[rsatya]

Hi

We are naturalized US citizens and have a question on our secondary home mortgage interst deduction .

We took loan to build a seconday home in foreign country ( where we born) . The enteir loan was processed on tha country and they don't have any branches in US. All the payment will do on the local currency . Our question how do we deduct the interst in our US taxes along with primary house interst deduction. These bank canw provide us with statement that how much money we paid them in form each month .

Could you please help us .

Thanks for the help

[AtlantaTaxExpert]

The statement from the bank MUST break the payment down to how much was principal and how much was interest. Only the INTEREST is deductible.

You report the interest on Schedule A, just like you would to a private person. You need to name the foreign bank, and provide their U.S. tax ID number, if they have one.

It is possible that the IRS will require that you withhold 30% of your mortgage payment to cover U.S. tax liabilities.

[rsatya]

Thanks for the reply however I have little confusion on below statement

" It is possible that the IRS will require that you withhold 30% of your mortgage payment to cover U.S. tax liabilities"

Mean they will deduct 30% of the refund ? Please note that we are not ginvg this home to anyone for rent , if there is no rental income we don't have to worry correct ?

[AtlantaTaxExpert]

No, I mean 30% of your payment to the foreign bank.

Of course, the foreign bank will NOT allow such a withholding even if you showed them an IRS letter demanding that it be done, so that puts you in the delicate situation of whether you heed an IRS demand letter or continue to pay the bank.

This is why I often caution my clients about claiming such foreign mortgage interest, because it could create more problems than the deduction justifies.

[IntlTax]

If you reside in the U.S. then the 30% tax applies. As indicated in another thread, it is the payment of the interest that triggers the 30% tax. The act of claiming the deduction or not claiiming the deduction has no impact on whether the tax is due. A treaty may apply to reduce or eliminate the withholding.

For other discussions on this topic, see
https://www.askmehelpdesk.com/taxes/...st-323588.html

And

https://www.askmehelpdesk.com/taxes/...ry-181648.html

And

https://www.askmehelpdesk.com/taxes/...rn-415054.html

[AtlantaTaxExpert]

What IntlTax says is true; see the other posts.

[mcl61]

Sorry if a double post. Is the withholding required if:

USA citizen drawing on a USA Bank and USA div/int income, but residing full time in the foreign property and paying the associated foreign mortgage to a foreign bank?

For example: I am retired, and I move to Ireland or Australia, where I am entitled to live via permanent status and/or citizenship. I buy a home there, and finance it. I do not earn income there.

[IntlTax]

No. No withholding is required if you are not residing in the U.S.

[mcl61]

Ugh... just posted and it vaporized.

Thank you for responding. Is there a publication I can reference, as the payment or non-payment of withholding tax is a significant sum in that I would be pursuing a large mortgage, i.e. $1M in USD.

Although firmly entrenched overseas, I would keep my US property and convert it to a rental, thereby filing a schedule E.

In a related note, assuming I max out the 1M mortgage interest deduction in pursuit of the foreign property, can I still claim related mortgage interest as an expense offsetting my rental income on my USA property? The rental property has approx 200K in mortgage balance.

And finally, where would I claim the foreign property tax... on my Sched A, or Form 1116 - or is itmy choice.

[AtlantaTaxExpert]

You cannot claim interest on a property that is different that the rental property reported on the Schedule E.

You would claim the foreign property tax as a deduction on Schedule A In my opinion.

[mcl61]

I think I did a poor job with my question, let me try again.

If the max mortgage interest ceiling is $1M, what happens in the following example:

Homeowner reports Sched A mortgage interest paid in tax year on a $1M primary residence mortgage, even though for argument's sake, he has a 1.5M mortgage. On Sched A he can't claim any more than the interest paid on $1M related to his primary residence. And yes, his primary residence is in a foreign country, he pays mortgage interest to a foreign bank. He converts everything to US dollars for US tax reporting.

This same homeowner has a rental property (his old home in the USA). This rental property has various operating costs, one if which is servicing the related mortgage debt. He owes 200K on that rental property mortgage. Can he claim this mortgage interest as an expense on his Schedule E?

In Summary:

* claiming Sched A interest on $1 million debt, primary residence. Maxed out, period. Would like to claim more, but has hit the $1M ceiling.

* using mortgage payments on 200K related to tiny investment property as a Sched E expense. Is this allowed? I ask because this 200K pushes his overall mortgage interest reported - albeit on different parts of the Fed tax return - past the $1M threshold. He is reporting interest paid on 1.2M worth of mortgage debt - exceeding $1M.

Or, is the payer limited to reporting interest on $1M regardless of where that interest is reported, be it Sched A or Sched E. Or could, in theory, he have a $1M mortgage on his primary residence, and a $1M mortgage on his rental property, thereby $2M of mortgage debt to his name, all being cleanly reported on its various forms.

[AtlantaTaxExpert]

The rental property is NO LONGER the primary or secondary residence, so the $1M threshold doe not apply!

The mortgage interest on the rental property is considered to be a valid deduction reported on Schedule E. There is NO limit on mortgage interest on rental properties.