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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I have a U.S. nonresident alien with trust rental income that

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I have a U.S. nonresident alien with trust rental income that is taxable in the U.S. This beneficiary borrowed money from the trustee to purchase his home overseas and is paying interest annually to this trustee. Is there any way to get a deduction for this interest payment by either securing the debt with trust property or some other re-working of the loan (inside or outside the trust) to get a deduction on this beneficiaries individual tax return?
Hello,

The beneficiary could use the trust income to finance the beneficiary's property with a loan from a lender in the beneficiary's jurisdiction. Then, the beneficiary would pay off the trustee's loan with the money from the property financing, and then deduct the interest from his or her foreign income.

All of this assumes that such interest is deductible from foreign income, and that the beneficiary has foreign income from which to deduct the interest. If not, then this is a dead end.

If the loan had originally been made for business purposes, and the beneficiary was receiving income from an enterprise in which he/she materially participated, then that would change things completely. But, as long as the beneficiary is receiving passive income from the trust, and the loan is for a principal residence located outside of the USA, I don't see any way of transforming the interest into a valid deduction.

Please let me know if my answer is helpful, or if I can provide further clarification or assistance.

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