One of the most frequent questions we receive is whether or not mortgage interest on a foreign home is deductible on a US expat tax return. Fortunately for US Expats who pay a mortgage on a foreign home, the determination of deductibility of foreign mortgage interest is subject to the same rules as property held within the United States.
First Let’s Define Things
Before we delve into the details of deducting home mortgage interest, we will first take a look at its definition. As per IRS Publication 936, home mortgage interest is defined as being any interest paid on a loan which is secured by a qualifying home. The term ‘qualifying home’ refers to any single detached house, condo, mobile home, cooperative, or even a boat which has cooking, sleeping and personal facilities. The loan on which deductible interest is paid may be in the form of a primary or secondary mortgage, a home equity loan, or a line of credit.
What many fail to realize is that not all of those who pay home mortgage interest will qualify for a deduction; there are certain conditions which must be met in order for home mortgage interest to be deductible. If all conditions are met and your home mortgage interest is – in fact – deductible, you will need to itemize your deductions on Schedule A in order to claim this deduction.
What Are the Qualifying Conditions?
One of the qualifying conditions of being able to deduct home mortgage interest is that you have at least part ownership of the property against which the loan is held. In many cases, you will be able to deduct mortgage interest in property other than your main or second home, as well – even if the home is in a foreign country. If the acquired loan was used for investment, business, or other deductible ventures the mortgage interest is deductible. If the home is for some personal use not related to business or investment, it will be considered personal interest and will therefore be non-deductible.
Assume you have a primary home in the United States and a second home in France. The location of your second home will have no bearing on whether or not the mortgage interest for the home will be deductible on your US expat tax return. Furthermore, it doesn’t matter where the mortgage was obtained; the IRS tax code does not differentiate between stateside or foreign homes and mortgages. Provided you meet the qualifications outlined in IRS Publication 936, you will be able to deduct the mortgage interest paid on your second home in France despite the fact that it’s not located in the United States. In order to deduct foreign home mortgage interest, remember that you must first convert the value of the interest payments into USD.
What About Real Estate Taxes?
Another great benefit of owning property – whether domestic or foreign – is that the real estate taxes you pay on your primary and secondary home are typically deductible. In order for state, local, and foreign real estate taxes to be deductible they must have been levied against the property for general public welfare; if taxes are assessed for local benefits or improvements which increase the property’s value, they are not deductible.
If you need assistance figuring out whether or not your home mortgage interest is deductible or you have other questions about your US expat tax return, make sure to contact Taxes for Expats and speak with a certified and experienced tax professional today.
I.J. Zemelman, EA is the founder of Taxes for Expats