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leo517 · Feb 7, 2008, 10:38 PM

If a person is carrying a home loan in some other country (outside US) for some property in that country is there any tax relief/deduction from IRS for such person ?

IntlTax · Feb 8, 2008, 06:33 AM

Mortgage interest on a second home is deductible on schedule A as an itemized deduction, even if the second home is located outside the U.S. The interest should be reported on Schedule A on the line that says mortgage interest not reported on Form 1098. However, if you reside in the U.S. and the lender is a foreign bank, then 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.

MukatA · Feb 8, 2008, 01:10 PM

I really doubt that you can withhold 30% tax for the interest paid to a foreign bank. For the bank it is not a U.S. source income.
Bank will not issue W-8BEN.
Foreign bank in a foreign country has nothing to do with the U.S. taxes.

IntlTax · Feb 8, 2008, 01:26 PM

Interest income is sourced based on the residence of the obligor. Code § 861(a)(1) ("The following items . . . shall be treated as income from sources within the United States . . . . Interest from . . . obligations of noncorporate residents . . . "). This is not a purely theoretical matter. In Housden v. Commissioner, 63 TCM 2063 (1992), a U.S. resident had existing loans from a Canadian bank prior to moving to the U.S. After he moved to the U.S. he continued to make payments on the loans from the Canadian bank. The Tax Court held that he was liable for the withholding tax.

While I agree that it is likely impossible to obtain a W-8 from a foreign bank and that the bank would not accept anything less than the full amount of the payment, I like to make individuals in this circumstance aware of their risk/obligation.

taxbizschool · Feb 11, 2009, 02:48 AM

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.

Five Rings · Feb 11, 2009, 09:39 AM

That is really interesting... wow, I never considered that. Particularly appreciated the citation there INTLTax.

Of course, the same rule does not apply to US taxpayers abroad.

IntlTax · Mar 3, 2009, 08:01 AM

Taxbiz,

1. You do not need a Form 1098. Foreign banks do not issue 1098s and there is no requirement to have a 1098.

2. See item 1 - Form 1098 is not applicable.

3. See item 1 - Form 1098 is not applicable.

4. Agree that the payer of the interest has the obligation to withhold.

I also agree with Five Rings that the same rule does not apply to U.S. citizens or residents living abroad.