US tax on extra 5% Mortgage payment in Germany

[Nixon]

Hello,

We have a mortgage for our apartment in Germany. We took it in 2018.
Last year we did an extra payment (5% Sondertilgung ) on it.

- Now people that are doing our US tax are telling us that we have to pay Foreign mortgage gain tax on the currency conversion rate difference between 2018 and 2023 on those 5%. Is that right?
- Should that be covered by double taxation agreement between Germany and the USA? Or if we pay taxes on that to the USA, would we have a right to ask for refund from German Finanzamt?

Anybody going through this issue?

Thanks.

[PandaMunich]

We have a mortgage for our apartment in Germany. We took it in 2018.
Last year we did an extra payment (5% Sondertilgung ) on it.

- Now people that are doing our US tax are telling us that we have to pay Foreign mortgage gain tax on the currency conversion rate difference between 2018 and 2023 on those 5%. Is that right?

Yes, see here: https://pjdtax.co.uk/updates/foreign-mortgage-gain/

Germany has something similar if you do transactions in another currency than the €: viewtopic.php?t=120

So you can't win.
If the USD appreciates against the €, the US will always tax you on that currency gain.

If the € appreciates against the USD, Germany will:

• always tax you on a currency gain if it happened in a non-€ savings account (and come to think of it, with their new mind-boggling definition, that would also apply to non-€ loan accounts).
  But since they say that's capital income, the currency gain would be taxed with a 25% income tax flat rate, but only if your total capital income (interest, dividends, profit from sellling stocks/funds/options, Vorabpauschale for owning funds and this currency gain) exceed the 1,000€ per person per year saver's tax-free allowance (Sparer-Pauschbetrag) - if you're married, you also get to use your spouse's saver's tax-free allowance, so then it's 2,000€, see § 20 (9) EStG: https://dejure.org/gesetze/EStG/20.html
  or
• if it happened in a non-€ current account, Germany will make you tax a currency speculation gain if you "touch" that batch of USD again within 1 year, i.e. if you do not let the USD cool off for more than 1 year.
  Germany will tax that gain with your own variable income tax rate of up to 42%, if your yearly currency speculation gain exceeds the Freigrenze 600€ (from 2024: 1,000€) that is laid down in § 23 (3) EStG: https://www.buzer.de/gesetz/4499/al194484-0.htm

- Should that be covered by double taxation agreement between Germany and the USA? Or if we pay taxes on that to the USA, would we have a right to ask for refund from German Finanzamt?

The double taxation agreement removes double taxation, i.e. both countries wanting to tax you on the same income.
--> this is not a double taxation case.

Only the USA want to tax you on that (fictive) gain of the USD against the €.

Germany doesn't, since they don't see a currency gain at all: looked at with the spectacles "my functional currency is the €", there is no currency gain for Germany to tax, since that mortgage is in €.

[Nixon]

Thank you PAnda.

I already thought that getting something favorable for us in this case would be a long shot, but I had to ask.
Who would think moving from one to another country would be this complicated

[Nixon]

This mortgage in Germany is for 10 years.
At the end if we don't make any extra payments we will still have some 150K to pay to the bank.
Would that amount be taxed by the USA for Foreign Mortgage gain due to different currency conversion rate after 10 years, or we would be able to pay it all or get another mortgage with no extra US taxes?

We gave up on making extra mortgage payment for this year since our savings would just get transferred to the IRS with this tax again.

[PandaMunich]

Please re-read the example in here: https://pjdtax.co.uk/updates/foreign-mortgage-gain/
Refinancing also kicks off a mandatory calculation of your US currency gain.

--> there is no way to avoid it - well, except hope that the USD loses in value against the €, since in that case, you would have a currency loss
--> no US tax due.

[Nixon]

Thank you PAnda for these clarifications!