FX gain/loss reporting with foreign cash earned before I became a US tax resident

[jingle123]

I was an foreign tax resident and refinanced the mortgage on my foreign rental property in December 2020. I also held a substantial foreign cash balance in my foreign bank account (earned from my previous work in the foreign country). In 2021, I became a U.S. tax resident.

If I use that existing foreign cash balance to pay off the foreign rental property mortgage, does this trigger any foreign‑exchange gain or loss for U.S. tax purposes? If yes, what are the FX basis I should use for the calculation? It's not possible for me to figure out what the FX rate was when I actually earned the money since it was long time ago but I do know the spot FX rate on the day when the loan was set up.

[MaxA1]

 No.  Paying off your mortgage on your foreign rental property won't cause a foreign exchange gain/loss.  You would only ‌deduct the mortgage interest that was paid during the year, and you would use the IRS average currency exchange rates for the applicable year to convert the foreign interest paid to USD.

Here's the link to the IRS' Average currency exchange rates:

• Yearly average currency exchange rates

[jingle123]

Can you explain why it doesn't cause any fx gain or loss?

[MaxA1]

Only the interest paid on your mortgage is deductible.  So you would only convert the interest portion of your mortgage payment during the year.  You will convert the interest portion by using the average currency exchange rate.  Once you've converted the amount to USD, you will enter it on your SCH E.

[jingle123]

I don’t think you understand my question. I’m asking about the principal repayment using the foreign cash I earned before I became a US tax resident.

[MaxA1]

I see, apologies for the confusion. Use the FX Rate on the day the loan was set up to calculate your basis.