Tag Archives: section 988

Section 988 Currency Devaluation from Britain to Australia

foreign corporation, IRS audit, saving taxes, how do I save taxes, tax planning

Tax planning for currency exchanges.

 Folks have been calling about Section 988 currency devaluation taxation. Seems like I am getting a call every day on U.S. taxation of home loans in foreign (non-U.S.) currencies.

As a foreign currency drops in value, the value of a debt (in U.S. dollars) decreases and the IRS wants to tax this windfall.

For example, I owe you 1 (one) British pounds.  When I made the loan, the one pound cost a U.S.$1.50.  

Now, the pound is worth $1.00.  So, I only have to spend a dollar to pay you back.  The IRS issued a ruling (which is merely an opinion), that repayment of the loan creates $.50 in taxable income.
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Tax Planning for Expats and Aliens with Foreign Homes

Owning a foreign home comes with an unexpected IRS attack.  The attack focuses on the real estate loan.   Even when your home lost value, its sale can cause U.S. and state income taxes if the loan’s currency lost value.  

The IRS sees this lost in value as a benefit to you.   This is not a new law, as I will explain below. 

A quarter of a century ago, the IRS issued a ruling to illegally tax gains and losses (yes, they tax losses as explained on this link).  In  Revenue Ruling 90-79, the IRS ignores the change in the home value so that it can tax you on a currency gain.  

When I wrote “illegal” I meant illegal.  Once the U.S. Supreme Court tells the IRS “no”, the IRS is to obey.  Revenue Ruling 90-79 is not the first time the IRS refused to obey the Supreme Court. Here is a link to more information on the Supreme Court case.

Many of you have found this blog because you have researched section 988.  This tax law in not your issue.  Section 988 is used to determine character of income and not to determine if you have income.

The tax issue has become more serious  because of the worldwide increase demand in housing.

In the report by the Oxford Economics, Adam Slater, the author of the report, compared data from twenty-two developed countries.

In Hong Kong, the rise in prices is the craziest, with a 21.5% jump over one year. In the Chinese city Oxford Economics treats as a country in its own right as its market is particular, this striking figure is a rebound after a decline of 12% in 2016.  

Property prices in Canada (+ 12.9%), Australia (+ 9.4%) and Sweden (+ 7.9%) are more likely to be monitored, says Adam Slater. These three countries concentrate the risks of bursting a bubble.  It is this bubble that will cause you to pay tax even though you lost money. 

If you are an American in these countries or a citizen from these countries planning to move to the U.S., then I encourage to be very pro-active in your tax planning. 

To refine the threat assessment, Oxford Economics used an OECD indicator that reports real estate prices to incomes and rents and compared them with their 2007 average before the financial crisis, as well as a longer-term average.

The trio Canada, Australia, and Sweden are among the countries whose prices are significantly higher than 2007 or the historical average. New Zealand joins this group overheating with prices raised by more than 40% in a decade.

At the other end of the ranking of the evolution of the prices of stone are Brazil and Russia. They experienced price cuts of 6.7% and 3.8% respectively. These adverse developments reflect the economic crisis that these two giants of the BRICS club have experienced.

Entering the markets threatened by the bursting of a bubble and those that deviate, France is in 12th position of the 22 countries studied, ranked according to the rise in prices. With 1.7%, the price increase in France calculated by Oxford Economics is below the average of this sample (3.5%), weighted according to the economic burden (GDP) of each country.

What to do and not do if you are an American.

Refinancing the debt into a U.S. dollars is considered a taxable event by the IRS (this does not mean the IRS is correct).   You will have to decide, with your tax CPA, if you want to not report the gain.   

Here is the problem.  Most CPAs do not understand how the U.S. Supreme Court governs tax laws (along with all of the other laws in America).  Thus, you need a CPA that has a graduate degree and also understand the role of the courts.