Do I owe depreciation recapture if I never claimed depreciation on my UK rental?

Yes. Under IRC section 1016(a)(2) your US basis is reduced by depreciation allowed or allowable, so depreciation you were entitled to but never claimed still reduces basis. On sale, that amount is unrecaptured section 1250 gain taxed at up to 25%. Publication 551 and the Form 4797 instructions both confirm that the basis reduction applies to depreciation you could have deducted, not just what appeared on a return.

What depreciation period applies to a UK buy-to-let for US tax?

A UK rental is used predominantly outside the United States, so it must use the Alternative Depreciation System. Publication 527 sets the ADS recovery period for residential rental property at 30 years if placed in service on or after 1 January 2018 and 40 years if placed in service earlier. Depreciation is straight line with the mid-month convention and applies only to the building, never the land.

Can I use Form 3115 to claim depreciation I missed because I never filed?

Usually not. The automatic depreciation changes in Rev. Proc. 2025-23 are changes in accounting method, which presuppose a method adopted on filed returns, typically two or more consecutive returns. Section 6.01 also requires you to still own the property. For years never filed, depreciation is claimed on the late original returns. A Form 3115 route may help where returns were filed without depreciation.

How is UK CGT on a residential property sale reported and paid?

GOV.UK requires UK residents to report and pay Capital Gains Tax due on UK residential property within 60 days of completion for sales completed on or after 27 October 2021, using a Capital Gains Tax on UK property account. The sale must also go on your Self Assessment return if you are registered. Rates are 18% and 24%, after a £3,000 annual exempt amount for 2025 to 2026.

Does UK CGT cancel out US tax on the sale of my London flat?

It usually offsets most of the US regular income tax, because gain on UK real property is foreign-source passive income and UK CGT is creditable on Form 1116, subject to the limitation. It does not offset the 3.8% Net Investment Income Tax, which the IRS says cannot be reduced by foreign tax credits. Differences in depreciation and exchange rates can also make the US gain larger than the UK gain.

What if my UK property sale falls outside the Streamlined three-year window?

The Streamlined Foreign Offshore Procedures require only the most recent three years of returns and six years of FBARs, so an older sale year may not be on any required return. The gain is not forgiven, and the assessment period for an unfiled year does not begin. Your Form 14653 certification must accurately describe the full history, so the sale should be considered carefully before filing.

Missed US Tax Returns: UK Rental Sale Depreciation

Missed US tax returns during the years you let a UK property do not stop the IRS from treating you as if you had claimed depreciation on it. When you sell, your US basis is reduced by the depreciation you were entitled to take, whether or not you ever deducted it, and that slice of the gain is taxed as unrecaptured section 1250 gain at a rate of up to 25%. The practical fix is to file the late original returns (usually through the Streamlined Foreign Offshore Procedures), claim depreciation on every return you file, report the sale on Form 4797, and credit your UK Capital Gains Tax against the US tax on the gain.

This is one of the most expensive surprises we see in the returns we prepare for US citizens living in London and the South East. The typical client bought a flat, lived in it or let it from the start, moved or upgraded, kept the first property as a buy-to-let, and never filed a US return because the UK tax was always higher. The sale is what brings everything to the surface: a large sterling deposit, an estate agent's completion statement, and a UK CGT return filed within 60 days. The US side then has to be rebuilt from scratch, and the depreciation rule is the part almost nobody anticipates.

What does allowed or allowable depreciation mean for missed US tax returns?

Allowed or allowable depreciation is the rule that reduces the basis of depreciable property by the greater of the depreciation you actually deducted and the depreciation you were entitled to deduct. It comes from Internal Revenue Code section 1016(a)(2), which requires basis to be adjusted for depreciation to the extent allowed, but not less than the amount allowable. The IRS repeats it in plain language in Publication 551 at https://www.irs.gov/publications/p551, which tells taxpayers to decrease basis by the depreciation they deducted or could have deducted, and in Publication 527 on residential rental property, published at https://www.irs.gov/publications/p527 with worked depreciation tables.

The consequence for a non-filer is harsh and simple. If you owned a let UK flat for ten years and filed nothing, the IRS does not treat your basis as the original purchase price. It treats your basis as the purchase price minus ten years of depreciation you could have claimed. You never received the deductions, but you still carry the basis reduction, and that reduction becomes taxable gain on sale. The Form 4797 instructions at https://www.irs.gov/instructions/i4797 make the same point on the line where you enter depreciation: the figure is depreciation allowed or allowable, not merely what appeared on a return.

How is a UK rental property depreciated for US purposes?

A UK buy-to-let is foreign residential rental property, and US law requires it to be depreciated under the Alternative Depreciation System (ADS) rather than the usual 27.5-year schedule. Section 168(g)(1)(A) mandates ADS for tangible property used predominantly outside the United States. Publication 527 sets the ADS recovery period for residential rental property at 30 years for property placed in service on or after 1 January 2018 and 40 years for property placed in service before that date. The method is straight line with the mid-month convention, so the first and last years are prorated to the middle of the month the property was first let and the month it was sold.

Only the building is depreciable. Land never is, so the purchase price must be split between land and building on a reasonable basis, supported by a valuation or other evidence.
The depreciable amount is measured in US dollars, translated at the exchange rate when the property was acquired or placed in service, not in sterling.
Capital improvements such as a new kitchen or extension are separate assets with their own placed-in-service date and their own ADS schedule.
Depreciation starts when the property is available for rent, not when you bought it. A flat you lived in first and let later is depreciated from the letting date, using the lower of adjusted basis and fair market value at conversion.
The UK offers nothing comparable: HMRC does not give capital allowances for plant or machinery for use in a dwelling-house, as explained at https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim3010, and there is no building depreciation deduction for a residential let.

That last point is why so many clients miss the issue. A UK landlord deducts letting agent fees, repairs and replacement of domestic items, but never depreciates the building. A US citizen who assumes the US rules mirror the UK rules has no reason to think about depreciation until the sale.

What rate applies to unrecaptured section 1250 gain?

Unrecaptured section 1250 gain is the part of a long-term gain on depreciable real property that is attributable to straight-line depreciation. Section 1(h)(1)(E) taxes it at a maximum rate of 25%, and section 1(h)(6) defines it. Because residential rental property placed in service after 1986 is depreciated on a straight-line basis, there is generally no ordinary-income recapture under section 1250 itself; the depreciation portion is instead carved out of the capital gain and taxed at up to 25%, while the remainder of the gain is taxed at the normal long-term capital gains rates. The 25% figure is a ceiling, not a flat rate: a taxpayer whose ordinary income bracket is lower pays at that lower rate on this slice.

On top of that sits the Net Investment Income Tax. The IRS explains at https://www.irs.gov/individuals/net-investment-income-tax that NIIT is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over $250,000 for married filing jointly, $125,000 for married filing separately and $200,000 for single filers. Gain on the sale of investment real estate is included. Critically for UK residents, the IRS states in its NIIT questions and answers at https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax that foreign tax credits may not be used to reduce NIIT. That makes NIIT the most common residual US liability on a UK property sale, even where UK CGT is higher than the US regular tax.

Can Form 3115 catch up the depreciation you never claimed?

This is where most online guidance overstates the position. Form 3115 lets a taxpayer change from an impermissible to a permissible method of accounting for depreciation and take a catch-up adjustment under section 481(a). The current list of automatic changes is Revenue Procedure 2025-23, published at https://www.irs.gov/pub/irs-drop/rp-25-23.pdf by the IRS. Two sections matter here, and both have conditions a non-filer usually cannot meet.

Section 6.01 (designated change number 7) applies to property for which the taxpayer used the impermissible method in at least two taxable years immediately preceding the year of change, and to property owned at the beginning of the year of change. A flat sold before the year of change fails the ownership test.
Section 6.07 (designated change number 107) applies to property already disposed of, where the taxpayer claimed less than the allowable depreciation. The year of change is the year of disposition, and the change can be made on the original return for that year or on an amended return with Form 3115 before the assessment period for the sale year closes.
Both routes are changes in method of accounting. A method of accounting for depreciation is generally adopted by filing returns, including by using the same impermissible method on two or more consecutively filed returns. If no returns were filed at all, there is no adopted method to change.

In practice, the answer for years that were never filed is not Form 3115. It is to claim the correct ADS depreciation on each late original return as it is filed. The Form 3115 routes become relevant where a client did file US returns during the letting years but left the rental off Schedule E, or reported rent without depreciation, for two or more consecutive years. Whether the disposed-property change under section 6.07 can reach depreciation for years in which no return was ever filed is not something the IRS addresses directly, and we do not treat it as available without a careful technical review of the specific filing history.

How do missed US tax returns and the Streamlined procedures interact with the sale year?

For most US citizens resident in the UK, the Streamlined Foreign Offshore Procedures are the route back into compliance. The IRS page at https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states requires delinquent or amended returns for each of the most recent 3 years for which the return due date (including a properly applied-for extension) has passed, delinquent FBARs for the most recent 6 years, a signed Form 14653 certifying non-willful conduct, and physical presence outside the US for at least 330 full days in at least one of the last three years with no US abode. A taxpayer who qualifies is not subject to failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties. Tax and interest remain payable.

Where the sale sits relative to that 3-year window changes the planning completely.

Sale year inside the window. The sale is reported on one of the three Streamlined returns, on Form 4797 Part III and Schedule D, with Form 1116 for the UK CGT credit and Form 8960 for NIIT. Depreciation is claimed on the three returns filed, but the basis is still reduced by allowable depreciation for every earlier letting year that falls outside the window.
Sale year outside the window. The procedure only requires three years of returns, so the sale itself may not be on any Streamlined return. That does not make the gain disappear. The assessment period for a year with no return filed does not start to run, and the non-willful certification has to give a truthful account of the whole history. This is a judgement call to make with the full facts, not a loophole.
FBARs. Sale proceeds landing in a UK current or savings account frequently push balances over the reporting threshold, so the sale year and the following years usually need FBAR attention even if the rental account was modest. Late FBARs are filed electronically through FinCEN's BSA E-Filing System at https://bsaefiling.fincen.treas.gov with a reason for late filing.

The depreciation you claim on the three Streamlined returns is real value. It shelters rental income on those returns, and because rental losses are generally passive, any excess is suspended and released on a fully taxable disposition of the entire interest. What cannot be recovered through the Streamlined returns is the deduction for the earlier letting years that are never filed, even though those years still count for basis. Some clients choose to file earlier years voluntarily to capture those deductions and any suspended losses; whether that is worth doing depends on the refund and assessment time limits, the foreign tax credit carryovers available, and the cost of preparing the extra returns, and it needs to be modelled rather than assumed.

How does the UK tax the same sale?

The UK computes the gain in sterling, on sterling cost and sterling proceeds, with no deduction for depreciation because none was ever given. According to GOV.UK at https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances, gains on residential property were taxed at 18% and 24% for individuals in 2024 to 2025, and from 6 April 2025 the main rates of 18% and 24% apply to all gains, so residential property no longer has its own rate. The annual exempt amount is £3,000 for 2024 to 2025, 2025 to 2026 and 2026 to 2027.

Timing is strict. GOV.UK at https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020 requires you to report and pay any CGT due on UK residential property within 60 days of completion for sales completed on or after 27 October 2021. A UK resident whose total gains are below the tax-free allowance does not need to make the 60-day report, and anyone in Self Assessment must also include the sale on their Self Assessment return. Interest and penalties apply to late reporting and late payment.

Does UK Capital Gains Tax offset the US tax on the gain?

Generally yes, for the US income tax, but not for NIIT. Publication 514 at https://www.irs.gov/publications/p514 explains that gain on real property is sourced where the property is located, so gain on a UK flat is foreign-source income, and for most individual landlords it falls in the passive category basket on Form 1116. UK CGT paid on the sale is a creditable foreign income tax, subject to the foreign tax credit limitation for that basket. Where the treaty is needed to treat income as UK-source, that income goes into its own separate limitation category, but for UK real property the ordinary sourcing rule usually gets there on its own.

The two gains are rarely the same size, and that mismatch drives the result. Four differences recur in the returns we prepare:

Depreciation. The US gain includes the allowed or allowable depreciation; the UK gain does not. This alone can make the US gain materially larger than the UK gain.
Currency. Your US basis is fixed in dollars at the exchange rate when you bought, and your proceeds are translated at the rate when you sold, as required by the dollar reporting rule in Publication 54 (https://www.irs.gov/publications/p54). If sterling strengthened during ownership, you can have a US gain on a flat that made no sterling gain at all. If sterling weakened, the US gain can be smaller than the UK gain.
Rates. The US applies up to 25% on the depreciation slice and 0%, 15% or 20% on the rest; the UK applies 18% or 24% to the whole sterling gain after the annual exempt amount. The credit can be absorbed on one slice and fall short on another only within the overall basket limitation, not line by line.
Mortgage. Repaying a sterling mortgage can create a separate US foreign currency gain or loss under section 988 that has no UK equivalent; it is a separate calculation from the property gain.

One line on the main home exclusion: section 121 does not apply to a property that was only ever let. If the flat was your main home for part of the ownership period, the exclusion may cover part of the gain, but it never covers depreciation attributable to periods after 6 May 1997, which remains taxable.

Worked scenario: a London flat sold after ten years of letting

The following figures are an illustration only. The exchange rates are assumptions chosen for arithmetic, not historical rates, and the calculation ignores purchase and selling costs, improvements and the rental income side to keep the depreciation effect visible.

Facts. A US citizen living in the UK buys a London flat in January 2015 for £500,000 and lets it immediately. She files no US returns. She sells in June 2025 for £700,000. Assumed exchange rates: $1.50 per £1 at purchase and $1.30 per £1 at sale. A valuation supports a 70% building and 30% land split. She is a UK higher-rate taxpayer and is in the top US brackets.

US depreciation. Dollar cost is $750,000, of which $525,000 is building. The flat was placed in service before 2018, so the ADS recovery period is 40 years, giving $13,125 a year. With the mid-month convention, 2015 allows 11.5 months ($12,578), 2016 to 2024 allow nine full years ($118,125), and 2025 allows 5.5 months to the sale ($6,016). Total allowable depreciation is $136,719.

US gain. Adjusted basis is $750,000 minus $136,719, or $613,281. Proceeds are £700,000 at $1.30, or $910,000. Total gain is $296,719, of which $136,719 is unrecaptured section 1250 gain and $160,000 is ordinary long-term capital gain. Note that in dollars the flat only rose by $160,000, because sterling weakened in this illustration; the depreciation nearly doubles the taxable gain.

US tax before credits. $136,719 at 25% is $34,180, and $160,000 at 20% is $32,000, a total of $66,180. NIIT at 3.8% on $296,719 is $11,275.

UK tax. The sterling gain is £200,000. After the £3,000 annual exempt amount, £197,000 at 24% is £47,280, or about $61,464 at the assumed sale rate. That UK tax is reported and paid within 60 days of completion.

Result. The UK CGT credit, subject to the passive basket limitation, absorbs most of the $66,180 of US regular tax on the gain, leaving roughly $4,716 of residual US income tax in this simplified illustration. The $11,275 of NIIT cannot be reduced by the credit. Combined residual US tax is roughly $15,991, plus interest from the original due date of the sale-year return.

Streamlined overlay. If she enters the Streamlined Foreign Offshore Procedures in late 2026, the three required returns are 2023, 2024 and 2025. She claims $13,125 of depreciation on 2023, $13,125 on 2024 and $6,016 on 2025, a total of $32,266 that reduces taxable rental income on those returns. The remaining $104,453 relates to 2015 to 2022, years not required under the procedure. That depreciation still reduces her basis and is still taxed at up to 25% on sale, but she never receives a deduction for it unless she files those earlier years, which is exactly the modelling decision described above.

What should you do if you have missed US tax returns and have already sold?

Reconstruct the dollar basis. Find the completion statement, the purchase-date exchange rate, the land and building split, and every capital improvement with its date.
Build the ADS schedule for every letting year, including years you will never file, because the total drives basis on sale.
Confirm the UK position: the 60-day CGT report and payment, the Self Assessment entry, and the sterling gain computation.
Decide the compliance route. For most non-willful UK residents this is the Streamlined Foreign Offshore Procedures, with three years of returns, six years of FBARs and Form 14653.
Prepare the sale-year return with Form 4797 Part III, Schedule D and the unrecaptured section 1250 gain worksheet, Form 1116 for the UK CGT, and Form 8960 for NIIT.
Review whether any years were filed without depreciation. If two or more consecutive returns were filed that way, a Form 3115 change may be relevant; if none were filed, depreciation is claimed on the late original returns instead.
Check the sale proceeds against FBAR and Form 8938 thresholds for the sale year and the years that follow.

The failure mode we see most often is a client who files three Streamlined returns reporting the sale with the full purchase price as basis, because nobody told them about allowable depreciation. The return understates the gain, the certification is technically inaccurate, and the correction later costs more than getting it right the first time. The second most common error is treating the UK CGT computation as if it were the US computation, which misses both the depreciation and the currency difference.

Our team prepares Streamlined submissions, late FBARs and the full US return set for UK property sales, including the ADS schedule, the Form 4797 and Form 1116 workings and the reconciliation to the UK CGT return. If you have sold a let UK property and have missed US tax returns, the right starting point is a complete reconstruction of basis in dollars before anything is filed.