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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

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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
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