Is there any tax deduction for home loan in other countries ?

Posted on Mar 16, 2013 in FHA Information

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by Chris Devers

Question by Leo: Is there any tax deduction for home loan in other countries ?
If a person carries a home loan in other country (other than US) is there any tax deduction(relief) given by IRS ? A part of his earning in US is being used to pay home loan EMI in other country.

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Answer by Ken
Mortgage interest on a second home is deductible on schedule A as an itemized deduction, and even if the second home is located outside the U.S. However, if you reside in the U.S. and the lender is a foreign person/bank, then you are required to withhold 30% tax on the interest portion of the payments, unless a lower treaty rate applies. Depending on the jurisdiction, a treaty may apply to reduce or eliminate the withholding tax. However, if you want to rely on the treaty, you need to obtain a Form W-8BEN from the foreign lender where the lender 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.

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One Comment

  1. Ken, the 1042-S does NOT apply here. You read publication 515 backwards.

    The property is located outside the US. Therefore the interest paid on it is NOT US-source income to the bank. Withholding 30% and issuing a 1042-S would truly gum up the works. The borrower would be dunned for failure to pay their loan and the bank would have trouble getting the money back.

    This is interest paid on any type of debt instrument that is secured by a mortgage or deed of trust on real property LOCATED IN THE United States, regardless of whether the mortgagor (or grantor) is a U.S. citizen or a U.S. business entity.