UK Mortgage Interest on a US Tax Return: What Counts

Interest on a UK mortgage secured on your home is deductible on a Form 1040 on the same terms as interest on a mortgage in Ohio — the qualified home rules in IRS Publication 936 test what the property is, not what country it sits in. The catch is that the deduction only reaches your tax bill if you itemise, and itemising only helps if your deductions beat the standard deduction, which is $31,500 for a married couple filing jointly for 2025. Council tax and other foreign real property taxes are explicitly non-deductible, so most American homeowners in the UK have their mortgage interest and very little else in the itemised column.

Key takeaways

• A UK home can be a qualified home. Publication 936 defines it by physical characteristics — "a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities" — with no location test.
• Acquisition debt limits apply. Interest is deductible on up to $750,000 of home acquisition debt ($375,000 if married filing separately) for debt taken on after 15 December 2017, or $1 million ($500,000 MFS) for debt from 14 October 1987 through 15 December 2017.
• Council tax is not deductible. The 2025 Schedule A instructions say plainly: "Don't include foreign taxes you paid on real estate."
• Your UK lender will not send a Form 1098, so the interest belongs on Schedule A line 8b, not line 8a.
• The foreign housing exclusion is often worth more than Schedule A — but it excludes mortgage principal and deductible interest, so owners get far less from it than renters.
• Filing status usually decides the outcome. The same interest loses to the standard deduction for a joint filer and beats it for a single filer.

Yes, interest on a UK mortgage is deductible — the rule has no location test

The deduction lives in Publication 936, and its definition of a qualified home is about the property, not the postcode. A qualified home is your main home — "the home where you ordinarily live most of the time" — plus, if you want, one second home. A terraced house in Bristol, a flat in Glasgow or a cottage in Devon all qualify on their face. Two conditions do the real work.

The debt has to be secured

Publication 936 requires a secured debt: an instrument "such as a mortgage, deed of trust, or land contract" that makes your ownership in the qualified home security for payment, allows the home to satisfy the debt on default, and "is recorded or is otherwise perfected under any state or local law that applies."

A normal UK mortgage, registered as a legal charge at HM Land Registry or the Registers of Scotland, satisfies this comfortably. What does not is the arrangement expats improvise more often than you would expect: an unsecured family loan, a personal loan used for the deposit, or a director's loan from your own company. If nothing is charged against the property, the interest is personal interest and is not deductible at all.

The acquisition-debt limits bite at UK prices

Interest is deductible on home acquisition debt — debt used to buy, build or substantially improve the home — up to $750,000, or $375,000 if married filing separately, for debt incurred after 15 December 2017. Older debt incurred between 14 October 1987 and 15 December 2017 is grandfathered at $1 million ($500,000 MFS). Both ceilings combine your main and second home.

These are dollar limits applied to a sterling debt, so the exchange rate when you drew the loan matters. A £600,000 mortgage taken out at $1.30 is $780,000 of acquisition debt — over the line, so a slice of the interest is disallowed and you carry that ratio for the life of the loan. In London and the South East this is not hypothetical.

A remortgage is deductible only to the extent it replaces acquisition debt. If you released equity to fund school fees or a business, interest on that slice does not qualify.

The real hurdle: beating the standard deduction

None of the above matters unless you itemise. The standard deduction is generous and, after the One Big Beautiful Bill Act adjustments, rising:

| Filing status | 2025 standard deduction | 2026 standard deduction |

|---|---|---|

| Single or married filing separately | $15,750 | $16,100 |

| Married filing jointly / surviving spouse | $31,500 | $32,200 |

| Head of household | $23,625 | $24,150 |

The 2026 figures come from the IRS inflation adjustments of 9 October 2025 (Revenue Procedure 2025-32).

Now look at what an American in the UK can realistically put on Schedule A. State and local taxes — the largest itemised deduction for most US-resident filers — are usually zero once you have broken residence with your last US state, so the state and local tax cap of $40,000 for 2025 and $40,400 for 2026 is irrelevant to most expats; there is nothing to cap. Which leaves mortgage interest largely on its own.

A worked comparison (illustrative figures)

A couple in Manchester, both US citizens, have a £320,000 repayment mortgage at 4.5%. Interest paid in calendar 2025 is roughly £14,400. At the IRS yearly average rate for the pound for 2025 of 0.759 — £14,400 ÷ 0.759 — that is about $18,970.

• Married filing jointly. $18,970 of itemised deductions against a $31,500 standard deduction. The standard deduction wins by $12,530, and the mortgage interest produces nothing.
• Single filer, same house, same mortgage. $18,970 against a $15,750 standard deduction. Itemising wins, by $3,220 of extra deduction.
• Married filing separately, common where one spouse is not American. The standard deduction is $15,750, but the acquisition-debt ceiling halves to $375,000 and spouses must both itemise or both take the standard deduction.

These figures are illustrative, not a quotation of anyone's return. The point is structural: for joint filers a UK mortgage alone usually does not get you over the line, and the higher 2026 standard deduction makes that harder still.

What each UK housing cost does on a US return

| UK housing cost | Deductible on your 1040? | Where it goes |

|---|---|---|

| Mortgage interest on your main or second home | Yes, if you itemise and the debt is secured acquisition debt within the limits | Schedule A, line 8b |

| Mortgage capital repayment | No | Nowhere — and specifically excluded from Form 2555 housing expenses |

| Council tax | No | Nowhere. "Don't include foreign taxes you paid on real estate" |

| Stamp duty land tax on purchase | No current deduction | Treated as a cost of acquiring the property |

| Buildings and contents insurance | No | Can count as a Form 2555 housing expense |

| Gas, electricity, water (not telephone) | No | Can count as a Form 2555 housing expense |

| Household repairs | No | Can count as a Form 2555 housing expense |

| Extensions and improvements | No | Added to your US cost basis |

| Rent, if you rent rather than own | No | Counts in full as a Form 2555 housing expense |

Council tax

Council tax is not deductible on a US return, and two IRS sources say so in almost identical words. The 2025 Schedule A instructions: "Don't include foreign taxes you paid on real estate." Publication 530, the IRS guide for homeowners: "You can't deduct foreign taxes you paid on real estate."

That was a change made by the 2017 tax law and it has not been reversed. Council tax would struggle even without that rule: under GOV.UK guidance you pay it because you are an adult resident in the dwelling, making it an occupancy charge rather than the uniform tax assessed "at a like rate on all real property throughout the community" that Publication 530 describes.

The foreign housing exclusion: where owners lose out

If you qualify for the foreign earned income exclusion, you may also exclude or deduct a housing cost amount — a separate, often larger benefit than anything on Schedule A. Its definition, though, is unkind to homeowners.

The Form 2555 instructions say housing expenses "include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, and household repairs."

Then the carve-out: "Don't include deductible interest and taxes, any amount deductible by a tenant-stockholder in connection with cooperative housing, the cost of buying or improving a house, principal payments on a mortgage, or depreciation on the house. Also, don't include the cost of domestic labor, pay television, or buying furniture or accessories."

Read the two lists together and the asymmetry is stark. A renter counts every pound of rent. An owner counts insurance, utilities and repairs — and nothing from the mortgage payment. Your largest housing cost is invisible.

How the housing amount is computed

The housing cost amount is your qualifying expenses, capped, minus a base amount you are assumed to have spent anyway.

• For 2025 the maximum foreign earned income exclusion is $130,000.
• The base housing amount is 16% of that: $20,800 for a full year.
• The general limit on housing expenses is 30%: $39,000 for a full year, or $106.85 per day.
• High-cost locations get a higher limit. Under Notice 2025-16, the 2025 limit for London is $67,000 ($183.56 per day). Other listed UK localities include Bracknell, High Wycombe and Reading at $62,100, Farnborough at $54,700, Surrey at $48,402, Cheltenham at $47,300 and Southampton at $44,200.

For 2026 the exclusion rises to $132,900 and the same percentages apply to it; the IRS publishes the high-cost location table each year in a separate notice.

A Londoner renting at £3,000 a month can generate a substantial housing exclusion; the same person owning the identical flat generates almost none. That is not a failure of preparation — it is how the statute is written.

No double dipping

Publication 54 states the governing principle: "you can't deduct or exclude any item, or take a credit for any item, that is related to amounts you exclude as foreign earned income or foreign housing amounts."

Two consequences follow for a UK homeowner. A pound of expense is counted once — you cannot run the same utility bill through the housing exclusion and claim it elsewhere. And, more consequentially, foreign tax credits on income you have excluded are disallowed, which is why the exclusion-versus-credit decision has to be made deliberately rather than by habit. We set the comparison out in FEIE vs foreign tax credit for US expats in the UK.

There is a further wrinkle. Itemised mortgage interest does not simply sit on Schedule A and stop: the Form 1116 instructions carry a dedicated "Worksheet for Home Mortgage Interest—Line 4a", because the interest is apportioned when you compute foreign source taxable income. Apportioning more deductions against foreign source income reduces the numerator of the foreign tax credit limitation — so a deduction that saves you nothing in tax can still shrink the credit you were relying on.

The currency angle

Sterling debt reported in dollars creates two issues. The first is translation, covered below. The second is that repaying or remortgaging a foreign-currency loan can itself produce a taxable foreign currency gain for US purposes — a trap that surprises people who have simply moved house. The mechanics are in buying a UK home as a US citizen: tax, mortgages and currency risk, worth reading before you refinance rather than after.

If you let the property rather than live in it, the analysis changes completely and the interest may be a business deduction on Schedule E instead. See US tax on UK rental income for American landlords.

Step by step: handling this on the return

1. Get the annual interest statement from your lender, on a 1 January to 31 December basis if the statement normally runs to a different date.

2. Confirm the debt is secured and is acquisition debt. Check your mortgage offer and the registered charge, and separate out any equity release used for non-property purposes.

3. Test the acquisition-debt limit in dollars, using the rate on the date the debt was incurred, and compute the deductible fraction if you are over the ceiling.

4. Translate the interest into US dollars. The IRS says: "In general, use the exchange rate prevailing (i.e., the spot rate) when you receive, pay or accrue the item", and that "The Internal Revenue Service has no official exchange rate." Its published yearly average rate for the pound for 2025 is 0.759.

5. Report on Schedule A line 8b. No Form 1098 will arrive: the Form 1098 instructions impose the obligation on a filer "engaged in a trade or business" who "receive[s] from an individual $600 or more of mortgage interest", with foreign recipients caught only where there is US nexus. Line 8b is for interest not reported on a Form 1098; enter the lender's name and address.

6. Compare with the standard deduction for your filing status, and take the larger.

7. Re-run Form 1116 with the itemised figures, because the credit limitation moves.

8. Keep the Form 2555 housing expense schedule separate from Schedule A, so the two are never double counted.

Common mistakes

• Claiming council tax as a property tax. Both Publication 530 and the Schedule A instructions rule it out.
• Itemising for the sake of it. Itemising below your standard deduction costs you money and can reduce your foreign tax credit at the same time.
• Deducting the whole mortgage payment. Only the interest element counts; capital repayment is not deductible, and is not a Form 2555 housing expense either.
• Treating a family loan as a mortgage. Without a recorded, perfected charge over the property there is no secured debt and no deduction.
• Forgetting that the acquisition-debt limit is a dollar limit, tested when the debt was incurred.
• Using a different exchange rate each year. A consistent, documented method is required.
• Double counting utilities, which appear in the Form 2555 housing expense list and nowhere on Schedule A.

What to keep

• Annual mortgage interest statements from your UK lender, in sterling, for every year.
• The original mortgage offer and the registered charge, evidencing secured debt.
• The completion statement showing price and stamp duty land tax, for your US cost basis.
• Remortgage documents, noting what any additional borrowing funded.
• A one-page exchange rate memorandum stating your method — spot, monthly average, or the IRS yearly average — applied consistently.
• Council tax bills: not deductible, but useful evidence of residence for the bona fide residence test.

Keep these for as long as you own the property; basis records in particular need to survive to the eventual sale, which may be decades away. If your US filings have fallen behind, our guide to US tax compliance for Americans abroad sets out the routes back into good standing.

Sources

• Publication 936 (2025), Home Mortgage Interest Deduction — IRS
• Instructions for Schedule A (Form 1040) (2025) — IRS
• Publication 530 (2025), Tax Information for Homeowners — IRS
• Publication 17 (2025), Your Federal Income Tax — IRS
• IRS releases tax inflation adjustments for tax year 2026 — IRS, 9 October 2025
• Instructions for Form 2555 (2025) — IRS
• Notice 2025-16, Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2025 — IRS
• Publication 54 (12/2025), Tax Guide for U.S. Citizens and Resident Aliens Abroad — IRS
• Instructions for Form 1116 (2025) — IRS
• Instructions for Form 1098 — IRS
• Yearly average currency exchange rates — IRS
• Council Tax: who has to pay — GOV.UK

When to get help

Most UK homeowners can work out whether to itemise in an afternoon. A second opinion earns its keep when the mortgage exceeds the acquisition-debt limit in dollars, when you have refinanced or released equity, when you are weighing the foreign earned income exclusion against the foreign tax credit, or when you are married to a non-American and filing status changes the answer. Those situations interact.

This is general information about how the rules work, not advice on your return. If you would like the calculation run properly, with a licensed CPA or Enrolled Agent reviewing and signing off the return, our US-UK expat tax accountants do this every day, and you can book a consultation first.