Mortgage Interest Deduction for Expats
Published on September 17, 2024
by Clark Stott
Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
Table of Contents
How can you benefit from a mortgage interest deduction as an expat?
If you keep track of your US mortgage, the mortgage interest deduction might just help in reducing your US tax obligations.
Where can I find my mortgage interest?
If you purchased a property through a loan, you’ll find there is interest on top of the principal debt that you’re paying.
The mortgage interest is calculated as a percentage of the total mortgage amount issued by the lender. It can either be a fixed amount or vary depending on the agreement between you and the lender.
How does the mortgage interest deduction work?
The mortgage interest deduction lets you deduct interest you’ve already paid on your mortgage debt from your taxable income.
Additionally, there are basic requirements to be able to deduct mortgage interest from your taxable income, namely:
- The mortgage must be a loan secured by a qualified home in which you have an ownership interest; and
- A qualified home is either your main home or a second home.
In this scenario, a qualified home can pertain to a house, condominium, cooperative, mobile home, house trailer, boat, or similar property with sleeping, cooking, and toilet facilities—this applies to both your main home and your second home in the US.
Main home vs. Second home
A main home is where you ordinarily live most of the time. At any point, you can have only one main residence.
A second home is a residence that you designate as your secondary home or vacation home.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
STREAMLINED AMNESTY
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
Can other loans qualify for the mortgage interest deduction?
Yes, mortgage interest is also charged for loans applied to benefit the residence, such as home equity loans and lines of credit (LOC). Loans used outside of financing your US property are not eligible for a deduction.
Certain items that are not loans can also be included as home mortgage interest, such as:
- Late payment charge on mortgage payment
- Mortgage prepayment penalty: In cases where you pay off your home mortgage early.
- Sale of home: You can deduct your home mortgage interest paid up to, but not including, the date of the sale.
- Prepaid interest: If you pay interest in advance that extends beyond the current tax year, you must allocate this interest across the years it covers. You can only deduct the portion of interest that applies to each specific tax year.
Relating items that are not included in the mortgage interest deduction
As certain items that are not classified as loans can be included in the deduction, here are related items that are not qualified:
- Homeowner’s insurance
- Mortgage insurance premiums
- Title insurance
- Deposits or down payments that were forfeited
- Settlement costs
It’s important to note that the amount of mortgage interest you can deduct can be limited, and not all homeowners may qualify for this deduction.
Is my mortgage interest fully deductible?
Your mortgage interest deduction is limited to the interest that isn’t more than your qualified loan limit.
You can deduct mortgage interest up to US$750,000 (for married filing jointly or individuals) from your mortgage debt for your main or second home.
If filing separately as a married couple, the deductible amount is limited to US$375,000 each.
Other mortgages used to buy, build, or substantially improve home
In certain circumstances, the interest you can deduct on loans applied for building or improving your home can be limited—specific rules apply to the following:
- Taking out the mortgage before the work is completed: The interest on the debt is limited to the amount of expenses incurred within 24 months before the date of the mortgage.
- Taking out the mortgage within 90 days after the work is completed: The interest on the debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage.
How can I claim the mortgage interest deduction?
Here are the steps you should take:
- Collect all required documents: Including form 1098 from your mortgage lender. You can only receive this if you paid US$600 or more of mortgage interest (including points) during the year to the lender. Check your eligibility and gather all the relevant paperwork.
- Itemize your deductions—Schedule A (Form 1040): Schedule A allows you to collect and calculate your deductions. This is where you will see accurate records of your mortgage interest payments and other deductions.
- File your tax return: You can now include the forms above on your income tax return when you file.
Accomplishing this can grant you a deduction on your mortgage interest for your next tax bill, reducing your tax obligations. Maintaining precise records of your mortgage interest and other deductions is important for smoother tax filing.
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