[srmcg]

Hi.
I am a recent resident alien in the US.
I have a property in my home country with I have a mortgage on. The property was purchased numerous years before I came to the US - property and lending bank for the mortgage and payment bank account are based in my original country.
I am very confused with regards claiming mortgage interest expense on my US tax return.
The country has a double taxation treaty and the bank does not give out W-8BEN forms - it has nothing to do with the US at all.

This is the only property I own and I rent an apartment here in the US - so I would think it is not considered a second home.

I am reading about schedule E which seems OK and that I can depreciate the property over 40 years straight line. (100% of it is the property cost, there is no land cost as it is an apartment).
When it comes to the mortgage interest I am reading stuff about witholding 30% of the interest from the bank and that has me very confused. Of course I can't withhold anything from the payment I have to make.

Does this 30% thing apply to me with my situation & circumstances?
If no (phew!), what other circumstances would make the 30% thing apply?
If yes, what are the key points of my situation that make this apply to me?

Obviously I can't do this so what is my options for the tax return and claiming mortgage interest deduction expense?

The other topics have not given me the clear answer on this
Eg. https://www.askmehelpdesk.com/taxes/mortgage-interest-deduction-foreign-held-mortgages-second-homes-68767.html
In this InltTax and AtlantaTaxExpert answers seem to me to conflict. The last answer by the later seems to apply and says I don't need to concern myself with the 30% - but I don't know.

I would greatly appreciate your advice on clearing this up for me.

[IntlTax]

The 30% withholding tax is an issue. If you cannot get a W-8BEN to obtain a zero rate under a treaty, you may want to refinance the debt with a loan from a U.S. bank. Otherwise, you may wish to consider selling the foreign property.

[srmcg]

Thanks. So you are saying the 30% definitely applies to me?
Which means what AtlantaTaxExpert said is wrong?

It seems crazy though.
Could I just say well I won't claim the mortgage interest as an expense? Or just apply 70% of it as the expense claim?

I don't understand why it has anything to do with the US and with paying them money for it.


Additional info, the apartment is being rented and I pay tax on the income in my home country.
It seems weird that I can only get a tax credit here for some of the tax I paid. For example last year I paid $1650 in my country and the tax credit calc here came to only $890 - so I paid double tax for over $750 dollars. Surely I should get the credit for 100% of the tax paid - as I said there is a double tax treaty between Ireland and the US. Should the tax credit cover it all?

[srmcg]

Some further info in case it helps.
I will be using the standard deduction and do not want to itemize.
Will this mean I don't need to add the mortgage interest stuff? And does it mean I can't include it as a list of expenses on schedule E?
This will incorrectly determine then that I have a large profit when in fact I don't at all - its all a huge loss for me (rent is $350 lower each month on the total costs to me). My own country already calls this a profit and taxes the hell out of it and I don't see why I should have to pay anything at all further in the US for something that has nothing to do with them.
Your advice on setting me right will really be appreciated because I feel somehow it doesn't seem right that it looks like I am meant to be getting screwed from all corners on a property I bought in another part of the world years ago and that on cost per month I am already being screwed.

[MukatA]

srmcg: You have property in your country and you are making mortgage payments. If you are making payments out of rent income from that property, you do not withhold 30% tax. Make sure that you are not making payment from income or funds in U.S. You can claim mortgage deduction on schedule E (Form 1040).
Also, if you are paying taxes in your country, you should also complete Form 1116 to get foreign tax credit.

[srmcg]

Ah great thanks for the clear clarification. Puts my mind at ease. Can anyone else please double confirm this?
The mortgage is paid from my irish bank accounts with money I left there and the money I receive from the rent. (the rent doesn't cover the entire monthly costs but there is money in the account for many years that was originally left there i.e. nothing from the US in used).
So I presume you are saying I can claim 100% mortgage interest deduction - last year I claimed only 70% of it as it seems I read something wrong.

Also, for the tax credit on Form 1116 do you think the credit should be 100% of the foreign taxes I pay or is it only a percentage of it? Meaning I would pay some tax here also on the same thing, which I would think goes against the double taxation treaty's purpose.
As explained last year the calculations for $1650 tax paid in the foreign country only got me a credit of $890. Should that really have been 100% of $1650?

Any issues with California state taxes on these points?

[IntlTax]

I disagree with MukatA on the withholding tax issue. For U.S. tax purposes, the source of the interest is not based on where the cash originates from, but instead is based on the residence of the payor. Since you are the payor and you are resident in the U.S. the interest is considered U.S. source income and subject to withholding unless an exception applies.

[srmcg]

I don't get why it is "US source" income for the bank.

Well, what if I was to change the mortgage payment from my Dad's bank account in the country (and I pay him from my bank account in that country with funds sourced in that country)? The payment to the bank would be coming from a non-US residents account and therefore the interest is now not "US sourced".
It seems that what you are saying is that it is a matter of the resident situation of where the payment of the mortgage is coming from.
Would I then not be able to claim the deduction because my payment is going immediately directly to the mortgage lender?

[IntlTax]

See Form 1042 and IRS Publication 515.

[MukatA]

1. I am not sure if income from real property located in a foreign country is U.S. source income or not.
2. For Ireland the withholding rate under tax treaty for interest payment is 0.

[srmcg]

I have a further question on this.

I have read that in order to claim mortgage interest deduction it has to be a first or second "qualified home".
So it seems that a "qualified home" is one where you spend over 14 days in a year.
So since my property is rented out 100% of the year, I would think this all doesn't apply to me and I can't claim mortgage interest deduction. I guess it is not a home to me anymore and is a business to me.
I don't really mind that as all I want to do is include the mortgage interest as an expense against my rental income received in that country - which I think goes with the other expenses on Schedule E.
It seems this discussion has turned into claiming mortgage interest deduction on Schedule A or whatever as itemized - I will use the standard deduction anyway.

So is there multiple locations for mortgage interest deduction like I seem to have suggested above?
Does the 30% thing apply when including the mortgage interest as an expense against the rental income on schedule E?

[IntlTax]

You can deduct the interest on Schedule E as an expense related to your rental income. The 30% withholding tax is independent of whether you can deduct the interest or which schedule the interest is deducted on.

[srmcg]

Thanks.
So the 30% requirement is still there regardless?
And is the only thing to save me from this is for my home bank to give me a completed W-8BEN form?
The tax treaty is 0%.

[IntlTax]

Yes and yes.