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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7223
Experience:  15years with H & R Block. Divisional leader, Instructor
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I am borrowing money (for downpay of house)from my relatives,

Resolved Question:

I am borrowing money (for downpay of house)from my relatives, who are in China. I want to sign family loan contract with them and pay the money and interest baseline IRS suggests family loan interest rate (3%?), my question is the loan interest I pay is tax deductible?. do I have to ask a lawyer to prepare a contract or I can download a templer and edit it by myself? Thanks.
Submitted: 2 years ago.
Category: Tax
Expert:  Jax Tax replied 2 years ago.

Jax Tax : Mortgage interest is interest on a loan to purchase a home. You can deduct the interest.
Customer:

even the loaner are in China

Jax Tax : As for the contract, the only time the contract will.come.into play is.if you and the lender have a dispute. It is better for you to keep it verbal as they would have a hard.time enforcing it against you. If you want a great.contract, get an attorney, but a written contract.between the two of you should be fine.
Customer:

do I have to get a attorney, most people are not familiar with international issue. Thanks

Jax Tax : The source of the loan is not an issue. Like i said, the contract is really only going to be an issue if a dispute between you and him arises. You know.your family better than I do.
Jax Tax : The only issue is that you may be required to withhold back up tax withholding from the interest payments under Us-china treaties. I am not an expert there, sorry. Many payments to non residents require the resident to withhold and submit tax to the Irs . Really, the best way to treat this is an interest free loan. The use.of the money interest.free would simply be considered a gift with no tax consequences.
Customer:

this is my question, most tax experts are not familiar with issue about us-china treaties, I know the easiest way is to treat it as an interest gree loan as gift, but my problem the money is not a gift, I have to and really want to pay the interest back.

Customer:

so when I file tax return next year, I want to know whether the interest I paid is tax deductible, even the loaners are foreigners

Expert:  Robin D. replied 2 years ago.
Hello and thank you for using Just Answer.
You may claim the interest that you pay on your main home. The interest amount that you are required to pay back can be included on your Schedule A. The Nonresident Alien will need to apply for and receive an (ITIN) Individual Tax Identification Number. You will be required to withhold 30% and remit the payment to the IRS. The 30% of the interest paid to your in-laws will be taxable to them because they are receiving income then from a US source. The interest will be US sourced because it involves real estate that is in the US and you will be wanting to use that interest as a deduction. Your in-laws will then be able to file a 1040NR for the US and take advantage of any tax treaty with China to be refunded the interest. This would allow for a lower amount on the actual return. The rate should be 10% for mortgage interest received per the treaty so they will file using the treaty and request the refund.
I sincerely XXXXX XXXXX information is helpful,
Customer: replied 2 years ago.

Thanks for your reply.

 

how my relatives (brothers) apply for ITIN from China, they dont have green cards or any US ID.

 

Expert:  Robin D. replied 2 years ago.

They will use the Form W7.

http://www.irs.gov/pub/irs-pdf/fw7.pdf

http://www.irs.gov/pub/irs-pdf/iw7.pdf

 

This is because they do not have the Green Card and are not in US

Customer: replied 2 years ago.

Thanks. does that mean, every year, after they get the interest, they have to file tax return from China?

 

is there any amount line, for example, if the amount is less than $xxx, they do not need to file the tax return.

Expert:  Robin D. replied 2 years ago.
Yes, every year that you pay them interest they will be liable to US for filing the return. When the amount is paid off they will not be liable to US. No, it does not matter how much you pay in interest. If you want to deduct it they must report it as US income.
Expert:  Robin D. replied 2 years ago.
You can always come back here even after you click ACCEPT. Especially if your parents need answers on the 1040NR filing.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7223
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Thanks.

Expert:  Robin D. replied 2 years ago.
You are welcome

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