Be Prepared by David Landay

Author:David Landay
Language: eng
Format: epub
ISBN: 9781466880092
Publisher: St. Martin's Press

3.7 Interest Deduction

Loans are a nontaxable source of income, and in some cases the interest payments on loans are tax deductible. The general categories of deductible loan interest are:

• Home mortgage interest: Qualified residence interest is deductible by individuals as an itemized deduction as long as the mortgage debt does not exceed specified dollar limits. See chapter 22, section 2.2.

• Investment interest: Interest expenses on debts that can be properly allocated to property held for investment are generally deductible by individuals as an itemized deduction to the extent of net investment income. Note that a taxpayer can borrow money to put in an IRA and deduct the interest on the money borrowed.

• Trade or business interest: Interest expenses on debts incurred in a trade or business in which the taxpayer materially participates (other than a rental business) are generally deductible in full.

Personal interest is not tax deductible. Interest on credit cards, car loans, personal bank loans, and school loans is not tax deductible. Home loans, on the other hand, are usually the lowest-interest-rate loans an individual can get, and the interest is deductible.

Tip. For homeowners who need to borrow cash, the best borrowing vehicle is either refinancing an existing mortgage or taking a second mortgage.

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