Is the mortgage taken out for buying property abroad tax-deductible?

Question

I'm thinking of buying offshore property that I plan to rent out most months of the year. The builder is also offering mortgage loans. I was wondering if the interest from this loan is tax deductible as well when I file my US income tax return even though the property is offshore and the mortgage is foreign as well?

I'm thinking of buying offshore property that I plan to rent out most months of the year. The builder is also offering mortgage loans. I was wondering if the interest from this loan is tax deductible as well when I file my US income tax return even though the property is offshore and the mortgage is foreign as well? There is a double-taxation treaty between the foreign country and the USA if that helps.

Answer 1

Yes, it is deductible. You will file Schedule E to report the net rental income from the property. On that form, you will report the gross rental income as well as any related deductions for maintenance, property taxes, mortgage interest, and depreciation. This is required even though the property is abroad and even if the income tax treaty allows the foreign country to tax the income.

The treaty only establishes the priority of each country's taxing rights. Generally, the country in which the property is located will be able to tax you first. The US will then impose a tax on the same income, but give you a foreign tax credit for any taxes paid to the foreign country.

Here's an example... you earn $100 of net rental income in a foreign country. The US tax on this property (as if the property was in the US) would be $35. However, the foreign country imposes a net income tax of $30 on the same income. In this case, you would pay the $30 to the foreign country and owe the US an additional $5.

Answer 2

Hard to say. You need to check the tax treaty between the U.S. and the country in which the property is located.

Sometimes it pays to create a shell entity (corporation or LLC) and buy the property in its name...

[A later addition]

Most of tax treaties stipulate that income from real estate is taxed in the country where real estate is located (you should check yours just in case). So your question is probably irrelevant; you should be asking whether the interest is deductible in the foreign country.

Answer 3

no.