If you own a home in the United States, you're probably aware of the existence of the Mortgage Interest Tax Deduction. This is one of the most popular tax deductions currently on offer from the Internal Revenue Service. Although it appears fairly likely that it will be phased out over the course of the next few years in response to the ongoing budget crisis, it remains useful for the current tax year.
The deduction is simple enough to understand. If you earn less than about $150,000 per year, you're eligible to deduct the total amount of interest that you paid on your mortgage from your gross annual income during the applicable tax year. In other words, you aren't required to pay taxes on any of the funds that you used to cover your mortgage's accrued interest. However, the principal payments on your mortgage aren't exempt from taxation. In practical terms, this means that between 4 and 8 percent of your total mortgage payment can be deducted from your taxable income. Depending upon the size of your mortgage, this could save you several hundred dollars per year.
In addition to your primary residence, current regulations permit you to use the Mortgage Interest Tax Deduction on one additional property. For most taxpayers, this "bonus property" is likely to be a vacation home or rental property. Unfortunately, you can't use the deduction to offset the mortgage-related expenses associated with a property that you rent out for the entirety of the year. If you wish to deduct the mortgage interest on a property for which you receive regular rent payments, you must use the property as your official residence for at least 37 days per year. You'll need to maintain official mailing records and other documentation to ensure that your annual change of residency is properly recorded.
You might be surprised to learn that there are few restrictions on the location of this second property. It can be located in virtually any country with which the United States maintains reciprocal tax treaties. In addition, you can claim any foreign property taxes that you pay on this property along with your tax-deductible interest. However, you may need to check with the foreign tax authorities to ensure that your U.S. tax deduction doesn't exempt you from claiming any foreign deductions. Otherwise, you could find yourself in violation of international law. Crucially, you can claim any mortgage-related deductions on any property regardless of whether you're a naturalized U.S. citizen, permanent resident or temporary worker.