I bought a rental apartment in my home country of India in 2016. I financed the purchase with a home-loan from an Indian bank and am now in the process of paying off the loan. As I live and work in the US and pay my taxes to the US government, I was interested in learning if I can claim any tax deductions for this foreign property investment. As someone who’s been doing my own taxes since I started filing, I did a little bit of reading around and turns out the US federal tax code does have the provision for claiming tax deductions on the home-loan interest that you pay to your foreign bank. I ended up going through the exercise of claiming this deduction and the IRS did not seem to have any objections with my filing.
In this post, I’d like to provide some details on how to go about claiming this deduction on your federal returns. A customary disclaimer is in order before I proceed. Here goes – Note that I’m not a tax professional and the directions provided here might not apply to your case. Please read the IRS instruction documents carefuly and run the facts by your tax adviser.
1. Itemizing your deductions
To claim tax deductions on your home loan interest payment, you would need to itemize your deductions. If your total itemized deductions including your repaid loan interest does not exceed the standard deduction amount set by the IRS, you are better off dropping this whole ordeal and just claim the standard deduction.
You would report your deductible home loan interest in the ‘Interest You Paid’ section of Form 1040 – Schedule A. See the screenshot at the end of this post.
2. Figuring the deduction amount
My bank (State Bank of India) did not provide me with any end-of-year document that reported the interest I paid toward my home loan over the calendar year of 2016. I worked it out by downloading my loan account statements for each of the 12 months of the year from my online banking account and made a list of the interest I paid each month. Do not sum up the total amount for the year at this stage as you still need to get the corresponding currency conversion rates for each quarter. More on that below.
3. Converting foreign currency into dollar
The listing of monthly interest amounts that you came up with in the previous step is in your local currency – Rupee in our case. You would need to convert this to US dollar before you can enter the figures into your Form 1040 – Schedule A.
The treasury website publishes rates each quarter. You can use the published conversion rates for the corresponding quarter. So you can now sum up the the interest amounts you paid in your local currency for January, February and March. Taking 2016 as an example, you can then look up the conversion rate published in the PDF for March 31, 2016. I see the rupee conversion rate to be 65.90. Repeat the process for the remaining quarters and get the dollar amount of interest you paid for all the quarters. Sum them up and now you have the dollar amount of interest you paid for the calendar year. You can now claim your deduction for this amount on your federal return.
Enter the name and address of your bank in the space provided in the IRS Form 1040 – Schedule A and the dollar amount you computed.
I’m interested in learning if there’s a more efficient way of doing this. Let me know in the comments if you’re better at this!