Dear Dave,
My family and I just started a three year assignment in Turin,
Italy. We were living in USA prior to the assignment, and my
wife and I both have LPR status in the USA (we are Cdn and
Italian citizens). At first we were considering to rent, but
have been unable to find any desirable and affordable rentals
that would be suitable for a young, large family (4 kids). Even
though it is "only" three years, we are seriously considering
buying an independent house (villa) in a nice small town just
outside Turin. However, at 4000 euros/square meter, it is not a
cheap prospect. We are also considering holding on to the
property long term (rent it out upon returning to USA).
Our question is to find the best way to finance the property.
Our choices are: 1) finance it entirely through a local (Italian)
bank; 2) partially finance it from USA (by taking some equity out
of our house in the USA); 3) 100% finance from USA. What are
the advantages/disadvantages with each strategy in terms of
claiming mortgage interest on Schedule A (i.e. how do we prove it
is for a second home outside the USA?) Is there a limit on how
much interest one can claim on Schedule A? Please also take into
account that we had to pay AMT last year, and probably will also
have to pay AMT in 2006. We currently have one large mortgage on
our USA home, and a small home equity loan.
Also, It appears that first time home buyers in Italy pay a
one-time 4% property tax on the purchase price, and the current
owner is proposing that we pay cash for 1/4 of the price, and so
pay taxes on only the 3/4 price. This practice seems wide spread
in Italy, but if I finance the 1/4 with the home equity loan from
the USA (option 2 or 3), could I still claim the interest in the
USA?
As far as immigration issues are concerned, we have already
submitted our I-131 re-entry permit forms prior to departure. I
am planning on filing the N-470 form to maintain the last rolling
5 year continuity, but we would be eligible to apply for USA
naturalization by mid-May. This would mean applying for
citizenship remotely and having to fly in from Italy for
fingerprinting and interview but two different people at the
Homeland Security Help line have told me that it is possible to
apply remotely.
Thanks for your help.
-----------------------------------------------------------------
----------------------------------------
david ingram replies:
The answer to your question depends on the relative values of the
US Dollar to the Euro in my opinion. The Euro is looking stronger
and the US dollar is looking weaker over the near future.
An example like that has just taken place between Canada and the
US.. In 2002, $1,000 US dollars were worth $1,570 Canadian
dollars. If A person bought a $$157,000 Condo in Vancouver that
year and sold it now, they would get $$314,000 for it because it
has likely doubled.
$1,000 US dollars today are only worth $1,120.00 Canadian
Dollars. The $314,000 Canadian is worth $280,000 US and the
American who paid with US cash has made a really good return on
his or her money. If they had borrowed the money to buy in the
US and were making their US Dollar payments, they were home free.
However, if they had borrowed the money in Canada and were / are
making mortgage payments here, the interest rate has risen 2% and
the dollar has dropped almost 40% and the monthly payments for
the Canadian mortgage have just about doubled in US dollars.
-----------------------------------------
You can do the math yourself for what happened in reverse. We
have all sorts of Canadians selling out their US property at a US
profit and having to pay Federal and state capital gains tax but
showing a capital loss on their Canadian return because of
currency exchange.
And I will always remember a Canadian client who bought a place
in Iceland and watched it go up 20x's but lost money in Canadian
dollars because the currency devalued 25 x's.
The last Italian election saw massive calls to crack down on tax
evasion and restore the inheritance tax and I think they also
wanted to increase the capital gains tax (fleeting memory).
Playing around with paying property purchase tax on a lesser
figure is tax evasion and a criminal offence in any country. You
do not want to do that because if charged, you could lose your US
resident alien cards. Crimes in another country affect your green
card.
I suggest get half the money in the US and half in Italy. That
way you only have to deal with the changing value of the dollar
relative to the Euro and the inflation rate in Italy. If half
and half is too hard - maybe 1/3 2/3rd's would work. At any
rate, the interest and property taxes paid in or for a second
home in Italy are clearly a schedule A deduction. Mortgage
interest is NOT one of the add-backs for AMT purposes.
---------------------------------------------------
I am not the person to talk to about your citizenship
application. Joe Grasmick almost "wrote the book" on Canadians
immigrating to the US. He is a prominent member of the American
Immigration Lawyer's Association and is set up to handle overseas
business by phone. He has a prepaid 1/2 hour consultation system
which I recommend you take advantage of. Find him at
www.grasmick.com.
===================
David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
My Home office is at:
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North Vancouver, BC, CANADA, V7N 3L7
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(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week Vancouver (LA)
time - (please do not fax or phone outside of those hours as
this is a home office)
email to taxman at centa.com
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed
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comment. Nothing in this message is or should be construed as
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