Tax Tip – Investment Interest Expense

Tax Tips provided by Don Fitch, CPA

The interest you pay on money you borrow to buy property that you hold for investment is called investment interest. You can take an itemized deduction for investment interest, up to the amount of your net investment income. The investment interest that you cannot deduct because of this limit is treated as investment interest paid or accrued in your next tax year, and is subject to the limits applicable to investment interest in that year.

Investment interest does not include any qualified home mortgage interest or any interest that you take into account in computing income or loss from a passive activity. Further, no deduction is allowed for interest you incur to produce tax-exempt income or for interest expenses on straddles.

For purposes of the deduction limit, net investment income is the excess of your investment income over your investment expenses. Your investment income is the sum of (1) your gross income from property you hold for investment (e.g., interest, dividends, annuities, and royalties), other than any gain attributable to the disposition of property you held for investment, and (2) the excess (if any) of your net gain attributable to the disposition of property you held for investment, over your net capital gain determined by only taking into account gains and losses from dispositions of property you held for investment. Investment income also includes your net capital gain from dispositions of property you held for investment and qualified dividend income, to the extent you elect to treat either or both of those amounts as investment income. The elections for net capital gain and qualified dividend income generally must be made on or before the due date (including extensions) of your income tax return for the tax year in which you recognize the net capital gain or receive the qualified dividend income. These elections may be revoked only with IRS consent. If you choose to include any amount of your qualified dividends and/or net capital gain in investment income, you must reduce the qualified dividends and/or net capital gain that are eligible for the lower capital gains tax rates by the same amount.

Your investment expenses are the allowed deductions (other than for interest) that are directly connected with the production of investment income.

Investment income and investment expenses do not include any income or expenses taken into account in computing income or loss from a passive activity.

For investment interest purposes, property you hold for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of your trade or business. Because stock generally produces dividend income, it is property held for investment unless the dividends are derived in the ordinary course of your trade or business. Property held for investment also includes property that produces gain or loss (not derived in the ordinary course of your trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Finally, property held for investment includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity).

DON FITCH, CPA
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This blog post is intended to serve solely as an aid in continuing tax education for Don Fitch Accountancy blog and email members. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any federal tax, accounting opinion, tax return position, and must be supplemented for such purposes with other current authoritative materials. The information in this blog post has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Don Fitch Accountancy is not engaged in rendering legal or other professional services and will not be held liable for any actions or suits based on this blog post, email, or comments made during the above presentation. If legal advice or other expert assistance is required, seek the services of a competent professional.

(Updated 02/18/2021 14:04)

Published by Don Fitch, CPA

Offers in Compromise, Wage Levy Releases, Installment Agreements, IRS Audits, and much more IRS assistance. Also, allow us to Help you complete your Tax Returns from 1913 to present (100+ Years) and for any of the 50 States.

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