Tax benefits for properties outside USA?

Question

I recently bought a home outside the United States and I have a mortgage with a bank in the foreign country. Can I get tax benefits for the mortgage loan I have.

Thanks

Answer 1

Yes (thoery). But (fact)....

Here is the Yes portion of it:

Home mortgage interest is interest you pay on a loan secured by your main home or a second home. The loan may be a mortgage to buy your home, a second mortgage, a home equity loan, or a line of credit.

Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as home mortgage interest.

Here is the BUT:

If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098, Mortgage Interest Statement, or a similar statement from the mortgage holder. You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. A governmental unit is a person for purposes of furnishing the statement.

The statement for each year should be sent to you by January 31 of the following year. A copy of this form will also be sent to the IRS.

* In other words, you get the deduction and the bank report as revenue and get taxed. Most likely, the IRS will determine the source of income (mortgage payment) as effectively connected to the US.

How To Report
Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Attach a statement explaining the difference and print “See attached” next to line 10.
(Hopefully, your bank will provide the 1098.)

Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. The seller must give you this number and you must give the seller your TIN. A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Failure to meet any of these requirements may result in a $50 penalty for each failure. The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number.
(Is the foreign bank willing to apply for an TIN (EIN) for their company? Will they willing to pay for the interest income that they get from you?)

PS Just in case you are doing Foreign Housing Exclusion and Deduction. Be careful about the cost of buying property, including principal payments on a mortgage.

OK if you are working and use the fund to pay for the mortgage deduction outside of the US, that will not be effectively connected to the US.

You may want to exclude all or most of your earned income. In that case, you may run into the following issues:

Items Related to Excluded Income
U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States.

If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. You can deduct only those expenses connected with earning includible income.

These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. These rules do not apply to items such as:

Personal exemptions,

Qualified retirement contributions,

Alimony payments,

Charitable contributions,

Medical expenses,

***Mortgage interest***, or

Real estate taxes on your personal residence.

As long as someone is willing to defend and pay for the theory position, I don't see why not.

Answer 2

Yes, the mortgage interest is deductible as long as the property is pledged as security for the loan. Property taxes based upon the value fo the home are also deductible. Taxes based upon occupancy (UK rates, for example) are not deductible. There is no requirement that the property or the mortgage be in the US.

Answer 3

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