Aya Takriti, an IRS Enrolled Agent with 10 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East.
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How does the Mortgage Interest Deduction work for expats?
If you have an ongoing mortgage on a US property, you can benefit from a tax deduction from your mortgage interest.
Where can I check my mortgage interest details?
The mortgage interest is charged on a loan to purchase a property; you can see it in your contract agreement with the lender.
It is calculated as a percentage of the principal amount of the mortgage. Depending on your agreement, the amount of interest can be fixed or varying.
Homeowners can find a summary of their mortgage interest payments on Form 1098, which lenders should send out by January 31 of the following year. A copy of this form will also be sent to the IRS.
How do I benefit from the mortgage interest deduction?
This tax break lets you deduct the interest you pay on your US mortgage from your US tax bill, resulting in tax savings. It is available to all US taxpayers, even when you’re abroad.
Generally, there are certain requirements to qualify for a mortgage interest deduction; these are:
- The mortgage must be a loan secured by a qualified home in which you have an ownership interest.
- A qualified home is either your primary home or a secondary home.
Primary and secondary home
A primary home is a house where you spend most of your time and where you currently reside. You are allowed to have only one primary home at a time.
A secondary home is a home that you choose to treat as your second home or a vacation home.
What qualifies as deductible mortgage interest?
Aside from the mortgage you pay for your qualified home, loans applied to build or improve your US property, like home equity loans and lines of credit (LOC) can also be included in your mortgage interest.
However, loans outside of financing and benefitting your property are considered personal interest and are not included in the deduction.
Can related expenses qualify as mortgage interest deduction?
Aside from loans, expenses that benefit your US property can be included in your deductions.
Some examples are:
- Late payment charge on mortgage payment: You can add it to your interest if it isn’t for a specific service performed in connection with your mortgage loan.
- Mortgage prepayment penalty: For instances of early payments.
- Sale of home: Upon selling, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.
- Mortgage interest credit: You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government.
There are other related items that are not classified as mortgage interest deduction, namely:
- Homeowner’s insurance
- Title insurance
- Mortgage insurance premiums
- Deposits or down payments that were forfeited
- Settlement costs
It is essential to know that the deductible amount of mortgage interest may be subject to limitations and are not fully accounted for.
Will I be able to fully deduct my mortgage interest?
You can only deduct mortgage interest up to the amount of your qualified loan limit.
The IRS states that you can deduct up to US$750,000 of your mortgage interest from your primary or secondary home debt, applicable for individuals or married filing jointly.
If filing separately as a married couple, the deductible amount is limited to US$375,000 each.
Mortgage treated to build or substantially improve home
Specific situations call for limitations on the interest you can deduct:
- Taking out the mortgage before the work is completed: The interest on the mortgage is limited to the 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 mortgage is limited to the amount of the expenses incurred within the period beginning 24 months before the job is completed and ending on the date of the mortgage.
How do I deduct my mortgage interest?
Here’s a guide to help you claim your mortgage interest deduction:
- Check your eligibility and gather all the relevant paperwork: If you paid US$600 or more of mortgage interest (including points), you should be able to receive Form 1098 from your mortgage lender, qualifying you for a deduction.
- Calculate and fill out your forms: Form 1098 can be used to calculate the amount of mortgage interest you paid, and Schedule A (Form 1040) allows you to itemize and calculate your deductions.
- File your tax return: Upon filing, you can include the forms above with your US income tax return for deductions.
After following all these steps, you can now claim your mortgage interest deduction for your next tax bill, lessening your US tax obligations. Keeping a good record of your mortgage interest, other loans, and expenses can help you correctly file your taxes.
