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Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: crh02 who wrote (2329)	10/15/1999 9:23:00 PM
From: V.	Respond to of 5810

Hi c r, I have typed some of the relevant passages from IRS Publication 550 - "Investment Income and Expenses". Note the statement to which I've added the asterisks. Also, please check the current tax laws as my information may be dated. I am not an accountant, so "check with your tax advisor"! <g>: Investment Interest If you borrow money that is used to acquire property you hold for investment, the interest you pay is investment interest. You can deduct investment interest subject to the limits discussed later. However, you cannot deduct interest you incurred to produce tax-exempt income. Investment interest does not include any qualified residence interest or any interest taken into account in computing income or loss from a passive activity. Allocation of Interest Expense Your deduction for interest expense may be limited, depending on how the debt proceeds are used. *If the money you borrowed is used for business or personal purposes as well as for investment, you must allocate the debt among those purposes.* You allocate the interest expense on that debt according to how you used the debt proceeds. However, fully deductible home mortgage interest does not have to be allocated, regardless of how the proceeds are used. Example 1. You borrow $10,000 and use $8,000 to purchase [a crappy BB stock that was spammed on a thread]. The other $2,000 is used to purchase items for your home [that you certainly shouldn't have bought, but the sale was too enticing]. Since 80% of the interest is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. (This is basically how the allocation rule works; however, see Example 2, later, for other calculations you may have to make.) Example 2. Assume in Example 1 that you borrowed the money on March 1 and immediately purchased the stock for $8,000. You did not purchase the household items until June 1. You had deposited the $2,000 in the bank. The $2,000 is treated as being used for an investment purpose for the 3-months period. Your total interest expense for 3 months on this debt is investment interest. In June, you must being to allocate 80% of the debt and the interest expense for investment and 20% for personal purposes. Payments on debt require new allocation As you repay the debt, you must reallocate the proceeds. You must first reduce the amount allocated for personal purposes. you then reallocate what portion is for investment purposes. Example 3. If, in Example 2, you repay $500 on November 1, the entire repayment is applied against the amount allocated for personal purposes. The debt is now allocated as $8,000 for investment purposes, and $1,500 for personal purposes. Until the next reallocation is necessary, 84% ($8,000/$9,500) of the debt and the interest expense is allocated for investment. Additional allocation rules. For more information about allocating interest expenses, see Chapter 8 of Publication 835. Interest on margin accounts. If you are a cash-basis taxpayer, you can deduct interest on margin accounts as investment interest in the year you paid it. You are considered to have paid interest on these accounts only when you actually pay the broker or when the interest becomes available to the broker through your account. Receipts for the payment of interest may become available in your account when the broker collects dividends for interest for you account, or sells securities held for you or received from you. But also see "Interest Expense and Carrying Charges" under "Straddles" in Chapter 4. Yes, I took a little liberty with the passages in [brackets] above! :) Note, too, that there is a limit to investment interest that can be claimed in a tax year. You will need Form 4952 - "Investment Interest Expense Deduction" to figure your deduction UNLESS you meet ALL of the four requirements below: 1) Your only investment income was from interest or dividends. 2) You do not have any other deductible expenses directly connected with the production of that income. 3) You r investment interest expenses is not more than the total of that income. 4) You have no carryovers of investment interest expense from the previous year. Hope this helps. :)