Interest Deductions

Interest Deductions

Interest Deductions are.

deductions that are treated as follows:

Investment Interest. Investment interest deductions are limited to net investment income, which includes interest, dividends, long-term capital gains, and income or loss from working interests in oil and gas. However, net investment income includes neither rental nor other passive activity income or loss, nor interest paid to buy an ownership in a passive activity.

Construction Interest. Interest incurred during the construction and development of most real estate (but not a personal residence) must be capitalized and deducted over the depreciable life of the property, beginning when the property is ready to be placed in service or sold.

Business Interest. Interest incurred in an active trade or business in which the investor materially participates is fully deductible.

Home Mortgage Interest. Interest on up to $1 million of acquisition indebtedness.

(used to purchase or improve a home) plus $100,000 of home equity debt is tax deductible. This may be claimed for a principal residence plus one vacation home (provided that the owner used the home personally for the greater of 14 days or 10% of the time it was rented). Debt incurred before October 13, 1987 is not subject to the $1 million limit, but other limits exist, based on home costs and medical and educational expenses.

Points paid on a mortgage to acquire a principal residence may be deductible if they are customary in the geographic area; points paid for other purposes (e.g., refinancing) are amortized (deducted evenly each year over the life of the loan) rather than deducted currently.

Consumer Interest. Interest on credit cards and auto loans has not been deductible since 1990.


See also Capital Gain in the American Legal Encyclopedia and Capital Gain in the World Legal Encyclopedia.

See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.






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