Tuesday, December 2, 2008

ASK THE TAX PRO - SECOND HOME OVERSEAS

Q. Last year we bought a small house (second home) overseas and financed it through the seller. The year end statement from the seller shows the total paid (principal and interest) but interest is not shown separately. Also, the seller does not have a social security number or employer identification number because he is not a US resident or citizen. So, I have two questions:

1- In order to deduct interest can I just calculate the interest portion based on 30 year mortgage amortization tables or should I get a separate statement from the seller? And,

2- What should I do about the social security number? I imagine IRS would also like to see some kind of social security or identification number in order to allow interest payment deductions.
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A. I have two answers.
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1- You can certainly calculate the interest deduction using a standard amortization schedule. There are several calculators available online. For example HSH Associates Financial Publishers website has an entire page of excellent
mortgage and financial calculators. Be advised that the loan must be secured by the property to qualify as a mortgage.
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2- According to
IRS Publication 936 (Home Mortgage Interest Deduction) - “If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11” on Schedule A. You can try to enter the information without a TIN, writing “foreign individual – no TIN”.
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However Pub 936 further states “The seller must give you this number and you must give the seller your TIN” and “Failure to meet any of these requirements may result in a $50 penalty for each failure”.
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The number for the mortgage holder does not have to be a Social Security number. It can also be “an individual taxpayer identification number (issued by the Internal Revenue Service)”. To be safe you should ask that the sellers apply for a TIN using a IRS Form W-7 (Application for IRS Individual Taxpayer Identification Number).

TTFN

2 comments:

Tim Manni said...

Tax Pro,

I just wanted to say thanks for publishing the links to our calculators. We're glad you found them useful enough to share with your readers. Hope to hear from you again soon.

Thanks again,
Tim Manni (HSH Associates)

K said...

Thanks for your info. It's helpful to get information about home mortgage loans and how they work.