US Tax Return Preparation for Expats: UK Rental Depreciation

US depreciation on a rental property is allowed or allowable. That phrase decides the outcome: when a US citizen sells a London flat, the gain is increased by the depreciation that could have been claimed, whether or not it ever was. A self-filed UK landlord who never claimed it is taxed on deductions they never took.

This is the single most expensive error we see in US tax return preparation for expats who own UK property. At Jungle Tax we rebuild back years for clients whose returns either omitted the rental altogether or, more commonly, reported it by copying the HMRC property-income figures straight onto Schedule E. Both routes leave depreciation missing. Only one of them can be fixed by amending, and it is not the one most people assume.

Why "allowed or allowable" is the whole problem

Under the US basis rules, the adjusted basis of depreciable property is reduced by depreciation allowed or allowable, whichever is greater. The IRS explains the same principle in plain terms in Publication 527: yearly depreciation deductions include depreciation you were allowed to claim, even if you did not claim it.

Follow that through to a disposal. Basis is written down by the allowable depreciation. Gain on sale is proceeds less that reduced basis. The depreciation component of the gain becomes unrecaptured section 1250 gain, taxed at a maximum federal rate of 25% rather than the 0/15/20% long-term capital gain rates — the IRS confirms the 25% ceiling in its guidance on capital gains and losses. Net investment income tax of 3.8% can sit on top.

So the landlord who "kept it simple" and never depreciated has achieved the worst of every world: no annual deduction against rental profit for fifteen years, and a 25%-rate charge on fifteen years of phantom deductions on the way out. The deduction was not waived. It was forfeited annually and then recaptured in full.

Does not claiming depreciation at least keep the return clean?

No. It creates an affirmative defect. Taking no depreciation for two or more consecutive years is not a series of small omissions; it establishes an impermissible method of accounting. The return is not merely under-claimed — it is on the wrong method, and the wrong method has to be changed rather than corrected. That distinction drives everything below.

How is a UK rental property reported on a US tax return?

A directly held UK rental sits on Schedule E of Form 1040 as a foreign rental. Gross rents are reported in full, in US dollars, with expenses claimed under US rules — not the net figure HMRC accepts. Depreciation is computed on Form 4562 and carried to Schedule E. UK tax paid on the same income is relieved through the foreign tax credit on Form 1116 in the passive basket.

Which recovery period applies to foreign residential rental property?

This is where domestic US guidance misleads. Tangible property used predominantly outside the United States must be depreciated under the Alternative Depreciation System (ADS), not the 27.5-year general system used for a US rental. The distinction turns on where the property is used, not on where the owner lives.

Under ADS, straight-line with a mid-month convention, the recovery period for residential rental property is 30 years — but that 30-year period came in with the 2017 Act and applies to property placed in service after 31 December 2017. Residential rental property placed in service before 1 January 2018 remains on the older 40-year ADS period. Non-residential real property let commercially runs on 40 years. Because most of our clients bought their London flat well before 2018, the pre-2018 40-year figure is the one that usually governs, and getting this backwards understates or overstates every year in the pack. Confirm the placed-in-service date and the applicable table in IRS Publication 946 before any figure is committed to a return.

What actually goes into the depreciable basis?

• Land is never depreciable. The purchase price must be split between land and building. In central London the land element can be a substantial share of the price, and a defensible, documented apportionment is essential — an unsupported 80/20 split invites challenge on audit and on any later disposal.
• Basis is fixed in dollars at acquisition. The sterling cost is translated at the exchange rate on the date of purchase and then frozen. It is not retranslated annually, and it does not move with sterling. Later capital improvements are separate assets, translated at their own dates and depreciated over their own periods from their own placed-in-service dates.
• Acquisition costs generally capitalise. SDLT, legal fees and survey costs attributable to acquisition are added to basis rather than expensed — the opposite of the instinct of a UK landlord used to seeing those costs sit in the capital gains computation only.
• The clock starts when the property was placed in service — available for letting — not when it was bought or when the first tenant paid.

US versus UK: two computations on the same flat

Clients frequently assume that because they already file a UK self-assessment property page, the US figure is a currency conversion away. It is not. The two systems disagree on almost every material line.

Item	US (IRS, Schedule E)	UK (HMRC, property pages)
Depreciation of the building	Required — ADS straight line, 30 or 40 years depending on placed-in-service date; allowed or allowable	No depreciation deduction of any kind against rental profit
Mortgage interest	Deductible in full against rental income on Schedule E, subject to the usual tracing and interest limitation rules	Not deductible for individual residential landlords — relieved as a basic-rate (20%) tax reducer under the finance cost restriction
Tax year	Calendar year to 31 December	6 April to 5 April
Default basis of accounting	Generally accrual or cash depending on the taxpayer's method, applied consistently	Cash basis is the default for most individual property businesses, with an accruals election available
Furniture and domestic items	Depreciated as separate assets over their own ADS periods	Replacement of Domestic Items Relief — deduction on replacement, not on initial purchase, and no depreciation
Currency	US dollars; basis frozen at acquisition rate, income and expenses at appropriate rates	Sterling throughout
Small-income relief	None equivalent	£1,000 property allowance available in place of actual expenses
Losses	Passive activity loss rules and at-risk limits apply; suspended losses carry forward	Property losses carried forward against future UK property profits of the same business

The mortgage interest line alone is decisive. A leveraged London landlord will often show a UK profit (because interest is stripped out of the computation and given back only as a 20% credit) while showing a US loss (because interest is fully deductible and depreciation is on top). Two correct returns, two opposite answers, and a foreign tax credit position that only works if both are computed properly in their own currency and their own year. HMRC's own treatment of the restriction is set out in the HMRC Property Income Manual, and the mechanics of the tax reducer are summarised in HMRC's published guidance on changes to tax relief for residential landlords. HMRC also sets out what counts as rental income and allowable expenses in its guidance on working out your rental income.

What about the year-end mismatch?

A UK property business reports to 5 April; the US return reports to 31 December. There is no shortcut that reconciles them. The rental ledger has to be re-cut on a calendar-year basis for the US return, and the UK tax paid has to be allocated to the correct US year for foreign tax credit purposes. Practitioners who simply drop the 2025/26 UK profit figure into the 2025 US return create a permanent timing mismatch in the credit that then has to be unpicked in every subsequent year.

Why amending prior returns does not fix omitted depreciation

This is the counter-intuitive step that catches even experienced advisers. The instinct is to amend the last three years on Form 1040-X, insert the missing depreciation, and claim refunds. It does not work, for two reasons.

First, an amended return can only reach open years. Depreciation missed in years now closed by limitation is unrecoverable by amendment — but it is still allowable, so it is still recaptured on sale. Amending three years out of fifteen leaves twelve years of forfeited deductions attached to a live recapture charge.

Second, and more fundamentally, once an impermissible depreciation treatment has been used for two or more consecutive taxable years, it is treated as a method of accounting. A method of accounting is changed, not amended. The mechanism is Form 3115, Application for Change in Accounting Method, with a section 481(a) adjustment.

How does Form 3115 and the section 481(a) adjustment work here?

The section 481(a) adjustment is the cumulative difference between the depreciation that should have been taken from the beginning and what was actually taken, computed as at the first day of the year of change. Where depreciation was understated, the adjustment is negative — a taxpayer-favourable catch-up — and a negative section 481(a) adjustment is taken entirely in the year of change rather than spread. In practice that means fifteen years of missed ADS depreciation can land as a single deduction on one current-year return, without amending anything.

Practical points that matter on these facts:

• The change is generally made under the automatic consent procedures, which carry no user fee. The current annual list of automatic changes is Revenue Procedure 2025-23; the relevant section deals with a change from an impermissible to a permissible method of accounting for depreciation. The designated change number must be taken from the current revenue procedure at the time of filing, not from an older article — the list is reissued annually and section numbering moves.
• The taxpayer must generally still own the property at the beginning of the year of change. This is the trap inside the trap. If the flat has already been sold, this route is typically closed and a different provision applies. Sequence matters: the method change should be made before a disposal, not after it.
• Two copies are required — one attached to the timely filed return for the year of change, and a signed duplicate filed separately with the IRS in Ogden, Utah, within the period the instructions specify.
• One year only is different. If the property was placed in service in the immediately preceding year and only that single year is wrong, the correction is generally made by amending that return rather than by Form 3115. Two years is the dividing line.
• A positive adjustment is spread. If depreciation was overclaimed — for example, a US 27.5-year schedule wrongly applied to a London flat that should have been on ADS — the section 481(a) adjustment is positive and is generally taken into income over four years, which softens the cash impact considerably.

The authoritative starting points are the IRS pages for Form 3115 and Publication 946's section on correcting depreciation deductions. Neither is light reading, and the automatic-change conditions change annually, which is precisely why this is not a self-file exercise.

Where does the correction sit in a streamlined filing pack?

Most clients arrive here because the property surfaced during a compliance catch-up rather than as a standalone question. The interaction has to be sequenced deliberately.

The Streamlined Foreign Offshore Procedures require three years of delinquent or amended returns and six years of FBARs, filed with a non-willful certification. Those three returns are prepared correctly from the outset — which means the London rental appears on Schedule E with ADS depreciation properly computed from the original placed-in-service date, not from the first streamlined year. The depreciation schedule inside a streamlined pack is a full-history schedule even though only three years of returns are filed.

Where the property was reported in earlier years but reported wrongly — the classic case being HMRC figures transplanted onto Schedule E with no depreciation at all — the method change is a separate, forward-looking step. It is filed with a current-year return, not buried inside the streamlined package. Attempting to correct method inside amended streamlined returns is a common preparer error that produces an internally inconsistent pack and an obvious audit flag: three returns showing depreciation, a decade of prior returns showing none, and no Form 3115 explaining the transition.

The narrative attached to the certification matters here too. "I did not know US rules required depreciation on a UK property when the UK gives none" is a coherent, credible non-willfulness explanation. It is also one that must be consistent with everything else in the pack. Our approach to cross-border compliance for property-owning families is to build the full depreciation history first, then decide which years are corrected by which mechanism, then draft the narrative to match.

The three-part US-side property problem

A US owner of a leveraged London flat has three separate US exposures that generalist UK advisers rarely see together, and each is a distinct computation:

• The holding period — Schedule E, ADS depreciation, foreign tax credits, the subject of this guide.
• The disposal — the gain computed in dollars, with the depreciation recapture element and the private residence relief mismatch. That is covered in our guide on the US capital gains trap for Americans selling UK property.
• The mortgage — repaying or refinancing a sterling mortgage can generate a separate taxable foreign exchange gain under section 988, entirely independent of the property gain, and taxed as ordinary income. See the section 988 mortgage foreign exchange gain.

All three can crystallise in the same transaction. A client who sells a flat in 2026, repays a 2009 sterling mortgage and has never depreciated the property faces recapture on depreciation never claimed, a dollar gain inflated by sterling movement, and an ordinary-income FX gain on the loan — with UK private residence relief or the 2015 rebasing giving no relief against any of them.

Worked outline: what the correction looks like in practice

Take a US citizen who bought a London flat in 2011, let it from 2013, and has filed US returns throughout showing the UK net profit figure with no depreciation.

1. Establish the depreciable basis. Sterling purchase price plus capitalised acquisition costs, translated at the 2011 rate, apportioned between land and building on documented evidence.
2. Build the full schedule from 2013. ADS straight line, mid-month convention, 40-year period because the property was placed in service before 2018. Capital improvements added as separate assets from their own dates.
3. Quantify the shortfall. Compare cumulative allowable depreciation to the nil actually claimed. That difference is the section 481(a) adjustment.
4. File Form 3115 with the current-year return, taking the negative adjustment in full in the year of change, with the duplicate copy filed as the instructions require.
5. Recompute the foreign tax credit position for the year of change. A large one-off deduction can push the US position into excess credit, and the interaction with carryovers needs modelling before, not after, filing.
6. Do it before any sale. Once the property is disposed of, the automatic method-change route on these facts is generally no longer available.

The errors we see most often

• Transplanting the HMRC net profit onto Schedule E — importing the UK finance cost restriction into a US return where interest is fully deductible.
• Using the 27.5-year US residential period on a foreign property, producing an overclaim that itself requires a method change to unwind.
• Using 30 years for a property placed in service before 2018 when 40 years applies.
• Depreciating the whole purchase price with no land apportionment.
• Retranslating basis annually as sterling moves, instead of freezing it at the acquisition rate.
• Amending three years and assuming the problem is solved, leaving a decade of allowable-but-unclaimed depreciation sitting in the recapture computation.
• Filing Form 3115 after exchange of contracts rather than before.
• Ignoring the Non-Resident Landlord Scheme position on the UK side, which changes the timing of UK tax paid and therefore the year in which the US credit is available.

Speak to us before you file, or before you sell

If you own a UK rental property and hold a US passport or green card, the depreciation position on your back returns is almost certainly wrong in one direction or the other — and the cost of that error is realised at the moment you sell, when it is too late to fix. The correction is available, it is well-trodden, and on the right facts it produces a substantial one-off deduction rather than a liability. Our private client team rebuilds these histories, files the method change, and integrates it with any streamlined catch-up so the whole position hangs together. To review your position in confidence, contact our cross-border team for a private consultation.