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Clearly anybody can buy a residential property in the US. If one buys for investment and lives in EU (say UK) where does he/she pay rent and sales tax? US or UK?

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When you, as a UK resident, own and either rent out or sell property in the US, it's important to understand that you essentially owe taxes in both countries. However, thanks to the US-UK Tax Treaty, you're safeguarded against double taxation, which means you don't have to pay tax on the same income twice. Here's a more detailed look:

Rental Income Tax: For rental income from your US property, you are liable for tax in the US, as the income is sourced there. However, you're also obligated to report this income in the UK, where you are a tax resident. The US-UK Tax Treaty allows you to claim a credit on your UK tax return for the taxes paid in the US, effectively reducing your UK tax by the amount already paid in the US.

Capital Gains Tax on Sale: Similarly, if you sell your US property, any capital gains are subject to tax in the US. Again, you'll need to report this in the UK. The tax treaty comes into play to prevent double taxation, allowing you to offset the US taxes against your UK tax liability on the same gain.

The US-UK Tax Treaty is specifically designed to prevent the issue of double taxation. It outlines how tax credits or exemptions can be claimed in one country for taxes paid in the other. This treaty ensures that while you owe taxes in both countries, you won’t pay tax twice on the same income.

Please note that the tax implications can vary based on whether you hold the property as an individual or through a business entity. Each scenario has its own set of rules and potential tax benefits under both US and UK tax laws.

Given the complexities involved, it's essential to consult with a tax advisor who is knowledgeable about the tax laws and treaty provisions of both the US and the UK. They can provide specific guidance on your situation, ensuring you meet all your tax obligations while taking advantage of the treaty to avoid double taxation.

Good luck with your investment endeavor!

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Big caveat on the potential for double-taxation: keep in mind your UK tax liability will be based in GBP, and your US tax liability will be based in USD. Because the cost basis and proceeds for future sale will be translated into the other currency many years apart, that can have negative tax ramifications that prevent full offsetting under the US-UK tax treaty. Not a lot you can do to avoid this potential impact.

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  • Exchange rate risk on the principal capital investment when owning property valued in another currency / foreign economy is likely to dwarf any tax treaty problems related to the exchange rate.
    – Ben Voigt
    Dec 14, 2023 at 19:14
  • @BenVoigt Well, yes the fx risk itself may be larger, but that is effectively a flip of the coin. Tax impact of the fx risk can mean that you are more likely to have a gain in at least one of the countries, which won't be offset by the other one. It is a 1-sided risk. ie: living in the UK, if you sell a property where the GBP cost = future GBP proceeds, but the USD has weakened [meaning you have a gain in USD], you may have US tax costs but no offsetting GBP tax deduction. Dec 14, 2023 at 19:19

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