What basis do I depreciate when I convert my UK home to a rental?

You depreciate the lesser of your adjusted basis or the fair market value on the conversion date, as set out in IRS Publications 527 and 946, excluding the value of land. Adjusted basis is your purchase cost plus capital improvements, translated into dollars at the exchange rates when you paid them. Because London values have generally risen, the adjusted basis is usually the lower figure, but a dated valuation should be kept to support the choice.

Does UK tax on my rent reduce my US tax?

Yes, through the foreign tax credit, but only up to the US tax on the net foreign rental income in the passive category basket. Because US depreciation and full interest deductions often make the US profit much smaller than the UK profit, part of the UK tax is frequently unusable in the year. IRS Publication 514 allows excess credits to be carried back one year and forward ten years within the same basket.

Is mortgage interest deductible against UK rental income?

Not as an expense for residential lets. Since 6 April 2020, HMRC restricts relief for residential finance costs, including mortgage interest, to a tax reduction at the basic rate of income tax. Higher-rate and additional-rate taxpayers therefore pay tax on a rental profit calculated before interest and receive relief at only the basic rate. On the US return, by contrast, mortgage interest on the rental is deducted in full on Schedule E.

Do I need to join the Non-Resident Landlord Scheme if I move to the US?

If you live abroad for more than six months of the year, the scheme applies. Your letting agent, or a tenant paying more than £100 a week, must deduct basic rate tax from the rent unless HMRC approves gross payment following an NRL1 application. Either way, the rent stays taxable in the UK and is reported on Self Assessment, and the final UK liability, not the withholding, is what you claim as a foreign tax credit.

Can I still use the Section 121 exclusion after renting out my former home?

Often yes, if you sell within the window that keeps you inside the test of owning and using the home as your main home for 24 months of the five years before sale. IRS Publication 523 confirms that the period after you last lived there is not nonqualified use. However, depreciation allowed or allowable after May 6, 1997 cannot be excluded and is taxed as unrecaptured section 1250 gain.

US UK Tax Returns Preparation: Letting Your Former Home

Q: Can I use 27.5-year depreciation on my rented London flat?

No. The Form 4562 instructions require the Alternative Depreciation System for tangible property used predominantly outside the United States. A residential rental placed in service after 2017 is depreciated over 30 years using the straight-line method and the mid-month convention, reported on line 20c of Form 4562. The 27.5-year General Depreciation System period applies to US residential rentals only. Using it on a UK property overstates depreciation and should be corrected on an amended return.

US UK tax returns preparation changes the moment your former UK home stops being your home and starts earning rent. On the US return, the property becomes a rental on Schedule E, depreciated over 30 years under the Alternative Depreciation System from a basis equal to the lower of your adjusted basis or its fair market value on the day you converted it. On the UK side, the rent goes on your Self Assessment return, mortgage interest is relieved only as a basic-rate tax credit, and if you leave the UK the Non-Resident Landlord Scheme applies. The two systems then have to be reconciled through the foreign tax credit.

That is the short answer. The longer answer matters because the two countries measure the same rental very differently, in different currencies and over different tax years. In the returns we prepare for Americans who move house within London, relocate to New York or take a posting elsewhere and keep the old flat, the same pattern repeats: the US profit is small or negative because of depreciation, the UK profit is large because there is no building depreciation and interest relief is restricted, and the client is left with UK tax that the US credit system cannot fully absorb in the year it is paid. This guide walks through each step, with a worked illustration, a checklist and the errors we correct most often.

What changes on your US return when your former UK home becomes a rental?

A converted home is a property you used as your main home that you now hold to produce rental income. The conversion date is the date the property is placed in service as a rental, which is usually when it is first advertised or made available for letting, not necessarily the date the first tenant moves in. From that date, three things happen on the US return.

The rent and the running costs are reported on Schedule E (Form 1040), translated into US dollars.
Depreciation starts, calculated on Form 4562 and carried to Schedule E, using the Alternative Depreciation System because the property is outside the United States.
The property is now a passive activity, so losses are subject to the passive activity loss rules, and a later sale is analysed under both the home sale exclusion and the depreciation recapture rules.

IRS Publication 527, at https://www.irs.gov/publications/p527, is the core reference for residential rental property and covers conversion from personal use directly. Expenses you paid while the property was still your home, such as a repair carried out before you moved out, are personal and are not deductible against later rent. Costs incurred once the property is held out for rent, including advertising and agent fees for finding the first tenant, are rental expenses.

How is the depreciable basis calculated when a UK home is converted to a rental?

The depreciable basis of a converted home is the lesser of its adjusted basis or its fair market value on the date of conversion. Publication 527 states this rule expressly, and IRS Publication 946, at https://www.irs.gov/publications/p946, repeats it in its section on property changed from personal to business use. Adjusted basis is broadly what you paid for the property, plus purchase costs that are added to basis and capital improvements, less items such as casualty losses claimed.

For most Americans who bought in London more than a few years ago, the property has risen in value, so the lower figure is the adjusted basis. Where values have fallen, the fair market value at conversion becomes the basis, which prevents a personal-use decline in value being turned into a depreciation deduction. A contemporaneous valuation, an agent's market appraisal or a surveyor's report dated close to the conversion date is worth obtaining either way, because the fair market value also matters on a later sale.

Two further adjustments catch people out. First, land is not depreciable. Publication 946 is explicit that you cannot depreciate the cost of land because land does not wear out, so the basis must be split between land and building. For a London flat held on a long lease there is still an allocation to be made, and the method used should be reasonable and documented, for example by reference to an insurance rebuild figure or a professional valuation. Second, the basis must be measured in US dollars. The sterling purchase price and improvement costs are translated at the exchange rates prevailing when you paid them, not at the rate on the conversion date, because your US basis was fixed in dollars when each cost was incurred.

Why does foreign residential rental property use a 30-year ADS recovery period?

The Form 4562 instructions, at https://www.irs.gov/instructions/i4562, list tangible property used predominantly outside the United States as property that must be depreciated under the Alternative Depreciation System. A London home let to tenants falls squarely within that rule. Under ADS, residential rental property placed in service after 2017 has a 30-year recovery period, using the straight-line method and the mid-month convention. It is reported on line 20c of Form 4562.

The mid-month convention treats a property placed in service in any month as placed in service in the middle of that month. A flat converted in April therefore gets eight and a half months of depreciation in its first US tax year. The 27.5-year General Depreciation System period that applies to US rentals is not available for the London flat, and in our experience the use of 27.5 years on a foreign property is the single most common depreciation error on self-prepared returns.

Depreciation is not optional. The home sale rules and the recapture rules both work on depreciation allowed or allowable, which means the amount you could have claimed reduces your basis and is taxed on sale even if you never claimed it. Skipping depreciation to keep the return simple produces the worst of both outcomes: no deduction now and recapture later.

What expenses can you deduct against UK rent on Schedule E?

Publication 527 allows ordinary and necessary expenses of managing and maintaining a rental property. For a let London home, the deductible items we see on almost every return include the following.

Mortgage interest on the loan secured on the property, translated into dollars. Capital repayments are not deductible.
Letting agent fees, including tenant-find fees and ongoing management commission.
Repairs and maintenance that keep the property in its ordinary working condition, as opposed to improvements, which are added to basis and depreciated.
Leasehold service charges and ground rent, buildings and landlord insurance, and council tax or utilities if you pay them during void periods.
Legal and professional fees connected with the letting, including the cost of preparing the rental schedules on your returns.
Safety certificates, inventories and cleaning between tenancies.
Furniture and appliances supplied with a furnished let, which are depreciated separately over their own recovery periods rather than expensed.

Unlike the UK, the US gives a full deduction for mortgage interest against rental income, subject to the passive activity rules. It also allows depreciation of the building, which the UK does not allow for residential lets. These two differences explain most of the gap between the US and UK profit figures on the same property.

How do the passive activity loss rules affect a let London home?

A rental activity is generally a passive activity, and a passive loss can only offset passive income. Publication 527 describes a special allowance of up to $25,000 for owners who actively participate, which phases out as modified adjusted gross income rises from $100,000 to $150,000. Most of our clients are investment bankers, business owners and senior professionals whose income is well above that range, so in practice a net loss on the London flat is suspended and carried forward.

Suspended losses are not wasted. They can offset future net rental profits from the property, other passive income, and they are released in full when you dispose of the entire interest in a fully taxable transaction. Tracking them on Form 8582 every year, rather than reconstructing them at the point of sale, is part of careful preparation.

Which exchange rate should you use for rents and expenses?

The IRS foreign currency guidance at https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates states that amounts on a US return must be expressed in US dollars, translated at the exchange rate prevailing when you receive, pay or accrue the item. The IRS also publishes yearly average rates on the same section of irs.gov, and for a regular stream of monthly rent and expenses many preparers apply a consistent annual average where it fairly reflects the spot rates over the year.

Large one-off items should be translated at the spot rate on the relevant date: the purchase price and each capital improvement for basis, the fair market value on the conversion date, a major roof or refurbishment cost, and the eventual sale proceeds. Whatever method you adopt, use it consistently from year to year and keep the workings with your records.

One gap that rarely appears in competing guides is the sterling mortgage itself. A US person's functional currency is the dollar, so when a sterling mortgage is repaid or refinanced, a movement in the exchange rate between borrowing and repayment can produce a foreign currency gain on the US return even though nothing has changed in sterling terms. On a remortgage or a sale with a large loan outstanding, this needs to be computed rather than ignored.

How is UK rental income taxed on Self Assessment?

If you remain UK resident, the rent from your former home is UK property income and goes on the property pages of your Self Assessment return for the UK tax year running from 6 April to 5 April. HMRC's guidance at https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income lists allowable expenses including letting agent and management fees, general maintenance and repairs, and landlord insurance, and explains replacement of domestic items relief for replacing furniture and appliances in a let residential property.

The most significant difference is finance costs. From 6 April 2020, relief for residential property finance costs, including mortgage interest, is restricted to the basic rate of income tax. The interest is not deducted from rental profit; instead it produces a tax reduction at the basic rate. A higher-rate or additional-rate taxpayer therefore pays tax on a profit figure that is higher than the economic profit, and receives relief on interest at only the basic rate. There is also no UK deduction for wear and tear on the building of a residential let, so nothing in the UK computation corresponds to US depreciation.

The £1,000 property allowance exists, but for a London flat with real costs and interest it is rarely the better option, because claiming it means you cannot deduct actual expenses.

What happens if you leave the UK and keep letting the property?

If you move abroad, including back to the United States, the Non-Resident Landlord Scheme applies. GOV.UK guidance at https://www.gov.uk/guidance/paying-tax-on-rent-to-landlords-abroad explains that a landlord who lives abroad for more than 6 months of the year is treated as a non-resident landlord. Letting agents must deduct basic rate tax from the rent after allowable expenses they pay, and tenants paying more than £100 a week directly to such a landlord must do the same, unless HMRC has authorised the rent to be paid gross.

An individual applies for gross payment using form NRL1, described at https://www.gov.uk/government/publications/non-resident-landlord-application-to-have-uk-rental-income-without-deduction-of-uk-tax-individuals-nrl1. Approval does not remove the liability: the rent remains taxable in the UK and continues to be reported through Self Assessment, with any tax deducted under the scheme credited against the final bill. For the US foreign tax credit, the figure that matters is the final UK liability for the year, not the amount withheld by the agent.

How does the foreign tax credit work for UK tax on rent?

UK income tax on the rent is generally creditable against US tax on the same income. IRS Publication 514, at https://www.irs.gov/publications/p514, places rents in the passive category basket unless they arise from an active trade or business, which a single let former home will not normally be. The credit for passive category income is limited to the US tax attributable to net passive foreign income, so where depreciation and interest reduce the US rental profit to almost nothing, there is almost no US tax for the UK tax to offset.

Excess foreign taxes are not lost. Publication 514 allows them to be carried back 1 year and forward 10 years within the same basket. In our files, these carryforwards are often used later when other passive foreign income arises, or when a UK-taxed gain is realised on a sale, subject to the sourcing and basket rules that apply at that time.

The second complication is timing. Publication 514 explains that foreign taxes generally accrue on the last day of the foreign tax year. The UK tax year ends on 5 April, so UK tax for the year ending 5 April 2026 accrues in US tax year 2026, while it relates to rent received partly in calendar 2025. A cash-basis taxpayer can elect on Form 1116 to claim credits in the year they accrue; the election applies to all foreign taxes and, once made, generally binds future years. Choosing a method deliberately, and applying it consistently, avoids double counting and missed credits.

Finally, the Net Investment Income Tax. The IRS page at https://www.irs.gov/individuals/net-investment-income-tax confirms that the 3.8% tax includes rental income where modified adjusted gross income exceeds $200,000 for single filers, $250,000 for joint filers or $125,000 for married filing separately. The IRS position is that the foreign tax credit does not reduce this tax, so HNW landlords should expect a small US liability on positive net rent even where the income tax is fully covered by UK credits.

US UK tax returns preparation in practice: a worked illustration

The following illustration uses assumed figures and assumed exchange rates. It is not a real client and the rates are not official rates.

Sarah is a US citizen who is UK resident and a higher-rate taxpayer through her salary. She bought a London flat in 2016 for £600,000 and later spent £20,000 on a new kitchen, giving an adjusted basis of £620,000. In March 2025 she moved to a larger house and made the flat available to let from 1 April 2025 at £3,000 a month. On that date it was worth £850,000. Her letting agent charges 12% of rent, other running costs are £400 a month, and mortgage interest is £1,000 a month.

US basis. The lower of adjusted basis (£620,000) and fair market value (£850,000) is £620,000. Assuming a 30% land allocation, the building basis is £434,000. For simplicity this illustration assumes the dollar cost of her historic payments equates to an exchange rate of $1.27 per pound, giving a building basis of $551,180. Annual ADS depreciation is $551,180 divided by 30, or about $18,373. With the mid-month convention and an April start, 2025 depreciation is eight and a half months, about $13,014.

US 2025 Schedule E (April to December), at an assumed average rate of $1.30 per pound: rent £27,000, or $35,100; agent fees £3,240, or $4,212; running costs £3,600, or $4,680; mortgage interest £9,000, or $11,700; depreciation $13,014. Net rental income is about $1,494.

UK 2025-26 Self Assessment (6 April 2025 to 5 April 2026): rent £36,000, less agent fees £4,320 and running costs £4,800, gives a property profit of £26,880. Mortgage interest of £12,000 is not deducted. At 40%, tax is £10,752, reduced by the basic rate finance cost credit of 20% of £12,000, or £2,400, leaving UK tax of £8,352 on the flat.

The mismatch is stark. The US sees roughly $1,500 of passive profit; the UK taxes roughly £27,000. The passive basket limitation allows a credit only up to the US tax on that small profit, so most of the UK tax becomes an excess credit to carry back or forward. Because the UK tax for 2025-26 accrues on 5 April 2026 and includes three months of rent that fall into the 2026 US year, Sarah's credit method determines which US year the credit is claimed in. Her US return still shows a small NIIT exposure if her income exceeds the threshold. None of this is a reason not to let the flat, but it is a reason to model both returns together before the first tenancy starts.

What happens when you later sell the former home?

We cover the sale in detail in a separate guide, so this is a short summary. Under Section 121, described in IRS Publication 523 at https://www.irs.gov/publications/p523, you can exclude up to $250,000 of gain, or $500,000 for a qualifying married couple filing jointly, if you owned and used the home as your main home for at least 24 months of the 5 years before the sale. Publication 523 confirms that the period after the last date the property was used as your main home is not treated as nonqualified use, so a rental period after moving out does not by itself reduce the exclusion. In practice this gives a window of roughly three years from moving out in which to sell and still meet the use test.

Depreciation allowed or allowable after May 6, 1997 cannot be excluded. It is taxed as unrecaptured section 1250 gain at a maximum rate of 25%, even where the rest of the gain is excluded. On the UK side, private residence relief covers your periods of occupation and, under GOV.UK guidance at https://www.gov.uk/tax-sell-home/let-out-part-of-home, the last 9 months of ownership; letting relief now applies only where you shared occupancy with your tenant. If you are non-resident when you sell, HMRC's guidance at https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property requires you to report and pay within 60 days of completion, even where no tax is due.

US UK tax returns preparation checklist for a let former home

Record the conversion date and obtain a dated valuation close to it.
Rebuild adjusted basis in sterling and in dollars, using the exchange rate for each purchase and improvement payment.
Document a reasonable land and building split.
Set up ADS depreciation over 30 years with the mid-month convention on Form 4562 line 20c; depreciate furniture separately.
Keep a full-year ledger of rent and expenses in sterling, split by UK tax year and US calendar year.
Choose and document the exchange rate method and apply it consistently.
Compute the UK property profit, the finance cost credit and the final UK liability; keep NRL deduction statements if non-resident.
Decide on the foreign tax credit timing method and track passive basket carryovers.
Track suspended passive losses on Form 8582 every year.
Report the bank account that receives the rent on the FBAR if aggregate balances require it, via https://www.fincen.gov/report-foreign-bank-and-financial-accounts.
Diary the Section 121 deadline that follows from your move-out date.

What are the most common errors we correct?

Using the 27.5-year GDS period instead of the 30-year ADS period for a property outside the United States.
Depreciating the full purchase price, including land, or using today's market value instead of the lower of basis and value.
Translating the historic purchase price at the conversion-date exchange rate.
Not claiming depreciation at all, then facing recapture on depreciation that was allowable.
Claiming UK tax withheld by the letting agent as the creditable amount instead of the final Self Assessment liability.
Claiming the same UK tax in two US years because the UK and US tax years were not mapped.
Treating the move abroad as ending UK reporting, when the rent remains taxable in the UK and NRL1 approval only stops withholding.
Ignoring the exchange gain that can arise when a sterling mortgage is repaid.

Each of these is avoidable with joined-up preparation of both returns. If you are about to let your former home, or have already done so and are unsure whether earlier returns were prepared correctly, our team prepares the US and UK filings together so that the depreciation, the exchange rates and the foreign tax credit all reconcile.