Hi,

I am an Indian citizen and currently on working in USA on work visa HI. I have recently purchased a first residential property in my home country India. I have taken Home loan from a Bank in India. I am paying monthly EMI’s on that loan using my NRI account.

Question?
Can I avail tax benefit on housing loan while filing tax return in US? I am not filing tax in India as I am not earning anything in my home country. Please reply.

Thanks for helping,
RasAgr

Hi,

I am an Indian citizen and currently on working in USA on work visa HI. I have recently purchased a first residential property in my home country India. I have taken Home loan from a Bank in India. I am paying monthly EMI’s on that loan using my NRI account.

Question?
Can I avail tax benefit on housing loan while filing tax return in US? I am not filing tax in India as I am not earning anything in my home country. Please reply.

Thanks for helping,
RasAgr

Mortgage interest on your Indian home is deductible on schedule A as an itemized deduction. The interest should be reported on Schedule A on the line that says mortgage interest not reported on Form 1098.

However, since you reside in the U.S. and the lender is a foreign bank, you are required to withhold 30% tax on the interest portion of the payments, unless a lower treaty rate applies. If you want to rely on the treaty, you need to obtain a Form W-8BEN from the foreign bank where the bank certifies that it qualifies for treaty benefits. In either case, you will need to also file Form 1042 and 1042-S reporting that you made interest payments to foreign persons.

The withholding tax rate under the U.S.-India Treaty would likely be 10% (if you can get a W-8BEN from the bank).
See also http://www.askmehelpdesk.com/taxes/there-tax-deduction-home-loan-other-country-property-country-181648.html

What if the Bank does not issue W-8BEN? Would you please elaborate on this witholding of tax on interest payment point. It is not very clear to me.

Thanks

If the bank does not issue a W-8BEN, then you are required to withhold 30% of the interest portion of the payments.

You mean to say that I withhold 30% of my Interest portion of the payments to the bank? Why will the Bank agree to this? Will they not charge me any penality for not paying them the full amount?

Thanks

I recognize that this is a tough situation. I am simply stating what U.S. tax law requires. I don't know what the bank would say.

According to IRS and legally it is very correct that you can take a tax deduction of Foreign Home Mortgage Interest paid on a foreign Home. But at the same time it very impractical to take this deduction for the following reasons:

1. You need to get Form 1098 form the recipient of the interest to report this HMI.
2. Even if you do not get this Form 1098 from the lender, you need to report the SSN or EIN of the recipient to report on SCH A. Else you will be disallowed the deduction and in addition you will be levied a penalty of $50.
3. Generally the foreign bank will never give you the Form 1098 or its EIN, because they are at obligation to pay 30% (applicable tax treaty rate) to the IRS.
4. The tax payer has also has an obligation to withhold taxes from the interest payment, for which no foreign bank will permit.
5. Resident Aliens of US has to pay their tax to US on their world wide income(not only income from US but income from outside US). Resident Aliens should also think of applicable capital gains tax in case they sell the house property.

One final consideration: the size of the joint standard deduction, which, for 2008, is $10,900.

Many homes in countries such as India or Pakistan sell of a very small price relative to the cost of real estate in the U.S.

Hence, the loan balances generate rather small annual interest amounts.

Over the past few years, I have had several foreign national clients provide me with interest payments of less than $5,000 which, when combined with the other itemized deductions on Schedule A, do NOT exceed the $10,900 standard deduction.

So, in many cases, the whole argument about withhlding 30% of the payment for taxes is a MOOT POINT, because the itemized deductions cannot exceed the $10,900 joint standard deduction.

The discussion regarding itemized deductions or the standard deduction has nothing to do with the imposition of the withholding tax. The deductions are related to the income tax imposed in Internal Revenue Code section 1. The withholding taxes are imposed under sections 871 and 881. The withholding taxes are based on gross amounts and no deductions are allowed.