A popular question we are often asked is whether interest paid on a mortgage for a residence in a foreign country is deductible. Fortunately, the rules for determining whether foreign mortgage interest is deductible is the same as the rules for a residence in the United States.
Before we dive into the details, let’s first define home mortgage interest. According to IRS Publication 936, home mortgage interest is any interest you pay on a loan that is secured by a qualified home. This can be your primary residence or second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking, and toilet facilities. The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
Unfortunately not everyone that has a mortgage on a home can claim the deduction. Several conditions have to be met in order to deduct home mortgage interest. First, you must itemize deductions on Form 1040 Schedule A. If you do not itemize deductions, you cannot claim credit for the mortgage interest paid. Second, the mortgage must be a secured debt on a qualified home in which you have an ownership interest. In certain cases the interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.
Let’s say you have a main home in the United States and a second home in Italy. The fact that your second home is located in Italy and not the United States will have no effect on whether you have qualified mortgage expense. Nor does it matter where you obtain the mortgage. The Code does not distinguish between domestic or foreign homes or mortgages. As long as you meet the definition included within IRS Publication 936, the interest paid on the mortgage would be deductible just as it would in the United States. However, payments would have to be converted from the foreign currency to U.S. dollars.
Another added benefit of owning real estate is that real estate taxes paid on your primary and second residence are also generally deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. However, deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property.
For more information and resources on taxes for taxpayers that reside overseas, please visit Tax Planner CPA for additional information or assistance.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
Tax Planner CPA is a team of Certified Public Accountants and Enrolled Agents with over 25 years of experience focusing on the taxation of US taxpayers living abroad.
Tax Planner CPA is a team of Certified Public Accountants and Enrolled Agents with over 25 years of experience focusing exclusively on the taxation of US taxpayers living abroad. Our services include representing taxpayers living abroad who wish to deduct their mortgage expenses. We maintain this knowledgebase where all articles are written by CPA’s, Enrolled Agents, or attorneys (Except for those on Expat Life – which have proven to be a popular read with fun facts on different cities!). Our main objective is to educate Americans abroad on their tax responsibilities, so that they can look for planning alternatives on time. They are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid. If you found this article helpful, you’ll likely benefit from our future ones as well – so we encourage you to avoid pitfalls and join our mailing list:
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