Understanding the mortgage interest deduction for US expats
If you own a home abroad or in the US, you may be able to reduce your US tax bill through the mortgage interest deduction. For US expats, this benefit is often overlooked – or misunderstood.
This guide covers who qualifies, what the current limits are, and how to apply this deduction correctly, whether your property is in London, Tokyo, or Los Angeles.
What is the mortgage interest deduction?
The mortgage interest deduction allows US taxpayers to subtract the interest they pay on a qualifying home loan from their taxable income, which can add up to real savings at tax time.
Here's the part many expats don't realize: this deduction applies not only to properties in the US, but also to your primary residence or second home located abroad.
If you own a home in the UK, Germany, Japan, or virtually anywhere else in the world, the IRS generally allows you to deduct the mortgage interest you pay on it – as long as you meet the standard requirements.
This is especially relevant for US expats who carry a full US tax obligation on their worldwide income. Any legitimate deduction that lowers your taxable income is worth knowing about.
Standard vs. itemized deductions
Before diving into the details, there is one key condition to understand: the mortgage interest deduction only works if you itemize your deductions on Schedule A, rather than taking the standard deduction.
For the 2025 tax year (filed in 2026), the standard deduction is:
- $15,750 for single taxpayers or married filing separately
- $31,500 for married couples filing jointly or a qualifying surviving spouse
- $23,625 for head of household
These are significant amounts to clear. For most expats, it only makes sense to write off mortgage interest if that interest – combined with other allowable deductions – exceeds the applicable standard deduction. If your total falls short, the standard deduction will likely serve you better.
How the mortgage interest deduction works
When you take out a mortgage to buy a home, you pay interest on that loan over time. That interest can add up to a significant amount – and it is exactly the part the IRS allows you to deduct from your taxable income.
Here is a simple example. Say you have a mortgage with an interest rate of 4%. In the first year, you pay $8,000 in interest. If you are in the 22% tax bracket, that deduction reduces your tax bill by $1,760 ($8,000 × 0.22).
Keep in mind that this deduction does not reduce your taxes dollar for dollar – it reduces your taxable income, and the actual tax savings depend on your tax bracket.
What qualifies as deductible mortgage interest?
Generally, you can deduct the interest you pay on a loan secured by your main home or a second home, such as a vacation home. The loan must be used to buy, build, or improve the home.
It's important to keep in mind that there are limits to the amount of mortgage interest you can deduct, and not all homeowners will be eligible for the deduction.
Can I deduct interest on a foreign mortgage?
Yes. The IRS allows US taxpayers to write off mortgage interest on property located outside the United States, provided the property serves as your primary residence or second home. The same general rules that apply to US properties apply to foreign ones.
This is one of the most commonly misunderstood aspects of the mortgage interest deduction for expats – many assume the benefit is limited to homes in the US. It is not.
Dealing with foreign currency and Form 1098
There's one practical complication: foreign banks typically don't issue IRS Form 1098 – the standard mortgage interest statement that US lenders send out each January. If you do not receive Form 1098, you can still deduct qualifying mortgage interest using your own records and a statement attached to Schedule A when required.
Request your annual mortgage statement from your foreign bank. It should show the total amount of interest you paid during the tax year. Once you have that figure, convert it to US dollars using a consistent exchange-rate method; the yearly average is generally acceptable, as the IRS publishes no official rate. Keep the lender statement, payment records, and any currency-conversion support.
Is interest on a home equity loan tax-deductible?
In addition to the interest on your main mortgage, you can also deduct the interest on a home equity loan or line of credit (HELOC).
You may deduct home-equity loan or HELOC interest only if the borrowed funds were used to buy, build, or substantially improve the home that secures the loan. If the money was used for personal expenses, the interest is not deductible.
Common projects that typically meet the criteria include remodels, new roof installations, HVAC system upgrades, and energy-efficient upgrades like solar panels or windows.
Cosmetic upgrades or generic repairs are considered routine upkeep rather than substantial improvements and are not eligible for tax deductions.
What mortgage costs are not deductible?
Only the interest portion of your mortgage payment qualifies for the deduction. Several other common costs are not deductible under this rule:
- homeowners insurance
- property taxes
- loan origination fees (in most cases)
Note on PMI: Mortgage insurance premiums are no longer deductible. The PMI deduction expired after the 2021 tax year and does not apply to returns for tax years 2022 through 2025.
Are there special circumstances?
There are a few situations where additional deductions may come into play, but it's important to understand the current rules.
If you use part of your home for business purposes, you may be able to deduct a portion of your homeowners' insurance and other home-related expenses – but this is handled separately, not through the mortgage interest deduction.
One critical point for expats: Foreign taxes paid on real estate are not deductible as personal real-estate taxes on Schedule A. If the property is rented or used in a business, different rules may apply.
Is there a limit to the mortgage interest tax deduction?
Yes, there is a limit to how much mortgage interest you can deduct. The limit depends on when you took out your mortgage and how much it's for.
For mortgages taken out after December 15, 2017, you can only deduct interest on the first $750,000 of your mortgage debt ($375,000 if you're married filing separately).
If your mortgage was incurred before December 16, 2017, the older $1 million limit generally applies ($500,000 if you're married filing separately).
NB! These limits only apply to mortgages on your primary residence or a second home. If you have a mortgage on a rental property or other investment property, the interest you pay is generally fully deductible as a business expense.
How the mortgage interest deduction interacts with the FEIE and FTC
This is a section many expat guides skip – but it's one of the most practically relevant for people living abroad.
If you use the Foreign Earned Income Exclusion (FEIE) and exclude 100% of your earned income, your US taxable income may already be zero – or close to it. In that case, claiming the mortgage interest deduction won't give you any financial benefit. There's simply nothing left to offset.
The deduction becomes much more valuable if you earn more than the FEIE exclusion limit (roughly $130,000 for the 2025 tax year) or if you use the Foreign Tax Credit (FTC) instead of the FEIE. Expats in this situation typically have some residual US taxable income, and that's where the mortgage interest deduction can meaningfully reduce what you owe.
If you're unsure which approach works best for your situation, a tax professional who specializes in expat returns can help you work through the numbers.
How to claim the mortgage interest deduction in 6 steps
If you're ready to claim the mortgage interest deduction, here's how to do it correctly.
1. Check if you are eligible
To claim the deduction, you must itemize deductions on Schedule A. That means your total itemized deductions need to exceed the standard deduction for your filing status.
2. Get all the necessary paperwork
Gather your Form 1098 if you have a US mortgage, or your foreign bank statements showing the total interest paid for the year if your mortgage is held abroad. If your statement is in a foreign currency, remember to convert the amount to US dollars using a consistent exchange-rate method; the yearly average is generally acceptable, as the IRS publishes no official rate.
3. Calculate your deductible mortgage interest
Use Form 1098 – or your converted bank statement figure – to determine how much mortgage interest you paid during the tax year. If your loan balance exceeds $750,000, use the IRS Pub. 936 worksheet to figure the deductible portion based on your average mortgage balance and loan category.
4. Fill out Schedule A
Enter your deductible mortgage interest on Schedule A, which is where all itemized deductions are reported.
5. File your tax return
Attach Schedule A to your federal income tax return. Expats filing from abroad typically use Form 1040 along with any applicable foreign income forms.
6. Don't forget FBAR and FATCA reporting
If your mortgage is held with a foreign bank, that account may trigger additional reporting requirements. The mortgage debt itself doesn't need to be reported – but the bank account from which you make your payments does.
If the combined value of your foreign financial accounts exceeds $10,000 at any time during the year, you generally must file an FBAR. Form 8938 has separate thresholds that depend on your filing status and whether you live in the US or abroad. These filings are separate from your tax return, but missing them carries significant penalties.
Mortgage interest deduction examples
Let's look at two real-world scenarios to see how this plays out.
Example 1
John and Mary are US expats living in London. They purchased a home in the UK and paid £12,000 in interest to Barclays Bank over the course of the year. They use the yearly average exchange rate of 1.25 as their consistent conversion method.
To report this on their US tax return, they multiply £12,000 by 1.25, giving them a deductible amount of $15,000 on Schedule A. They don't have a Form 1098, but their Barclays annual mortgage statement serves as their documentation.
Example 2
Sarah is a US expat living in Germany who owns a home in Frankfurt. She pays approximately €10,000 per year in mortgage interest to Deutsche Bank. Using the yearly average exchange rate of 1.10 as her consistent conversion method, her deductible amount is $11,000 on Schedule A.
Her total itemized deductions – including the mortgage interest – come to $18,000, which exceeds the $15,750 standard deduction for single taxpayers. Because of that, itemizing gives her a real tax benefit. She uses her annual bank statement to document the interest paid, since her German lender does not typically issue Form 1098.
FAQ
Yes, the IRS allows the home mortgage interest deduction for both US and foreign residences. If you are a US citizen or resident alien living abroad, you can typically deduct mortgage interest on your taxes if the loan is secured by your main home or a second home, provided you itemize deductions on Schedule A.
The mortgage interest tax deduction limit depends on when you took out your loan. For mortgages originated after December 15, 2017, the max mortgage interest deduction is capped at interest on $750,000 of debt ($375,000 if married filing separately). For older loans, the limit is generally $1 million.
Yes, you can write off the interest on your mortgage even if you do not receive Form 1098. You must keep your own records (bank statements) and convert the interest paid into USD using a consistent exchange-rate method; the yearly average is generally acceptable, as the IRS publishes no official rate.
The most common reason is that the standard deduction has increased significantly. If your total itemized deductions (including mortgage interest and taxes) are lower than the standard deduction, you won't see a tax benefit from the mortgage tax break. Also, the mortgage interest limitation may apply if your loan exceeds the $750,000 threshold.
You can claim the home mortgage interest tax deduction for your primary residence and one other home (second home). However, if the foreign property is a rental property, the interest is not an itemized deduction on Schedule A; instead, it is deducted as a business expense on Schedule E to reduce your AGI.
If your mortgage debt exceeds the applicable limit, use the IRS Pub. 936 worksheet to figure the deductible portion based on your average mortgage balance and loan category. For foreign mortgages, apply a consistent exchange-rate conversion before doing the math.
Currently, while you can claim mortgage interest on taxes for foreign homes, foreign taxes paid on real estate are not deductible as personal real-estate taxes on Schedule A. If the property is rented or used in a business, different rules may apply.
