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I am a US resident. This scenario involves 3 entities.

I want to know what would be the situation (legal and cost) if I can borrow money (complete value of the house Eg: 500 K) from a person or a business in abroad (Not based in US, owners not US citizens) to buy a house in USA and pay it back to the same person/business that I borrowed the money just like a normal mortgage.

Note: And this person or business is not based in USA.

I am wondering whether it is worth it (how taxation works in this scenario ect.) and legally possible to do so and what is the approach for doing this?

  • Would this be a mortgage that would be held by a foreign business with no US presence on your property in the US and you would be making monthly payments to the business, or an interest-free loan from an uncle (also with no US presence) which loan might possibly never get repaid? – Dilip Sarwate Feb 3 '16 at 4:30
  • @DilipSarwate thanks for the reply. Please see my edit :) – diyoda_ Feb 3 '16 at 4:36
  • So... What's the question? – littleadv Feb 3 '16 at 6:07
  • @littleadv :D I edited the question – diyoda_ Feb 3 '16 at 6:22
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I am wondering weather it is worth it (how taxation works in this scenario ect.) or not and legally possible to do so ?

Whether it is worth it or not is up to you. There's nothing illegal in this, unless of course there's a legal issue in the foreign country. The US doesn't care.

Re taxes - it is a bit trickier.

If your lender does not provide you with form 1098, you'll have to report the lender's name, address and SSN/ITIN on your tax return in order to claim a deduction.

The IRS will then expect the lender to report that interest as income. This is US-sourced income and is taxed in the US despite the fact that the lender is non-resident. See here for more info. If the lender doesn't report the income and doesn't pay the taxes - your deduction may be denied as well for double-dipping.

It is easier if this is an investment. Then the deduction is not going to Schedule A, but rather as an expense to Schedule E. The IRS may still require matching, but you won't need to report the SSN/ITIN - just have the expense properly documented.

Obviously, the best when it comes to legal issues, is to talk to an attorney licensed in the State in question. Similarly with tax questions - you should talk to a EA/CPA licensed in that State. I'm neither.

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  • Thank you very much. Is the investments in the sense of my own investment or is it a investment from the foreign company. And also, how the foreigner reports the income in US, because that entity is nowhere present in US ? – diyoda_ Feb 3 '16 at 6:41
  • @Diyoda investment in the sense that you're not going to live there yourself but rather rent it out at fair market price and collect rental income. Re reporting in the US, since the invention of mail there's no longer a need to be physically present at a place in order to have a stack of papers delivered there. – littleadv Feb 3 '16 at 6:43
  • Oh Ok, got it, but I can provide the payments to the loan as an expense. Thanks a lot littleadv. I know these information are very valuable. Really appreciate it :D – diyoda_ Feb 3 '16 at 6:45
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    @Diyoda private loans and repayments should be very rigorously documented, and showing that the lender properly reported the interest on their tax return will probably be critical in case of audit. The IRS can deny an expense if the recipient hadn't properly reported the income. If the IRS shows that you knew that the recipient didn't report - then they can charge you with fraud. Bottom line - make sure you have proper legal counsel for this transaction. – littleadv Feb 3 '16 at 6:57
  • Im still in the research stage. So, I will do a through consultation before making an action. Thank you :) – diyoda_ Feb 3 '16 at 7:02

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