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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22739
Experience:  Taxes, Immigration, Labor Relations
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I plan to borrow money from my parents in Asia to purchase

Resolved Question:

I plan to borrow money from my parents in Asia to purchase a property. My parents are not US citizens. What are the paperwork required to document the loan? What do they need to do to avoid paying the taxes in the US? Do I need to file paperwork to the IRS at the end of the year? Thanks.
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to our site!
The loan is not taxable income - as long as that is a true loan - and it is expected to be paid back.

Lev :

As such - the loan itself is not reported to the IRS. However if that is NOT a loan, but a gift - which you are not obligated to pay back - it might need to be reported is the amount is above $100k - but there will not be any tax liability.
However - if that is a true loan - no need to report.
In additional when you will purchase a property - you will be ask for the proof of funds. You woudl need to show that the money are on your account and might be asked about the source of the money. If the money are borrowed - it might be helpful to have a loan agreement between you and your parents. You do not need an attorney or a complicated agreement - but a simple note might be OK. Here are some examples:

Lev :

http://www.entrepreneur.com/formnet/form/807
http://www.leaplaw.com/pubsearch/preview/loan.pdf
Because your parents are in a foreign country - it would be better if their signatures are notarized.

Customer:

I intend to pay for the loan and the interest. My question is how to report the interest I pay to my parents? How do I report the interest payment? Does my parents need to pay taxes in the US for the interest income? Thanks.

Lev :

In general - you may deduct interest payments - if that is your investment property. Your parents - as nonresident aliens do not pay any taxes on that interest in the US, but will report that income in their country of residence according to local law.
However...

Lev :

If the loan is a mortgage - means - the property is used as a collateral for the loan - the interest is taxable in the US for nonresident aliens.

Customer:

Thanks I'm famililar with the general concept but I'm looking for "specific" - such as what form to file to IRS, what form to send to my parents (as foreign lender), etc.

Expert:  Lev replied 11 months ago.
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Expert:  Lev replied 11 months ago.
You will deduct interest income depending on situation.
1.
If that is your investment property - report deduction on schedule A line 14 - http://www.irs.gov/pub/irs-pdf/f1040sa.pdf
There is no form to send to your parents. Generally interest income is reported on form 1099INT - however this form is only used by banks and financial institutions - not by private persons. You may simply send a letter indicating the amount of interest paid during a year.

2.
If that is your personal home - and if the property is used as a collateral - report deduction on schedule A line 11 - in this case - you need to report the name of the person, address and tax ID. If that is a case - the interest would be taxable to your parents.

3.
If that is your rental property - report interest income deduction on schedule E line 13 - http://www.irs.gov/pub/irs-pdf/f1040se.pdf
If the property is used as a collateral - line 12

4.
If that is a business property - report interest income deduction on schedule C line 16b - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
If the property is used as a collateral - line 16a

So specifics mainly depends on your situation - how the property is used and if the property is used as a collateral or not.
Let me know if you need any help.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22739
Experience: Taxes, Immigration, Labor Relations
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