FX Gain on Discharge of Mortgage

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underwhelmed
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Joined: Fri Nov 16, 2012 3:36 pm

FX Gain on Discharge of Mortgage

Post by underwhelmed »

Does anyone know how the IRS calculates foreign exchange gains on mortgages, and what triggers the gain?

All of the examples I have seen online assume interest-only mortgages that are discharged when the property is sold.

For example, assume a US citizen takes out a C$500,000 mortgage to buy a house in 2011. Assume that at the time, the $C is at par with the $US, so the value of the mortgage was US$500,000.

Assume that no principal payments are made from 2011 through 2015, and that the mortgage is discharged in 2016 when C$1 = US$0.80.

I understand that the IRS would view the US citizen as having had a foreign exchange gain of US$100,000 because a mortgage that was initially US$500,000 was discharged using US$400,000.

I understand that this US$100,000 "gain" would be treated as ordinary income by the IRS.

I am wondering how the gain is calculated in situations in which principal is paid down periodically rather than all at once. For example, does the IRS use the exchange rate at the time of each principal payment, aggregate the USD equivalent amounts of each payment, and calculate the FX gain on the basis of that calculation of the total USD payment that discharged the mortgage?

Or does the IRS use the average annual exchange rate for each year of principal payments to calculate the USD equivalent for principal payments that year?

Or does the IRS simply take the exchange rate applicable as of the final payment and apply it to all payments?

Also, I am wondering what triggers the FX gain. That is, is there an FX gain for each year that principal is paid down? Or only in the year when the mortgage is completely paid off? Does it matter if the mortgage is paid off without the underlying property being sold? Does a mortgage refinancing trigger the gain?

Is anyone familiar with the mechanics of this?

Thanks. Any assistance is greatly appreciated.
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