Tax Musings of a Burbank CPA: The Four Fingers of Interest Deductions (and One Thumb!)
When you think of interest expense you normally think, ok, a tax deduction. There are four main ways interest can be a tax deduction, and one big way it can’t be! Let’s talk about the four fingers of deductible interest and the thumb of nondeductible interest:
1. Mortgage Interest: If you have seen my other blogposts about mortgage interest, you know the interest on the first $1,000,000 of acquisition indebtedness and the first $100,000 of home equity indebtedness on your principal residence and a second home that is not being rented is deductible as mortgage interest. The mortgage(s) have to be secured by the property(ies), you have to be on title of the properties and make the payments to claim the deduction as an itemized deduction on Schedule A of your personal tax return.
2. Rental Interest: If you are renting a property to a third party, the interest you pay on the rental property’s loan can be deducted as a rental expense and reduce the rental income. It can sometimes create a deductible rental loss. Again, the mortgage has to be secured by the property, you have to be on title of the property and make the payments to claim the deduction as a rental deduction, usually on Schedule E of your personal tax return.
3. Business Interest: If you have a business (a sole proprietorship, corporation, LLC or partnership), any ordinary or necessary business expense is deductible as business interest expense. You have to use the loan for the business and have a business purpose to get the deduction, usually on the entity’s tax return or, if a sole proprietorship, on Schedule C of your personal tax return.
4. Investment Interest: If you have borrowed money to invest (like a margin account, or a loan where you have invested the proceeds in some investment), you can normally deduct the interest as investment interest. You have to file form 4952 to calculate the deductible portion (you can only reduce investment income, such as dividend, interest or capital gain income by investment interest expense; the rest gets carried over until you have more investment income to offset), then the investment interest is deducted as an itemized deduction on Schedule A of your personal tax return.
Now that we have talked about the four fingers of deductible interest, let’s talk about the thumb, which is nondeductible personal interest. ANY interest that can’t be put into one of the four fingers becomes the thumb and can’t be deducted.
Obviously the key is to find a way to turn a thumb into fingers! Call or email me or contact me on my website http://briantstonercpa.com/ and we can see if there is a way to get a deduction. Just remember that the more you cover the fingers with the thumb, the more you shake your fist in frustration because of the tax you owe!
For financial, accounting and tax musings,
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1. Mortgage Interest: If you have seen my other blogposts about mortgage interest, you know the interest on the first $1,000,000 of acquisition indebtedness and the first $100,000 of home equity indebtedness on your principal residence and a second home that is not being rented is deductible as mortgage interest. The mortgage(s) have to be secured by the property(ies), you have to be on title of the properties and make the payments to claim the deduction as an itemized deduction on Schedule A of your personal tax return.
2. Rental Interest: If you are renting a property to a third party, the interest you pay on the rental property’s loan can be deducted as a rental expense and reduce the rental income. It can sometimes create a deductible rental loss. Again, the mortgage has to be secured by the property, you have to be on title of the property and make the payments to claim the deduction as a rental deduction, usually on Schedule E of your personal tax return.
3. Business Interest: If you have a business (a sole proprietorship, corporation, LLC or partnership), any ordinary or necessary business expense is deductible as business interest expense. You have to use the loan for the business and have a business purpose to get the deduction, usually on the entity’s tax return or, if a sole proprietorship, on Schedule C of your personal tax return.
4. Investment Interest: If you have borrowed money to invest (like a margin account, or a loan where you have invested the proceeds in some investment), you can normally deduct the interest as investment interest. You have to file form 4952 to calculate the deductible portion (you can only reduce investment income, such as dividend, interest or capital gain income by investment interest expense; the rest gets carried over until you have more investment income to offset), then the investment interest is deducted as an itemized deduction on Schedule A of your personal tax return.
Now that we have talked about the four fingers of deductible interest, let’s talk about the thumb, which is nondeductible personal interest. ANY interest that can’t be put into one of the four fingers becomes the thumb and can’t be deducted.
Obviously the key is to find a way to turn a thumb into fingers! Call or email me or contact me on my website http://briantstonercpa.com/ and we can see if there is a way to get a deduction. Just remember that the more you cover the fingers with the thumb, the more you shake your fist in frustration because of the tax you owe!
For financial, accounting and tax musings,You can count on us to count for you!
email: bstonercpa@sbcglobal.net phone: 818-317-6035 Website: www.briantstonercpa.com https://twitter.com/bstonercpa
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