Foreign Exchange Gains

[NeddyS]

Can the discharge of a mortgage on the disposal of a foreign rental property in a foreign currency (non-functional currency for a US tax resident) result in a foreign exchange gain or loss under IRC Section 988 in addition to a capital gain or loss on that property? If so, how is that gain or loss calculated?

Assuming the answer to the above question is positive, do the same rules apply to the annual mortgage payments in respect to foreign owned real estate where those payments are made in foreign currency? 

I would be grateful for anyone to throw light on these difficult questions

[itonewbie]

When you with confronted with unfamiliar questions such as this, it helps to take a step back and dissect the transaction into pieces you actually need to deal with.

Once you get under the surface, there are actually three related but distinct pieces:

1. Cancelled debt;
2. Foreign currency gain/loss; and
3. Gain/loss from the sale of the property.

These gains and losses, although related, cannot offset one another.  Whether losses incurred are deductible would depend on whether this is a personal or business/investment property.

[itonewbie]

When you say "discharged", I associated that with cancelled debt.  If it's just a normal retirement of the mortgage, #2 and #3 will still apply.  Foreign currency gain/loss will be calculated on the principal that was settled during the installment over the year plus the balance that was settled at the sale of the property.