return and the non-resident landlord rules, the credit for UK tax, and what the letting years mean for a later sale.
How does a US citizen report UK rental income on the US return?
On Schedule E of Form 1040, in dollars, for the calendar year. Gross rent, letting agent fees, repairs, insurance, mortgage interest and depreciation are each translated from pounds and entered as they would be for a US rental. The result joins the rest of the return, so a UK let is never reported in sterling or left off.
IRS guidance on foreign currency and exchange rates (opens the official IRS page in a new tab) says items in a foreign currency are translated at the rate prevailing when they are received, paid or accrued, and that taxes are among the items to translate. Where rent and costs arrive evenly through the year, many filers use the IRS table of yearly average exchange rates (opens the official IRS page in a new tab), applied consistently. Larger one-off items, such as a new boiler or a large service charge bill, are better translated on their own dates.
The two tax years do not line up. The US return covers January to December, while the UK rental figures run from 6 April to 5 April. A US return therefore draws rent and expenses from two UK tax years, and the agent's annual statement rarely matches it. We rebuild the calendar-year figures from the monthly statements when preparing Form 1040, rather than reusing the UK totals.
How is a UK rental property depreciated for US tax?
Under the alternative depreciation system, using the straight line method. Publication 946 requires ADS for tangible property used predominantly outside the United States, and its tables give foreign residential rental property a longer ADS recovery period than the one used for a let property in the United States. The period also depends on when the property was first let, with a longer one for property placed in service before 2018.
Only the building is depreciated. Publication 527, the IRS guide to residential rental property, says land cannot be depreciated, so the purchase price is split between land and building. Where a flat was first a home and later let, its basis for depreciation is the lower of its adjusted basis and its fair market value on the date it was changed to rental use, measured in dollars. Publication 946 also says property that must use ADS cannot take the special depreciation allowance.
Depreciation is not optional. Publication 527 says basis is reduced by depreciation that was allowed or allowable, even if it was never claimed. A landlord who skipped it for years still has a lower basis on sale, so missing depreciation is worth correcting while it can be. Furniture and appliances supplied with the flat are depreciated as separate assets, also under ADS.
- Building. ADS, straight line, over the recovery period in Publication 946
- Land. Never depreciated; its share of the cost stays in basis
- Former home. Basis is the lower of adjusted basis and value at conversion
- Contents. Furniture and appliances depreciated as separate assets
- Missed years. Allowed or allowable depreciation still reduces basis
Which rental deductions differ between the UK and US rules?
Mortgage interest and the building itself. HMRC restricts relief for residential finance costs to a tax reduction at the basic rate, while the US deducts the interest in full as a rental expense. The US also requires depreciation of the building, which the UK does not allow against rent from a residential let.
HMRC's guidance on working out rental income (opens the official HMRC page in a new tab) says relief on all residential finance costs, including mortgage and loan interest, is restricted to the basic rate of income tax, and that capital expenses cannot be set against rent. It offers instead a relief for replacing domestic items such as furniture and appliances, a property allowance that can be claimed in place of actual expenses, and the cash basis for straightforward lettings. None of these has a direct US equivalent.
On the US side, Publication 527 allows mortgage interest on a rental, except interest on extra borrowing from a refinance that is not used for the rental. A loss on the property is a passive loss under Publication 925. A special allowance lets someone who actively participates use some rental loss against other income, but it shrinks as income rises and is unavailable to a married person filing separately who lived with their spouse at any time in the year. Disallowed losses are carried forward.
- Mortgage interest. UK: basic rate tax reduction. US: deducted as a rental expense
- Building. UK: no deduction for its wear and tear. US: ADS depreciation required
- Replacing furniture. UK: replacement relief. US: each item depreciated
- Rental losses. UK: UK lets pooled as one property business. US: passive loss rules
What does the UK rental return involve for an American landlord?
The rent goes on the UK property pages of a Self Assessment return, known as SA105, filed with the SA100. This applies while the owner lives in the UK and after leaving, because the UK taxes rent from UK property wherever the owner lives.
A UK resident reports the profit, worked out under the UK rules, for the tax year to 5 April. The online return and any balancing payment are due by 31 January, and anyone new to Self Assessment registers by 5 October. Our UK Self Assessment service prepares the property pages alongside the US return, so that one set of records serves both.
A landlord who moves abroad falls within the Non-resident Landlord Scheme. GOV.UK guidance on rental income if you live abroad (opens the official GOV.UK page in a new tab) says the letting agent, or a tenant paying more than a weekly amount set by HMRC directly to the landlord, deducts basic rate tax from the rent after allowing for expenses, and issues a certificate of what was deducted. A landlord can apply to HMRC to receive rent without deduction, which is refused if tax affairs are not up to date. A Self Assessment return is still needed unless HMRC says otherwise.
How does the foreign tax credit work for UK tax on rent?
UK tax on the rent is credited on Form 1116 (opens the official IRS page in a new tab), generally in the passive category. Publication 514 (opens the official IRS page in a new tab) sources rent where the property is, so UK rent is foreign-source income, and it lists rents among passive income, apart from rents from an active business.
The credit is limited to the US tax on the foreign-source rental profit in that category. Because the US profit is reduced by depreciation and full interest, it is often smaller than the UK profit, so the UK tax can exceed the limit. Where foreign tax exceeds the highest US tax that could be imposed on the income, Publication 514 treats it as high-taxed income in the general category. Unused credit carries back one year and forward ten within its category, as our post on carrying excess UK credits explains.
Two further points sit outside the credit. The 3.8% net investment income tax (opens the official IRS page in a new tab) can apply to rent, and UK tax is generally not creditable against it under domestic law, with treaty-based claims contested, as our post on the net investment income tax explains. A US rental loss that offsets other foreign income can also affect the credit in later years. Our treaty relief service keeps each category on its own Form 1116.
What happens on a later sale of a let UK flat?
The US recaptures the depreciation. Publication 544 describes unrecaptured section 1250 gain as the part of a long-term gain on real property that is due to depreciation, and IRS guidance taxes it at a capped rate that can exceed the usual long-term rates. Depreciation that was allowable but never claimed counts as well.
The UK and US gains are worked out separately. The UK charges Capital Gains Tax on the sterling gain, and a non-resident reports a UK residential disposal under the non-resident capital gains rules (opens the official HMRC page in a new tab) within 60 days of completion. The US computes the gain in dollars, with cost translated at the purchase date and proceeds at the sale date. A former home may still qualify for part of the US main-home exclusion, but Publication 523 says gain equal to depreciation after 6 May 1997 cannot be excluded. Our post on selling a UK home as a US citizen sets out both calculations.
A sterling mortgage adds a separate currency result. A loan that financed a let property can fall within section 988, unlike a loan on a home, so a currency gain on repaying it can be ordinary income and a loss may be allowable. Our post on sterling mortgages and currency gains explains why the split between personal and rental use matters.
What does this look like for an American who kept a UK flat?
Take a US citizen who bought a flat in Bristol, lived in it for several years, then moved to Boston for work and let it through an agent. From the date of letting, the flat is a foreign rental on Schedule E, and its basis for depreciation is fixed in dollars at the lower of adjusted basis and value on that date.
Each year her agent deducts basic rate tax under the Non-resident Landlord Scheme unless HMRC has approved gross payment, and she files a UK return with the property pages. Her UK profit is higher than her US profit, because the UK gives only a basic rate reduction for the mortgage interest and nothing for the building. Her US return shows a smaller profit, or a loss limited by the passive rules, and credits the final UK tax in the passive category.
When she sells, the UK taxes the gain in pounds, and the US taxes the dollar gain with the depreciation recaptured and the mortgage measured separately. Our cross-border property service prepares the UK and US schedules together, and the guide to avoiding US-UK double taxation shows where the rental fits among the other reliefs.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
