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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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If I buy a commercial real estate in the US (San Francisco)

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If I buy a commercial real estate in the US (San Francisco) and get a mortgage from a Bank in Germany in Euro, can I deduct the interest which I pay to the bank in Germany in my US tax-return?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello Helmut,

If you reside in the U.S. and the lender is a foreign person/bank, then you are required to withhold 30% tax on the interest portion of the payments, unless a lower treaty rate applies. Depending on the jurisdiction, a treaty may apply to reduce or eliminate the withholding tax.

However, in order for you to not withold tax based on the treaty, you need to obtain a Form W-8BEN from the foreign lender where the lender certifies that it qualifies for treaty benefits. In either case, you will need to also file Form 1042 reporting that you made interest payments to foreign persons.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Helmut.

Customer: replied 7 years ago.
As I stated I would pay the interest to a bank in Germany. Do you know by chance what withholding rate the treaty with Germany foresees for such interest payments?
Expert:  Merlo replied 7 years ago.
Hello again Helmut,

The US does have a tax treaty with Germany and the terms of that treaty dictate that interest earned shall only be taxable in the contracting state where it is earned. Therefore as long as the lender fills out the W-8BEN form, you should not have to withhold any tax from the payments you make to them.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.

Customer: replied 7 years ago.
I am sorry, but my original question was

Can I deduct the interest which I pay to the bank in Germany deduct from my taxable income in the United States?
Expert:  Merlo replied 7 years ago.
Hello again Helmut,

I apologize for not explaining my answer entirely.

The answer is yes, you may deduct the interest on your mortgage which you pay to a foreign bank, BUT, only if you have done one of two things:

1. Either withhold 30% in tax from the interest portion of your payment OR
2. Obtain a signed W-8BEN form from the lender showing they are exempt from this withholding

You would of course not need to do either of these things simply to claim the interest as a deduction. However, if the IRS were ever to select your return for an audit, if you had not complied with one of the above two rules, then your interest deduction would end up being disallowed.

Thank you Helmut, and let me know if you have more questions.

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