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Hi,
Nice to meet you. I'm Xiaowei and lives in Seattle. I'm doing my US tax preparation and my colleague mentioned you to me.
Wondering if you are familiar with the foreign exchange rate gain due to selling a foreign property or refinancing a foreign mortgage, aka the section 988.
Here's the situation with my wife. She used to live in Canada and she moved to the US recently as a US tax resident. She has a property in Canada as primary residence. We are now thinking about selling that property. She bough it when the US dollar was much weaker than right now. So according to the US tax law section 988, my understanding is that we have to pay tax for any exchange rate gain. And the formula I heard was
Mortgage settlement balance * (exchange rate @closing date - exchange rate @ mortgage renewal date).
My question is that if we renew our mortgage right now, and sell it immediately once renewal is done, looks like the exchange rate gain would be 0? So I can avoid the tax this way? wondering if this is correct understanding. Or, we still have to pay the tax because we renew the current mortgage which means any gain/loss will be realized already.
Thank you so much!
Subject: Re: Question Regarding Foreign Exchange Rate Gain Tax
Dear Xiaowei,
Nice to meet you, and thank you for reaching out. I appreciate your detailed question regarding the foreign exchange rate gain and Section 988 taxation.
You are correct that under U.S. tax law, foreign currency gains or losses related to mortgage settlements can be taxable events. Section 988 generally applies to foreign currency transactions, including the repayment of a foreign mortgage where exchange rate fluctuations create a gain or loss in U.S. dollar terms.
Regarding your specific question—renewing the mortgage before selling the property—it’s important to clarify that a mortgage renewal does not necessarily reset the exchange rate for tax purposes. The IRS typically considers the original loan terms when calculating foreign exchange gains or losses, meaning that renewing the mortgage may not eliminate the taxable gain upon final settlement. Essentially, any gain or loss is usually realized when the debt is repaid, rather than at the time of renewal.