According to the opinion set forth in the private ruling, interest on loans obtained from abroad used to purchase an apartment in Türkiye cannot be deducted from rental income derived in Türkiye, as there is no explicit provision in Article 74 of the Income Tax Law. One of the matters that taxpayers deriving rental income from immovable property often find ambiguous is which loan interest expenses can be deducted when declaring rental income. In particular, when a loan is obtained from abroad to purchase a residential property located in Türkiye, whether the interest on such loan can be deducted in the annual income tax return is a frequently asked question in practice. The private ruling dated June 9, 2017, and numbered 62030549-120[70-2017/207]-162467, issued by the Istanbul Tax Office, provides direct clarity on this issue. This article addresses the matter solely based on the specific case set forth in the said private ruling. What Is the Specific Case Addressed in the Private Ruling? In the case addressed in the private ruling, the taxpayer resides abroad and purchases an apartment in Türkiye using a loan obtained from abroad. Since the said apartment generates rental income, the taxpayer inquired whether the interest amounts on the foreign loan could be deducted from the rental income from immovable property to be declared in Türkiye. The tax authority made its assessment within the framework of the provisions of the Income Tax Law regarding rental income from immovable property, residential rental income exemption, and the actual expense method. Case Flow Illustrated Through an Example To better understand the issue, let us concretize the case in the private ruling using an example scenario: Mr. Mehmet, who resides in Germany, wishes to purchase an apartment in Türkiye for investment purposes. He obtains a loan from a financial institution in the country where he resides to finance this purchase. Subsequently, he rents out this apartment in Türkiye and begins deriving monthly rental income. When the tax declaration period arrives, Mr. Mehmet wonders: I used a loan from abroad to purchase the apartment in Türkiye. Can I deduct the interest I pay on this loan from the rental income I will declare in Türkiye? The private ruling issued by the Istanbul Tax Office clearly answers this question in the negative. What Is Rental Income from Immovable Property? Article 70 of the Income Tax Law No. 193 stipulates that income derived from leasing buildings by their owners, trustees, possessors, holders of easement or usufruct rights, or lessees constitutes rental income from immovable property. Within this framework, income derived from leasing an apartment located in Türkiye is assessed as rental income from immovable property. In the specific case of the private ruling, the rental income derived from the apartment purchased in Türkiye falls under this income category. When Is Residential Rental Income Declared? The private ruling also references Article 21 of the Income Tax Law. According to this, if the gross proceeds derived from residential properties leased exceed the exemption amount determined for the relevant year, they must be declared. The private ruling notes that for income from the 2016 calendar year, this exemption amount was TRY 3,800. For income from the 2025 calendar year, the exemption amount is TRY 47,000. For the 2026 calendar year (to be declared in March 2027), the residential rental income exemption amount has been set at TRY 58,000. It is also stated that if the exemption threshold is exceeded and a tax return is not filed or the income is under-declared, the exemption cannot be availed. Therefore, in the case of the private ruling, the first step is to determine whether the residential rental income requires declaration. However, the main issue arises regarding which expenses may be deducted if a tax return is filed. Can Any Loan Interest Be Deducted Under the Actual Expense Method? Taxpayers may choose the actual expense method when determining the net amount of rental income from immovable property. However, selecting the actual expense method does not mean that every payment related to the property will automatically be considered an expense. Article 74 of the Income Tax Law enumerates, in subparagraphs, which expenses may be deducted under the actual expense method. The tax authority specifically drew attention to this article in the private ruling. The crucial point here is that for an expense to be deductible from rental income, there must be an explicit provision in Article 74 of the Income Tax Law allowing it. Can Interest on a Loan Obtained from Abroad Be Deducted from Rental Income? According to the conclusion reached in the private ruling, no. It is stated that Article 74 of the Income Tax Law contains no provision allowing interest amounts paid on loans obtained from abroad to be taken into account as a deduction. Therefore, even if the loan was used to purchase a residential property located in Türkiye that is leased out, it was deemed not possible to deduct interest on a loan obtained from abroad from the rental income derived in Türkiye. This is the most significant conclusion of this private ruling. Does the Fact That the Loan Was Used for Real Estate in Türkiye Change the Outcome? No. The specific case in the private ruling pertains precisely to this situation. The taxpayer purchased an apartment in Türkiye using a loan obtained from abroad. Nonetheless, the tax authority did not conclude that the interest expense could be deducted simply because the property is located in Türkiye or because the loan was used for this property. The tax authority directly examined the statutory provision and emphasized that there is no regulation to this effect in Article 74 of the Income Tax Law. Consequently, the economic connection alone was not deemed sufficient. Does a Person Residing Abroad Declare Rental Income in Türkiye? Although the private ruling does not provide an extensive explanation directly on this point, it clearly states that residential rental income derived in Türkiye must be declared if it exceeds the exemption amount determined for the relevant year. Therefore, the tax authority’s approach in the context of the private ruling is clear: if the rental income from the apartment in Türkiye falls within the scope of declaration, a tax return must be filed. However, interest expenses related to the loan obtained from abroad cannot be deducted in this tax return. Why Is Article 74 of the Income Tax Law Determinative? The main factor determining the outcome in this private ruling is Article 74 of the Income Tax Law. This is because the expenses deductible from rental income from immovable property are limitedly enumerated. The tax authority makes its interpretation based on this limited list. Even if an expense is economically connected to the acquisition of the property, it cannot be deducted in the tax return unless it is explicitly listed as a deductible expense in the law. This is the fundamental reason for the negative conclusion regarding foreign loan interest in the private ruling. What Is the Practical Importance of This Private Ruling? This private ruling is significant for individuals residing abroad who invest in real estate in Türkiye. Because in practice, many individuals assume that interest on any loan used to purchase a property in Türkiye can be deducted from rental income. However, the opinion set forth in the private ruling clearly demonstrates that interest on loans obtained from abroad cannot be deducted from rental income in Türkiye. Therefore, when preparing the tax return, the tax implications of the financing source and the place where the loan is used must be carefully evaluated. Conclusion According to the private ruling dated June 9, 2017, issued by the Istanbul Tax Office, even if an apartment in Türkiye was purchased using a loan obtained from abroad, the interest amounts paid on such loan cannot be deducted from the rental income derived in Türkiye. This is because Article 74 of the Income Tax Law contains no provision allowing interest on loans obtained from abroad to be deducted when determining the net amount of rental income from immovable property. This private ruling provides clarity through a specific case on questions such as whether interest on foreign loans can be deducted from rental income, whether a tax deduction is available when a foreign loan is used for a property in Türkiye, which interest expenses can be expensed against rental income from immovable property, and which expenses can be taken into account in the rental income tax return filed in Türkiye by individuals residing abroad. Q&A Regarding the Specific Case in the Private Ruling Can interest on a loan obtained from abroad be deducted from rental income in Türkiye? No. According to the specific case in this private ruling, interest on a loan obtained from abroad cannot be deducted from rental income derived in Türkiye. If I used a foreign loan to purchase an apartment in Türkiye, can I claim the interest as an expense? No. The fact that the loan was used for real estate in Türkiye does not, based on the conclusion in the private ruling, alone grant the right to a deduction. Is every loan interest expense considered deductible against rental income from immovable property? No. Only expenses explicitly recognized as deductible under Article 74 of the Income Tax Law may be taken into account. If the actual expense method is chosen, can foreign loan interest be deducted? No. Even if the actual expense method is selected, the private ruling states that such interest cannot be deducted. Does a person residing abroad declare rental income in Türkiye? According to the explanation in the private ruling, residential rental income exceeding the exemption amount for the relevant year must be declared. What was the residential rental income exemption amount for 2016? As stated in the private ruling, the exemption amount for income from the 2016 calendar year was TRY 3,800. What are the residential rental income exemption amounts for 2025 and 2026? The exemption amount for income from the 2025 calendar year is TRY 47,000. For the 2026 calendar year (to be declared in March 2027), the exemption amount has been set at TRY 58,000. If total residential rental income derived during the year does not exceed this amount, no tax return is required. If rental income is not declared, can the exemption still be availed? No. If income exceeding the exemption threshold is not declared or is under-declared, the exemption cannot be availed. What is the primary justification for the non-deductibility of foreign loan interest? The absence of an explicit provision in Article 74 of the Income Tax Law allowing such interest to be deducted. What is the most significant outcome of this private ruling? Interest on loans obtained from abroad cannot be deducted as an expense from rental income derived in Türkiye. 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