- advertisement -

George Saenz, the Bankrate.com Tax Talk columnistDeducting foreign mortgage payments

Dear Tax Talk,
I am a U.S. citizen working in South Korea for a U.S. company and I plan to purchase a house in S. Korea. I will have to get a loan from a local South Korean bank and pay a monthly mortgage. Will I be able to deduct the foreign mortgage payment on my income tax return? Thank you.
-- Bryan

- advertisement -

Dear Bryan,
As most people know, you can deduct the interest paid on your primary residence and a second home. Since you live and work in Korea, your Korean home would be considered your primary residence. There is no requirement that the home be in the United States, nor that the lender be a U.S. citizen.

However, there is bad news. Interest paid by a U.S. citizen to a foreigner is subject, in most cases, to a withholding tax of 30 percent (or lesser treaty amount, if applicable).

IRS Publication 515 states the following:

Since you as obligor are a U.S. citizen, you are required to withhold tax. If you do not withhold the tax, you could be liable for the tax. If you withhold the tax, the bank will probably not want to do business with you or you will quickly find yourself in default.

The publication provides the following example:

The portfolio interest exception does not apply in your case.

From Publication 515:

Hence, even though you might be entitled to an interest deduction for home mortgage interest, your withholding obligation may make it impractical to obtain financing.

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: Oct. 19, 2006
Read more Tax Adviser columns Ask a question
 RESOURCES
Taxes on a foreign property sale
Tax repercussions on foreign property
Depreciating foreign real estate
 TOP TAX STORIES
June 15 filing deadline for some
Find the tax professional who's right for you
Coming up with tax cash




Compare Rates
NATIONAL OVERNIGHT AVERAGES
30 yr fixed mtg 4.45%
48 month new car loan 3.77%
1 yr CD 0.89%
Rates may include points
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS
FINANCIAL LITERACY
Rev up your portfolio
with these tips and tricks.
- advertisement -