Sharia Law and the Mortgage Interest Deduction (Part I)

Today’s blog post was written with the assistance of Daniel S. Eckenrode.  Daniel received his JD and LLM in Taxation from Villanova University School of Law. He is avidly learning about US- Middle Eastern international taxation. Daniel’s interest in this field stems from his studies and interaction with the Arabic culture at St. John’s University in New York. He hopes to specialize in this area and eventually to become one of its leading experts.



In the realm of international law, it is commonplace to find many differences among the rules of different countries.  In applying them to a particular transaction, it may appear at first blush, that one is faced with impasses that cannot be worked through. International taxation is no stranger to this notion. It’s easy to find oneself in a quagmire when trying to juggle laws from different regions of the world.

The problem is compounded when there is a clash of secular and non-secular laws.  Individuals can be placed in a difficult moral/legal predicament as they try to follow the tenets of their religion while at the same time respecting the laws of the land.

As noted in several of my previous posts (here, here and here), the tax law of the United States often collides with various tenets of Sharia law.  For many followers of Islam, a thin tightrope must be walked when trying to be compliant with both. Fortunately, with proper planning and advice, alternatives and solutions can often be found.

This two-part blog post will focus on the US tax deductions available for payments of mortgage interest that are legal in the United States but that may be forbidden under Sharia. Part I will provide the background and overall dilemma faced by Muslim Americans in utilizing the mortgage interest deduction. Part II of the post will focus on the possible solutions for obtaining a mortgage interest deduction on Sharia-compliant mortgages.

Riba – General Background

As a general matter, interest that is paid or received is forbidden according to Sharia law. This prohibition against interest is known as riba. The motive behind riba is to protect consumers from any sort of predatory lending and unjust enrichment. Riba is a subjective term because there is disagreement among Islamic scholars about what is prohibited. There are some who consider any amount of interest to be prohibited; others do not agree. Not all Islamic scholars equate riba with all forms of interest; there is also disagreement over whether charging interest is a major sin and against Sharia or whether it is simply disapproved.  An excellent discussion of the complexities of riba is here.

Some Islamic scholars who disagree with an absolute prohibition of interest argue that this way of thinking would put Muslims at an economic disadvantage. Additionally, they also argue that if the interest level is only keeping up with inflation, then it cannot be viewed as predatory. If Muslim Americans were to adhere to the strict interpretations of riba, then, as further explored below, they could be put at an economic disadvantage under US tax law.

The Benefits of Loans and the Impact of Riba

In today’s economy, the cost of purchasing a home is astronomical. Thus, it is very common to see individuals borrowing money in order to finance the purchase. Oftentimes, the loan is charged with an interest rate that is slightly above the rate of inflation.  This factor can place Muslim Americans in a difficult  position. Do they take advantage of these loans or do they strictly adhere to their religion?

Home ownership is one of the staples of the “American Dream”. This “dream” can be quite expensive, but the American government has helped incentivize home ownership through unique provisions in its tax regime for certain interest payments.

Interest Deductions Under US Tax Law

Pursuant to IRC 163(h)(3), individuals can deduct from taxable income certain interest paid on their mortgage.   According to a 2006 report, over three-fourths of Americans have taken out a mortgage. See Table 1.  If the Muslim individual were to adhere to the strict interpretation of riba, the individual could be put at a severe economic disadvantage. For example, he may decide not to take any loans whatsoever, and consequently could miss out on home ownership. Instead, he might choose to take the loan but forego the tax benefits of the interest deductions.

It is clearly evident that a mortgage loan can have both an immediate and eventual economic benefit. Taking out a loan to finance home ownership enables the individual to finance his dream immediately while at the same time reducing taxable income for the years to come.  In addition, the loan may pave the way to an overall higher standard of living.

Deductibility of Mortgage Interest – The New US Tax Law

Sweeping tax reform was signed into law by President Trump on December 22, 2017.   Mortgage interest is still deductible under the new rules, but the deduction is far more strictly curtailed.  You can read everything you need to know at my US tax blog post.

Next week, Part II of this blog post will examine some possible solutions to the problem faced by Muslim Americans in obtaining a Sharia-compliant mortgage loan that may also permit an interest deduction for US tax purposes.


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