US taxation of change of currency valuation from Great Briatin UK to the United States


I recently did taxes for a citizen of Great Britian now living (and
working)in the U.S. He sold his house in England after renting it out for a
year. He is able to exempt part of the gain since it was his main residence
for almost two years and he sold it due to a job move. Our biggest problem
is the difference in valuation in the currency. When he bought the house,
the exchange rate was $1.50 lb for $1.00 U.S. When he sold the house, the
exchange rate was $1.65 lb for $1.00 U.S. That means he has a gain also due
to the exchange rate. My question (finally, I get to my question). Can this
gain be considered part of the gain for sale of the house (and therefore
excluded as part of the gain on the house) or does it have to be considered
an investment gain (a separate transaction) and put on Schedule D? I wrote
to the IRS but they completely ignored the question and just sent me to a
publication that had nothing about this.
Thanks you for your help.

david ingram replies:

I thought I had answered this question a month ago, but if I did, I can't find the reply.

The currency exchange is part fo the sale profit on the house. It happens all the time, particulary here in Vancouver where so many Canadians have a place in Palm Springs, Mount Baker, Scotsdale or Point Roberts and so many Americans have properties in the Gulf Islands or Whistler.

No separate schedule. Just convert it to American Dollars at the purchase and sale dates and the result is the figure you use.

And for Great Britain, the cost is the price he paid for it and I have just spent an hour going over the UK / United States Tax Treaty looking for a similar provision to Article XIII(6) of the Canada / United States Tax Treaty which reads a follows:

6. Where an individual (other than a citizen of the United States) who was a resident of Canada became a resident of the United States, in determining his liability to United States taxation in respect of any gain from the alienation of a principal residence in Canada owned by him at the time he ceased to be a resident of Canada, the adjusted basis of such property shall be no less than its fair market value at that time.

What this means is that if your client had been a Canadian, the US cost price of the former personal residence would have been the value on the date he became a US resident, not what he paid for it.

This Article came into force on Sept 26, 1980 and in the 23 years or so in between, I have never seen another accountant anywhere invoke it even though it would always result in less US tax. In one case involving a very expensive house, I got back a $43,000 US refund by refiling.


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