UK Rental Property and US Taxes: Depreciation, Mortgage Interest and Section 24

A UK rental property puts a US citizen under two sets of rules, and US taxes on the rent are worked out very differently from UK tax. The IRS requires depreciation of the building over 30 years and allows mortgage interest in full. HMRC allows no depreciation and, under Section 24, gives interest relief only as a basic rate tax reduction. The result is two different profits from the same rent, and usually more UK tax than US tax.

This guide concentrates on the three items that cause that gap: depreciation, mortgage interest and the finance cost restriction. For the wider picture of who taxes the rent, the Non-Resident Landlord Scheme and the reporting forms, see our companion guide to landlord tax on UK rental income for a US citizen.

How do US taxes apply to a UK rental property?

The US taxes its citizens and green card holders on worldwide income, so rent from a UK rental property goes on Schedule E of Form 1040 every year. The figures are converted into US dollars, the expenses allowed are those in the US rules, and the UK tax paid is then claimed as a foreign tax credit on Form 1116 (the US form that gives credit for tax paid to another country).

The UK taxes the same rent because the property is in the UK. A UK resident reports it on a Self Assessment return; a landlord living abroad is still taxed on UK property income. Neither country exempts the income. The US/UK tax treaty leaves the country where the land is situated free to tax it, and double taxation is removed by the credit, not by an exemption.

What differs is the measurement. The table sets out the main differences for an individual landlord of UK residential property.

Item	UK (HMRC), 2026/27	US (IRS), tax year 2025 rules
Cost of the building	No deduction. Capital expenses are not allowable against rental income	Depreciated over 30 years under ADS (40 years if placed in service before 2018)
Mortgage interest	Not deducted. Tax reduction at the basic rate, 20%	Deducted in full on Schedule E
Furniture and appliances	Replacement of domestic items relief when an item is replaced	Depreciated as separate assets
Repairs, insurance, agent fees	Allowable if wholly and exclusively for the letting	Deductible as ordinary rental expenses
Currency	Pounds	US dollars, converted at the rate for the year or the day
Tax year	6 April to 5 April	Calendar year

Depreciation: the deduction the UK does not give

Depreciation is the largest structural difference. Under US rules the cost of a rental building is written off over a set number of years, starting when the property is placed in service, meaning ready and available to let. IRS Publication 527 is clear that land cannot be depreciated, so the purchase price has to be split between land and building.

A US rental property is depreciated over 27.5 years. A UK one is not. IRS Publication 946 requires the Alternative Depreciation System (ADS) for any tangible property used predominantly outside the United States, and the ADS recovery period for residential rental property is 30 years, or 40 years for property placed in service before 1 January 2018. ADS is straight-line: the same amount each full year.

HMRC's guidance on working out your rental income takes the opposite approach. Capital expenses are not allowable and cannot be claimed against rental income. There is no annual allowance for the building at all. For furnishings in a residential let, relief is given only when a domestic item is replaced.

Depreciation is not really optional

Some landlords leave depreciation off the US return because the foreign tax credit already covers the US tax. That is a mistake. US basis in the property is reduced by the depreciation allowed or allowable, which means the deduction you were entitled to counts against you on sale whether you took it or not. Claiming it at least produces a lower US profit each year and a larger pool of unused foreign tax credits.

What depreciation costs you on sale

Each year's depreciation lowers the US basis, so the US gain on sale is larger than the UK gain. The part of the gain that reflects depreciation on the building is called unrecaptured section 1250 gain, and IRS Topic 409 gives its maximum rate as 25%, compared with the 0%, 15% or 20% rates on other long-term gains. The UK has no equivalent because it gave no deduction in the first place. UK Capital Gains Tax for US citizens on residential property is charged at 18% or 24% for 2026/27, after a £3,000 annual exempt amount, and that tax is normally available as a credit against the US tax on the same sale.

How is mortgage interest treated in each country?

The US deducts mortgage interest on a rental property in full, and the UK does not deduct it at all. Publication 527 states that you can deduct mortgage interest you pay on your rental property, and nothing in that rule depends on where the property or the lender is. A sterling buy-to-let mortgage with a UK bank qualifies.

The UK position changed between 2017 and 2020. HMRC's guidance on tax relief for residential landlords explains that relief for finance costs on residential property is restricted to the basic rate of Income Tax. This is the rule landlords call Section 24, after the section of the Finance (No. 2) Act 2015 that introduced it.

How the Section 24 tax reduction is calculated

Rental profit is calculated without deducting any finance costs. Income Tax is worked out on that higher profit. A tax reduction is then given, equal to the basic rate multiplied by the lowest of:

1. the finance costs for the year, plus any brought forward from earlier years;
2. the property business profits for the year, after losses brought forward; and
3. adjusted total income: income other than savings and dividends that exceeds the Personal Allowance.

The reduction cannot create a refund. Where it is limited by the second or third figure, the unused finance costs carry forward. For a basic rate taxpayer the result is close to a full deduction. For a higher or additional rate taxpayer, tax is charged at 40% or 45% on profit that includes the interest, and relief comes back at only 20%.

What changes on 6 April 2027

For 2026/27 the UK rates on rental profit are the ordinary Income Tax rates: 20%, 40% and 45%, above a Personal Allowance of £12,570. From 6 April 2027, property income has its own rates. The government's note on changes to tax rates for property, savings and dividend income sets the property basic rate at 22%, the property higher rate at 42% and the property additional rate at 47%, with finance cost relief given at the property basic rate of 22%. Those rates were legislated in the Finance Act 2026. The Scottish and Welsh governments are able to set their own property rates.

A worked comparison: one flat, two profits

Illustrative example, with invented figures shown in pounds for both countries so the rules can be compared: a US citizen living in London, a higher rate taxpayer, lets a flat bought in 2020 for £300,000, of which £240,000 is the building and £60,000 the land. In the year the rent is £24,000, running costs are £4,000 and mortgage interest is £9,000.

	UK calculation	US calculation
Rent	£24,000	£24,000
Running costs	(£4,000)	(£4,000)
Mortgage interest	Not deducted	(£9,000)
Depreciation, £240,000 over 30 years	Not available	(£8,000)
Taxable rental profit	£20,000	£3,000

UK tax for 2026/27 is 40% of £20,000, or £8,000, less a tax reduction of 20% of £9,000, or £1,800: £6,200. Under the 2027/28 rates the same figures give 42% of £20,000, or £8,400, less 22% of £9,000, or £1,980: £6,420. The US taxes a profit of only £3,000, converted into dollars. The UK tax is roughly twice the entire US profit, so the foreign tax credit removes the US income tax on the rent and leaves a large amount of unused credit.

The actual US figures are in dollars, and the choice of exchange rate matters. Rent and expenses that arise evenly are normally converted at the yearly average; our guide to the IRS exchange rate for GBP covers which rate goes where. The depreciable basis is fixed in dollars at the rate on the date the property was bought, so the dollar depreciation does not move with the pound from year to year.

What the mismatch does to your foreign tax credit

Rental income normally falls in the passive category on Form 1116, and credits in one category cannot be used against US tax on another. UK tax on rent can offset US tax on rent and on other passive income such as UK dividends and interest, but not US tax on a salary.

Because the UK profit is larger and the UK rates are higher, most US citizen landlords in the UK build up excess passive credits. The Instructions for Form 1116 allow unused foreign tax to be carried back one year and forward ten. Those carryovers have real value in the year the property is sold, when depreciation has made the US gain bigger than the UK gain.

Three limits are worth knowing:

• Net Investment Income Tax. The 3.8% Net Investment Income Tax applies to rental income where modified adjusted gross income is above $200,000 for a single filer or $250,000 for a joint return. It is calculated separately from regular income tax.
• Rental losses. A US rental loss is generally a passive loss. It may be restricted in the year and carried forward rather than set against salary.
• The mortgage itself. Repaying or refinancing a sterling mortgage on a let property can produce a taxable currency gain or a deductible loss in dollars, with no UK equivalent. See our guide to the section 988 currency gain.

What US citizen landlords get wrong

• Copying the UK profit onto Schedule E. The UK figure has no interest deduction and no depreciation. Converted and copied, it overstates US income every year.
• Using 27.5 years. That is the period for US property. A UK residential let uses 30 years under ADS, or 40 years if it was first let before 2018.
• Depreciating the whole purchase price. Land is excluded. A reasonable, documented split between land and building is needed from the first year.
• Forgetting the UK tax year. UK tax for the year to 5 April has to be matched to US calendar years when the credit is claimed.
• Ignoring the property until sale. Missing depreciation, an unsupported basis and unclaimed credit carryovers are all far cheaper to fix while the property is still let.
• Assuming a UK company solves Section 24. A company is outside the finance cost restriction for UK purposes, but for a US shareholder a UK company brings its own US reporting and anti-deferral rules. It needs modelling in both countries before anything is transferred.

Getting UK rental property right on both returns

The practical answer is one rental schedule that feeds both returns: rent and expenses recorded once, a depreciation schedule kept in dollars for the US, a finance cost computation for the UK, and a running record of foreign tax credit carryovers. With that in place the annual filings are routine, and the sale, when it comes, has no surprises.

US/UK Cross Border Tax is a team of US CPAs and UK tax advisers working as one team, with offices in London, Manchester, New York and San Francisco. We prepare the UK and US sides of UK rental property and US taxes together, including the depreciation schedule and the Section 24 computation. If you are a landlord with property on either side of the Atlantic, or you need a UK Self Assessment return alongside your US filing, contact us for a fixed fee quote.