US Tax Preparation for American Expats Letting a US Home

If you kept your American home and let it out after moving to London, the United States taxes that rental profit first as the country where the property sits, and HMRC then taxes the same profit on the arising basis and gives you credit for the US tax. That reversal of the usual relief direction, plus two profit computations that will never agree, is what makes US tax preparation for American expats in this position genuinely technical.

Why this situation behaves differently from every other expat rental

Most guidance written for Americans abroad assumes the property is in the host country: a flat in Fulham owned by a US citizen, with HMRC taxing it first and the IRS granting a foreign tax credit on Form 1116. Your position is the mirror image. The house is in Boston, Austin or Scarsdale; you are now resident in the United Kingdom; and the credit flows the other way.

Article 6 of the US-UK double taxation convention gives the country in which real property is situated the primary right to tax income from that property. The United States therefore taxes the rent as US-source income under its ordinary rules, and it does so whether you are living in Kensington or Kansas, because US citizens are taxed on worldwide income regardless of residence. The United Kingdom, meanwhile, taxes you as a UK resident on your worldwide income as it arises, which includes rent from a house in Massachusetts. HMRC resolves the overlap by granting foreign tax credit relief for the US federal tax properly payable on that income.

The practical consequence catches people out constantly. You cannot use the US foreign tax credit here, because there is no foreign income to shelter: US-source rent is not foreign income on your Form 1040, and no amount of UK tax paid on it can be credited against the US tax on it. The relief has to be claimed in the UK, on the UK return, in the UK tax year, at the UK computation of profit. If your adviser files your 1040 on the assumption that a Form 1116 will mop everything up, you will end up with a double charge and a UK return that has to be amended.

Does keeping the US house make me UK tax resident in a different way?

No, but it affects the Statutory Residence Test in both directions. Retaining a US home does not stop you becoming UK resident once you have a London home, a UK job and UK days. It can, however, matter for the ties test in the years either side of your move, and it matters enormously for split-year treatment: the date UK residence begins fixes the point from which the US rent starts appearing on a UK return at all. Rent arising before that date is outside the UK charge; rent arising after it is inside it. Getting the split-year case right is the first thing we reconstruct when a client hands us a lease that started mid-move.

Two computations, one property: how the US and UK profits diverge

The single most expensive misunderstanding is assuming that the Schedule E net profit can simply be copied onto the UK foreign property pages. It cannot. The two systems differ on depreciation, on finance costs, on the accounting basis, on the tax year and on currency. Each difference moves the profit figure independently, and the credit you can claim in the UK is limited by reference to the UK figure.

Item	United States (Schedule E)	United Kingdom (foreign property pages)
Depreciation on the building	Mandatory. Residential rental property is written off straight-line over 27.5 years under MACRS, with a mid-month convention. Recapture applies to depreciation "allowed or allowable", so failing to claim it does not save you later.	No equivalent. The UK gives no writing-down allowance for a residential building, so UK profit is structurally higher.
Mortgage interest	Fully deductible against rental income on Schedule E as a rental expense.	Restricted. Finance costs are not deducted; relief is given as a basic-rate tax reducer, generally at 20%, which is worth far less to a higher or additional-rate payer.
Furniture and appliances	Capitalised and depreciated, typically over shorter recovery periods, with bonus or section 179 treatment sometimes available.	No deduction for the initial cost. Replacement of domestic items relief gives a deduction only when an item is replaced, restricted to a like-for-like equivalent.
Accounting basis	Cash basis for most individual landlords.	Cash basis is the default for a property business with gross receipts at or below the statutory threshold; accruals must be elected. The UK and overseas property businesses are tested separately.
Tax year	Calendar year to 31 December.	6 April to 5 April.
Currency	USD throughout; the property is in the functional currency.	Sterling. Every receipt and expense must be translated, and HMRC expects a consistent, justifiable rate.
Losses	Passive activity loss rules can suspend the loss; a limited special allowance may release some of it depending on income and active participation.	Losses of the overseas property business are ring-fenced. They carry forward against future overseas property profits and cannot be set against UK property profits or other income.

Why depreciation is the difference that compounds

US depreciation is not optional in any meaningful sense. On sale, unrecaptured section 1250 gain is computed by reference to depreciation allowed or allowable, taxed at a higher rate than the long-term capital gains rate. A landlord who never claimed it is taxed as though they had. So the US profit is suppressed by a deduction the UK does not recognise, year after year, and the gap widens.

Concretely: a house generating US rent of $60,000 with $18,000 of operating costs, $22,000 of mortgage interest and $11,000 of depreciation shows a US profit of $9,000. The same year, translated into sterling, the UK computation adds back the depreciation entirely and removes the interest from the expense column, producing a UK property profit in the region of the sterling equivalent of $42,000, against which a 20% tax reducer on the interest is applied. The UK tax on that profit will comfortably exceed the US tax on $9,000. Foreign tax credit relief will eliminate the US element, but the UK residue is real, and it is the number that determines your cash position. Anyone who budgeted on the Schedule E figure has budgeted wrongly by an order of magnitude.

How do I handle the tax year mismatch?

The UK charge arises by reference to the year to 5 April; the US charge arises by reference to the calendar year. There is no election that aligns them. In practice the computation has to be built from the underlying records, month by month, and then cut twice: once at 31 December for the 1040 and once at 5 April for the UK return. Building the workbook this way is more work in year one and saves the position permanently thereafter.

Credit timing is the related problem. HMRC's helpsheet on relief for foreign tax paid limits foreign tax credit relief to the lower of the foreign tax payable and the UK tax on the same item of income. Because a UK return for the year to 5 April 2026 is due by 31 January 2027, and the US return covering the overlapping calendar years may still be on extension, the US figure often has to be computed on a properly supported basis and revisited. HMRC's guidance is at HS263, Relief for foreign tax paid, and the foreign pages themselves are the SA106 supplementary pages published at GOV.UK.

What the UK return actually looks like

Your US letting is an overseas property business for UK purposes. HMRC's Property Income Manual confirms at PIM4702 that the profits of an overseas property business are chargeable only where the business is carried on by a UK resident, that the computational rules mirror those for a UK property business, and that the overseas business is kept separate from any UK property business, so losses cannot be moved between them. That separation matters if you also own a UK buy-to-let: a loss on the London flat does not shelter the profit on the Denver house.

The mechanics on the return are: the foreign property income and expenses on the SA106 foreign pages, the foreign tax paid entered against that income, and a claim for foreign tax credit relief rather than deduction relief in almost all cases where there is a UK charge to relieve. Where UK tax on the income is lower than the US tax, the excess US tax is simply lost; it does not carry forward in the UK system the way an excess US foreign tax credit would.

What about the Foreign Income and Gains regime?

From 6 April 2025 the remittance basis was replaced by the four-year Foreign Income and Gains regime. A qualifying new arrival with the required run of consecutive non-UK-resident years immediately beforehand can claim relief on foreign income and gains, which would include the US rent, for their first four years of UK residence. For an American arriving in London for the first time this can be transformative, and for an American returning to the UK after a shorter absence it is usually unavailable.

It is not free. Claiming under the regime means giving up the personal allowance and the capital gains annual exempt amount for that year, and it requires the income to be identified and claimed correctly on the return rather than simply omitted. It also interacts awkwardly with the US side, because if HMRC does not tax the rent there is nothing for the US to relieve and nothing to relieve in the UK, but the US tax is still payable in full. Whether the claim is worth making is an arithmetic question that has to be run on your actual numbers, and it changes as the four-year window runs down. Our UK tax services team runs that comparison as part of the annual return preparation.

The US side of the file, done properly

On Form 1040 the letting goes on Schedule E, described by the IRS at About Schedule E (Form 1040). Depreciation begins in the month the property is placed in service as a rental, which is the month it is available to let, not the month the first tenant moves in. The depreciable basis is the lower of adjusted basis or fair market value at conversion, allocated between building and land, and the land portion is never depreciated. Getting the conversion-date basis wrong is the most common error we correct on inherited files, and because it drives every subsequent year and the eventual recapture, it is worth documenting contemporaneously with an appraisal or a defensible allocation.

Several other US points recur in London files:

• Net investment income tax. Net rental income is ordinarily net investment income, so the 3.8% charge can apply on top of regular tax. Whether HMRC will give credit for that charge as part of the US tax on the income is a live and unsettled question, and we generally take a documented position rather than assume it.
• Passive activity losses. A US tax loss on the property is usually passive. A limited special allowance may release part of it where you actively participate, but it phases out with income and, for most of our clients, is unavailable. Suspended losses are not wasted; they carry forward and are generally released on a fully taxable disposition.
• The foreign earned income exclusion trap. Rent is not earned income, so the exclusion does nothing for it. Clients who assumed the exclusion covers everything discover a balance due on rental profit alone.
• Withholding and the property manager. Because you remain a US person, the withholding regime for foreign landlords does not apply to you. Do not let a property manager withhold on the assumption that a London address means a nonresident alien. Correcting that after the fact is slow.
• State filing. The state in which the property sits will usually require a nonresident return regardless of where you live, and the US-UK treaty does not bind the states. That is a separate obligation with its own thresholds and deadlines; we treat it as a distinct workstream and it is covered separately in our guides.

Currency: the detail that quietly destroys a reconciliation

The UK computation must be in sterling. Rent received in dollars is translated at a rate appropriate to the date of receipt, and expenses at the date paid, or on a defensible average where the volume makes that impractical. HMRC publishes rates for this purpose; the IRS accepts a yearly average for many purposes on the US side. The point is consistency: the same policy, applied the same way, every year, documented. A file that uses spot rates one year and averages the next invites questions that are tedious to answer three years later.

There is a second currency issue if the mortgage is in dollars. Your economic exposure is naturally hedged, since the rent and the debt are in the same currency, but the sterling value of both moves every year and the UK profit moves with it. A year of dollar strength can produce a materially higher UK tax bill on unchanged dollar rents. Clients who are managing cash between two countries should model this rather than be surprised by it in January.

What happens when the property surfaces unfiled UK returns

A very large proportion of the enquiries we receive on this topic do not begin with a question about depreciation. They begin with an American who has been in London for four or seven years, has never filed a UK Self Assessment return because PAYE covered the salary, and has just realised that the rent from the house in Chicago should have been on a UK return every year since arrival. The property is the item that surfaces the problem, because it is the one source of income PAYE cannot absorb.

The exposure is usually two-sided and the two disclosures are not symmetric:

• The UK side. Undeclared overseas property income is offshore non-compliance. HMRC's assessment windows extend well beyond the ordinary period where behaviour is careless or deliberate, the offshore penalty regime is materially harsher than the domestic one, and unprompted disclosure attracts significantly better terms than a disclosure made after HMRC has written to you. Because financial account information now moves automatically between jurisdictions, waiting is rarely a strategy.
• The US side. If the US returns were filed but the rent was omitted, or if returns were missed entirely while abroad, the streamlined foreign offshore procedures are frequently the right route. The IRS sets out the eligibility conditions, including the non-willfulness certification, on its streamlined filing compliance procedures page. Our IRS streamlined filing team prepares these submissions to a standard designed to survive review rather than merely to be accepted.

The ordering matters. Because HMRC grants the credit and the IRS does not, the UK disclosure is computed by reference to US tax that may itself be the subject of an amended or streamlined filing. Running the two in isolation, or running the UK one first on guessed US figures, produces disclosures that have to be revisited. We sequence them together.

When you eventually sell

Return preparation for a let US home has to anticipate the disposal, because the records you keep now determine the tax then.

On the US side, the section 121 exclusion for a principal residence requires ownership and use as a main home for a qualifying period within the five years before sale. Letting the house for years after moving abroad erodes that. Even where the exclusion still applies, depreciation taken after May 1997 is excluded from it and comes back as unrecaptured section 1250 gain, taxed at a rate above the ordinary long-term capital gains rate. Periods of non-qualifying use can also restrict the proportion of gain that the exclusion covers.

On the UK side, a UK resident is chargeable on the gain on a foreign property, computed under UK rules in sterling using the exchange rates at acquisition and disposal. That sterling computation can produce a gain where the dollar computation shows very little, purely on currency. Private residence relief may cover part of the period of ownership, but not the years it was let while you lived in London. Foreign tax credit relief is again available for the US tax on the same gain, subject to the same limitation.

None of this is a reason to sell or not to sell, and we do not give that advice. It is a reason to hold a clean basis schedule, a depreciation schedule that ties from the conversion date, and a currency policy that has been applied consistently, so that whenever the decision is made the return can be prepared accurately and the credit claimed in full. Where the interaction needs to be modelled across both systems before a filing position is locked in, our cross-border tax team runs the computation alongside the return.

A practical order of work for the first year

• Fix the date UK residence began and whether split-year treatment applies; everything else hangs off it.
• Establish the conversion-date depreciable basis with a land and building allocation, and document it.
• Build one source workbook in dollars with dates, capable of being cut at 31 December and 5 April.
• Set a currency translation policy and write it down.
• Compute the US profit with depreciation and full interest; compute the UK profit without depreciation and with the finance cost reducer.
• Decide on the Foreign Income and Gains claim on the numbers, not on instinct.
• File the UK return with foreign tax credit relief claimed on the SA106; file the 1040 with Schedule E; confirm the state position separately.
• Diarise the two deadlines together, not as separate events.

Talk to us before the next deadline

Jungle Tax prepares US and UK returns for Americans in London whose affairs sit across both systems, including those who have discovered the problem several years late. If you kept a home in America and are letting it from the UK, we will reconstruct the position properly, prepare both returns from a single reconciled workbook, and put any historic exposure right through the appropriate disclosure route on each side. Contact our cross-border team for a confidential consultation and a clear view of what the position actually is.