Ask Me Help Desk - Tax Benefit on Overseas Home Loan

Hi,

I am Indian citizen and currently on working in USA on work visa. I have recently purchased a first residential property in my home country India. I have taken Home loan from 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.

Thanks,
Ashish

Home Mortgage Interest paid on Homes in foreign country:

Case 1: HMI paid to a US financial Institution/Bank for property outside US.

• Definitely Form 1098 will be issued by US Financial Institution.
• Even though 1098 is not issued for the full interest paid, it can be reported on Line 11 of Sch A (itemised deductions) by attaching a statement explaining the difference (We may be required to paper file the return).
HMI can be claimed without any doubt in this case. Capital gains may arise for such property if sold.

Case 2: HMI paid to a bank/financial Institution outside US for property in a foreign country.

The bank/FI overseas is no way related to US IRS administration.

I opine HMI cannot be taken in this case because –

1. The interest is not getting taxed in US.
2. A payer of interest, dividends, patronage dividends, or royalties, a broker, or a barter exchange may have to withhold 28% of each payment or transaction if the payee does not provide a correct taxpayer identification number. Generally foreign corporations, partnerships, and estates and trusts that are not engaged in a U.S. trade or business and do not have an office or place of business in the United States are not required to have U.S. taxpayer identification numbers. In such a case no foreign bank will allow the taxpayer (our client) to deduct tax from such interest payments.
Therefore, to take HMI, the interest payment should be taxed either at payer (by way of backup withholding and issuing 1099-INT to the payee) or payment of tax on such interest income by the Bank/FI in foreign country which is not practical in nature.

Reporting requirements:

The reporting of HMI and points on SCH A, Line 10 and Line 11 also confirms this.

From Pub: 936 How to Report: It reads as follows:

“Deduct the HMI and points reported to you on Form 1098 on Schedule A(Form 1040), line 10. If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount of line 10. Attach a statement explaining the difference and print.

Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A(Form 1040), line 11…..)”

Reporting on Line 11 comes into picture only if there is a difference in interest paid to the financial institution, to that of the interest reported on Form 1098 by such institution.

If there is any payment of interest to any person other than the financial institution, he should be the seller of House property (not the financial institution). In such case we need to show such person’s name, address and TIN on the dotted lines next to line 11. It is also mentioned that failure to meet any of these requirements may result in a $50 penalty for each failure.

General Rule for any deduction or credit on Form 1040:

1098-T: Tuition and Education expenses: We cannot take deduction or education credits unless we receive valid 1098-T form from the education institution. We cannot take a deduction/credit for education expenses paid in foreign country without form 1098-T.

Child and Dependent Care Expenses: We cannot take child and dependent care credit unless we pay the qualified expenses to an authorised child care benefit provider who has valid SSN/EIN. Even here we cannot take a credit for the expenses paid in Foreign country.

I opine that even in case of HMI the same principle will apply. :(

Kishore

International Tax Business School - Professional Trainers in US, UK, Indian, Canadian and Australian personal income Tax laws
US TAX - Form 1040 - Personal and Dependent Exemptions

To Taxbizschool:

I don't know if I can entirely agree with you here.

Let us take Child and Dependent Care Credit first.
I have more than a few clients working for the State Dept. and NATO and naturally they are posted to several countries. In most circumstances both husband and wife are employed at the embassy or consulate and must have someone watching their little ones who is a resident of that country and has no TIN.
After discussion with the IRS on this issue the credit was accepted. It was agreed that if they were not subject to US tax there would be no problem.

On the mortgage interest deduction, US citizens and residents abroad must be able to deduct that interest payment to a foreign bank or they would never be able to buy a house, condo, etc. in the country where they lived. I have never had this deduction challenged or denied.

I agree with Five Rings on BOTH the Child Care Credit and the Mortgage Interest Deduction. I too have claimed the HMI paid to foreign banks and have yet had the deduction challenged.

Now, there MAY be a requirement for the banks to pay U.S. taxes on said interest, and IntlTax has noted an IRS requirement to withhold 30% of the payment towards that end, but it is not really an option for the average taxpayer to try to do such a withholding.

As for the education credit, the Form 1098-T is a great tool to allow us to properly calculate the education credit or deduction, but it is not required to the claim the credit. What IS required is the need for proof that the tution has actually been paid, and that is normally not a problem, as most university bursars will issue an itemized receipt upon request.

I agree that the deduction can be taken for home mortgage interest on foreign properties. However I disagree that it is:

Quote:

not really an option for the average taxpayer to try to do such a withholding.

I don't believe it is appropriate to counsel taxpayers to evade their U.S. tax/withholding obligations, especially when they may be subject to penalties for failing to comply with those obligations.

Note that the withholding obligation only applies if the person lives in the U.S. If the person lives outside the U.S. the interest is not U.S. source income and no withholding is required.