Good morning. My wife and I are Australian expats living the the US since 2013. We have our family home still in Australia which we are renting out while abroad. We are reporting the income on this property on both AUS and US tax returns (getting foreign tax credit).
This year our tax accountant has advised that because we paid down some of our AUD home mortgage during the year, the IRS is entitled to tax us on the FX gain (between taking out the mortgage in 2011 and today) on the movement on our mortgage balance. As any Australian knows the AUD to USD have moved considerable over this time.
Note we have not sold the property, nor refinanced or extinguished the mortgage just paid down the balance by $100k.
Has anyone had similar experience and is this the correct treatment? I have been unable to find any solid tax ruling on this. Its being included on Form 8949 of the IRS return.
Thanks for the support. Sounds like it's still a grey area. To answer some of the questions:
Part of the funds came from a transfer of USD to AUD during the year but the rest came purely from the payment of the mortgage using funds received from the tenant. The monthly mortgage repayments were interest plus principal.
When I spoke to the accountant (Big 4), I asked him if I had have left the mortgage balance the same and but the excess funds in a term deposit or such would this be an issue and he said no. All I would be liable for would be the tax in term deposit earnings!! Just crazy
Also just to clarify, the property was not and will not be sold while we are living in the US.
DJohnM - I had seen this article but per someone else's comment, had assumed it related to sale of asset not just mortgage movements over course of loan.
I'm seeking additional advice this week.