Rental property

[Unregistered]

Client refinanced in 2005. He did cash out.
I think interest on cash out is not deducted on excess amount over value of home?

Part of this cash out was used to purchase Rental property in India. This property is currently under construction in 2005.

(a) What tax treatment should be aware of in 2006?

(b) Is it same as rental here in usa? Just report in USA and take expense deduction.

(c) Any special treaty that I need to be aware of?

(d) Can he get credit for taxes paid in India?

Thanks.

[Bees Knees]

Interest tracing rules apply if you take out a loan that is not secured by your first or second home. Rental property is generally treated as business property. TTB, page 4-14 mentions the interest tracing rules. If the proceeds can be traced to the purchase of rental property in India, then the interest is deductible for that rental activity. Rental real estate is taxed the same on the federal return, regardless of which country the property is located in (for purposes of a U.S. citizen or U.S. resident). Any taxes paid to India on the income would qualify for the foreign tax credit on Form 1116.

As to special treaties, I don't know anything about that. Anytime you have a client that has property located in a foreign country, you need to do research to make sure there are no special rules that apply to that specific country.