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kobos posted a topic in FinanceI'm a US citizen, tax resident in Germany and looking to get a euro denominated mortgage to buy a primary residence, I do not want to use an LLC (QBI). In the eyes of the IRS I would be taking out a long term short position on the US Dollar, this is due to IRC legislation that prevents individuals from declaring a mortgage in a non-functional currency, this means my mortgage counts as a section 988 transaction and any unrealized gains due to currency fluctuations are taxed as ordinary income. Almost all examples that I have come across deal with "interest only" mortgages where there are no capital repayments during the life of the mortgage, and only when the house is sold do the taxpayers find that they have to pay income tax on the phantom gain resulting from the change in the exchange rate between the USD and the currency the mortgage was taken out in; even if no actual gain was realised. An example from this site:  £ $ Approx. Mortgage Valued in £ 250,000 Exchange Rate at 16/12/2005 1.9267 Approx. Mortgage Value in $ 481,675 Approx. Mortgage Value in £ 250,000 Exchange Rate at 07/07/2013 1.4877 Approx. Mortgage Value in $ 371,925 Foreign Exchange Rate Gain 109,750 Tax Charge at Marginal Rate of 28% 30,730 My issue with publicly available resources on section 988 is that it is geared towards forex traders, where the transaction is disposed in its entirety at the end and not repaid in partial amounts, this confusion is present in most sources (i.e. does repayment mean in full? or partial?). What I'm afraid of is getting a mortgage and repaying it gradually, then having to wait until the exchange rate is close to what was when I took out the mortgage to then pay the final instalment or face a massive tax bill on a phantom gain. My theory is that i can take out a euro denominated mortgage, make repayments on a monthly basis and then only if my phantom gains from the exchange rate exceed the standard deduction for that tax year would I have to pay any tax. This means that over the years if the dollar appreciates I could adjust my payments accordingly. So... Given an annuity mortgage in a non-functional currency: 1. Would monthly capital repayments during a tax year incur income tax on a phantom gain? 2. Can a phantom gain be reduced with the standard deduction? 3. Would i report the net gains and losses from multiple capital repayments in a year or are all losses ignored? 4. Would this be reported on IRS form 8949? (i have emailed a couple of tax advisors but not heard anything back yet) sources:  https://expatriates.stackexchange.com/questions/8157/aussie-expat-living-in-us-taxed-on-paying-off-foreign-mortgage (the only link where multiple repayments were talked about)  https://www.ustaxfs.com/foreign-mortgage-repayment-exchange-rate-gain/  https://blog.taxadvisorypartnership.com/blog/us-tax/foreign-mortgage-exchange-rate-gain  https://renounceuscitizenship.wordpress.com/2012/10/11/how-fluctuating-fx-rates-generate-capital-gains-taxes-on-the-discharge-of-debt-us-citizens-abroad/  https://www.andrewmitchel.com/charts/rr_90_79.pdf
AyamBerlin posted a topic in FinanceHello all, I am a US citizen and new to Germany. I moved here last year in 2019 (less than 180 days in Germany in 2019), and I just finished working with an EA to prepare for my US income tax return for 2019, which by the way is my first filing since moving to Germany. I have been reading up on pros and cons between Foreign Income Exclusion and Foreign Tax Credit, so we did 2 scenarios in our filing, and now I am deciding which one to go with. Because I lived less than 180 days in Germany in 2019 and earned income in Germany only from Oct 2019 - Dec 2019, in my German Einkommensteuererklärung I was considered a non-German tax resident, eventhough I have become resident of Germany. With that, long story short, I got all my German taxes back. Now because of this treatment, I could not claim foreign income tax credit on the US side, simply because I ended up not paying any tax in Germany. My EA then decided to do the other method - Foreign Income Exclusion - In either case, the Foreign Income Exclusion or Foreign Income Tax Credit, I ended up paying taxes to Uncle Sam, for various reason. Under the 'Exclusion' method, I would pay LESS to Uncle Sam than under the 'Credit' method. The difference in additional tax payment between the 2 methods is about $1,500. I wanted to invest in IRA but if one day the exclusion limit catches up with my German income, and one day I shows no taxable income, then for that tax year I would not be able to invest in IRA again... This is my contemplation now, so I am leaning towards the 'Credit' method, but then I would pay $1,500 more in taxes to Uncle Sam in 2019. Is it worth it to pay more tax (in my case, $1,500 more) to 'buy' that flexibility to invest in IRA? Then I also read up on some other article that it is not worth it investing in IRA if you live in Germany, which is new to me? I also know that as a rule of thumb, if one lives in a 'high income tax' country like Germany, the 'Credit' method is the better way to go, rather than the 'exclusion' method. I also know it is almost impossible to switch back from the 'Exclusion' method to the 'Credit' method, once one decided to use the 'Exclusion' method, so since this will be my very first filing, I would like to hear some learnings from all of you! Thank you.