Many American expats face unexpected taxable gain on their mortgages due to soaring dollar


It is common for an American citizen abroad to buy a house in the country they live by taking a mortgage from a local bank. Needless to say, the loan is in local currency such as euros, pounds, Australian dollars etc., and very rarely in US dollars. What few Americans abroad know is that the borrowing of funds in any currency other than the US dollar is viewed by the IRS as a foreign currency transaction and the subsequent repayment of the loan may generate a taxable gain when the value of the US dollar increases after they initially took the loan.

How could this be possible???

The IRS has long considered the US dollar as the functional currency of every US citizen around the world regardless of where that person actually lives, works, earns and spends their money.  Every transaction is denominated in US dollars for tax purposes and may result in unexpected gain or loss only due to fluctuation in currency exchange rates.[1]


Mr. Johnson is a US citizen who lives in the UK and purchases a house in London for £500,000 in 2007 by taking a mortgage for that same amount from a British bank. Back in 2007 the £500,000 was worth $1,000,000.  Several years later, in 2015 Mr. Johnson repaid the mortgage loan with money he had saved while working in the UK. What Mr. Johnson failed to consider was that the exchange rate had changed from 2007 to 2015 and the £500,000 was worth only $750,000 in 2015. As a result, in the eyes of the IRS Mr. Johnson borrowed $1,000,000 and returned $750,000 in full repayment of the loan, thus effectively he made a taxable gain of $250,000!

What about monthly repayments?

In the example above, Mr. Johnson did not make any repayments during the years and made one lump sum payment in 2015. In real life however, most people pay their mortgages monthly and with every monthly payment they pay some interest also they down a portion of their loan balance.  As a result, with every principal repayment they realize either gain or loss depending on which direction the exchange rate has gone since the day they borrowed the funds initially.

Are there any exceptions or de-minimis threshold?

Yes, the IRS provides a minimum threshold of $200 where one does not need to report a gain on exchange rate when the gain does not exceed $200.[2] Thanks to this exception, most personal transactions of small amounts do not trigger a taxable exchange gain. For the same reason, people who pay their mortgages on small monthly payments do not realize taxable gains. In the example above however, since Mr. Johnson made a large payment, he realized an exchange gain that exceeded this minimal threshold.

Another exception is that if the loan is used to finance a rental property or another business activity, it may fall under the qualifying business exception rule. However, most personal mortgage loans do generate taxable gains or losses.


While the US tax consequences borrowing money in a foreign currency may seem harsh for Americans abroad, the IRS and the courts have been clear in the application of the rules.[3] As part of their annual US tax reporting and compliance, US citizens abroad should determine the amount of mortgage or any other personal loan for that matter that they have repaid during the year and determine if thy may have realized any gain on the repayment that should be reported to the IRS.

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Disclaimer: The content of this page does not constitute legal advice, and should not be relied upon for tax avoidance purposes. The facts and circumstances specific to your situation are the ones that ultimately determine the application of the rules. The text above is based on Taxential's interpretation of the US tax law from a general perspective only.


[1] Generally, Section 988 of the Internal Revenue Code regulates the treatment of gains and losses on foreign currency exchange. In addition, the IRS has issued Revenue Ruling 90-79 that specifically discusses the application of Section 988 to US citizens with foreign mortgages

[2] IRC Sec 988(e)(2)(B)

[3] Some 20 years ago a US taxpayer challenged the constitutionality of Revenue Ruling 90-79 in court, unfortunately without success. See QUIJANO v. UNITED STATES

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