Poll
How much time do you spend reading financial articles (per week)?
Less than 1 hour
1-2 hours
2-5 hours
5+ hours
Do not read

 
Link exchange
Are you interested in link exchange? Contact Us
Home » Taxation
What Are Deductible Investment Interest Expenses?
Category :- Taxation

Author :- intuit.com 
* Please rate and share the article if you find it interesting *

Posted on January 7, 2014, 1:28 am
(2 Ratings)

The federal tax code includes a number of incentives to encourage investment. Among them is the deduction for investment interest expenses. In general, you can deduct interest paid on money you borrow to invest, although there are restrictions on how much you can deduct and which investments actually qualify you for the deduction.

Definition of an investment interest expense

When you borrow money to buy property for investment purposes, any interest you pay on that borrowed money becomes an "investment interest expense." For example, say you take out a $5,000 loan against your home equity and use the money to buy stock. The interest on that loan is investment interest. (It wouldn't be deductible as mortgage interest because you didn't use the money to buy, build or improve your home.) If you use only part of the borrowed money for investments, you can deduct only a proportional amount of the interest you pay.

What qualifies for deduction

The deduction applies to interest on money borrowed to buy property that will produce investment income -- interest, dividends, annuities or royalties -- or that you expect to appreciate in value, allowing you to sell it at a gain in the future. However, you can't deduct interest when the property you buy produces nontaxable income, such as tax-exempt bonds.

In any year, you cannot deduct more in investment interest than you earned in investment income. However, you can carry forward your "disallowed" investment interest to the next year.

Passive activity

Interest incurred for an investment in a "passive activity" generally doesn't qualify for the investment interest deduction. A passive activity is a business or trade in which you hold an ownership interest but in which you don't actually participate.

For example, say you borrowed $20,000 to buy a 10 percent stake in a friend's car wash. That stake is certainly an investment, but unless you were there washing cars (or doing some other work), it's a passive activity, because you're not materially involved running the business. Thus, you couldn't deduct the interest on the $20,000 loan as investment interest. However, you could use the interest to offset income you received from the passive activity.

Also, under the tax code, rental activity generally counts as passive activity, so if you borrowed money to buy a house to rent out, the interest isn't deductible as investment interest. But in this case, you could use the interest as an expense item for operation of the rental property on Schedule E.

Taking the deduction

To actually claim the deduction for investment interest expenses, you must itemize your deductions. Investment interest goes on Schedule A, under "Interest You Paid." You may also have to file Form 4952, which provides details about your deduction. You don't have to file this form if you meet three conditions: interest is the only investment expense you're deducting; you're not carrying forward any disallowed interest from the previous year, and your investment interest doesn't exceed your investment income from interest and ordinary dividends.

Remember, when you use TurboTax to prepare your taxes, we’ll ask you easy-to-answer questions about your investments, determine which deductions you qualify for, and fill in all the right tax forms for you.

 

Source: https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/What-Are-Deductible-Investment-Interest-Expenses-/INF23233.html


Comments : Updated for Tax Year: 2013
Rate this article   

Sort»
Protect Your Company With The Right Commercial Insurance
Commercial insurance is a necessity for every company, but c....
(0 Rating)
--------
Understanding the Different Types of Business Insurance
InsurEye helps business owners understand what they need and....
(0 Rating)
--------
No Medical Insurance Means Coverage Despite Pre-Existing Conditions
Having a pre-existing medical condition does not exclude you....
(0 Rating)
--------
In which situations you can apply for a car title loan?
Life throws us challenges that are tough to get through. The....
(2 Ratings)
--------
Smashed Silver Snaps Back into Ferocious Bull Market
The question facing precious metals investors now is: How su....
(2 Ratings)
--------
We do not like ads, banners, Google ads or any other kind of promotion. We promise to never put such ads on our site.
 
Greengeeks.com-Leading Web Host Provider
Our web provider, has very reliable support (: 2013)

Contact us for more details

Keywords: Articles about money, canadian financial articles, information about saving taxes, tips to save taxes, how credit history works, best articles, financial articles 2013, money topics journal, blog insurance article, legal blog, tax planning, investment and retirement articles, tax child credits, how to reduce taxes


ABOUT THE SITE

AUTHORS/READERS