Family loan from abroad to finance purchase of vacation rental home

[aloyabo]

Looking to purchase a second home that I plan to use as vacation rental. Given where rates are, a family member who lives in the EU has offered to put down the financing (replacing a mortgage) at a rate that is lower than banks but higher than the AFR. My questions are:

- What do I need to file with the IRS to structure this loan and make sure I can get tax deductibility for my vacation rental business? 

- Are my interest payments abroad subject to tax deductions?

Any help is welcome! Thanks!

[AmyC]

1. When you report your US income and expenses, the house will be included. No need to file anything special. You will file a Sch E for a rental house on your tax return - if you own it as an individual. If you have formed another tax entity, like a partnership, then it will file the rental house and pass through income and loss to you on a K-1.

2. In order to deduct mortgage interest, the loan must be secured by the house. Therefore, the paperwork for the loan should include the house as collateral. If you make payments in a foreign currency, convert it to USD for each date a payment is made. 

3. Be sure there is no issue in the Tax Treaties. It would be unusual.