First time buyer advice needed.

[Benjamin Hall]

Hi everyone!

I'm a Brit, living in the middle east and am married to an American. 

We have secured financing from the middle east in order to invest in my wifes hometown in Indiana, so from the buying point of view, we are effectively cash buyers. We have researched the market thoroughly and have narrowed down our search to a selection of properties which my wife is currently viewing in America.

I'm really asking you lovely people for some advice about unexpected pitfalls we might face. 

We are aiming to rent the property out and use a property management company to look after to daily aspects. My wife has lots of family in the area in case anything dramatic happens that needs immediate assistance.

I'm also a bit stumped regarding the tax situation. Obviously, I'm going to contact an accountant regarding this, but a bit of initial information on here would be jolly useful. We both live in a Tax free country, and therefore currently pay zero taxes. I understand that the income collected from rental returns is taxable, but is there any way to offset some of this against the loan we have in the middle east?

Thanks for all of your time!

[Linda Weygant]

Oh boy.  Lots of moving parts here and a very complicated taxation scenario.  Most of my answers will be generalities.  Your particular situation may vary and I suggest you consult with both a CPA and maybe a CA who is well versed in international taxation.

The first issue is that, if your wife has maintained her US citizenship or if she has dual citizenship, US tax law is such that you are taxed on your worldwide income.  There is an exclusion for income earned while a resident in a foreign country - still reportable, but not always taxable depending on the amount.

However, the rental income will not be earned income - it is passive income, so it will be taxable in the US.

My understanding of British taxation is that you are not taxed on your worldwide income - only income earned there.  I may be off on that, which is why you should consult with a Chartered Accountant if you don't know the answer yourself.  

Since the loan you are getting isn't technically a mortgage on the property, then the interest you pay on it isn't technically deductible mortgage interest expense on the Schedule E (which is where you report the rental income and expenses).  However, it would be investment interest expense, which would be deductible on the Schedule A (subject to a 2% floor).  

It would be more advantageous, however, to attach the loan to the house with a lien, making it a mortgage.  You would realize better tax savings that way.

One thing to keep in mind as well is that many properties that cash flow well will still have a tax loss due to the depreciation deduction.  Depending on your purchase price and overall rental income and other expenses, you may actually have a tax loss despite having a cash gain and you may, therefore, have no tax due.

As I said, a ton of moving parts here.  Also, if some of the above concepts need to be explained, please feel free to ask additional questions.

(My partner is a Brit and I've studied a little bit of international taxation, but I am not an expert).

Good luck!