Question

George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The loan terms are 8 percent interest with interest-only payments due each year for five years. At the end of the five-year period the entire loan principal is due. When George closed on the loan on April 1, 2015, he decided to invest $16,000 in stock and to use the remaining $4,000 to purchase a four-wheel recreation vehicle. George is unsure how he will treat the interest paid on the $20,000 loan. In 2015, George paid $1,200 interest expense on the loan. (Hint: Visit www.irs.gov and consider IRS Publication 550.)
What amount may he deduct as interest in 2015?

Answer 1

Answer:

The amount may he deduct as interest in 2015 is $960.

Explanation:

As per the provision of IRS (reference to 550), any amount of interest due towards money borrowed for investment purposes (also known as investment interest) can be claimed as a deduction. Therefore, it becomes important to allocate the total amount of loan/borrowing between the amount utilized for personal/business purposes and investment purposes.

In the given case, George has borrowed $20,000, out of which $16,000 has been used for investment purposes, that is, 80% (16,000/20,000*100%), while the remaining 20% (4,000/20,000*100) is used for personal purposes (purchase of four-wheel recreation vehicle).   Out of the total interest of $1,200 (20,000*8%*9/12) due on the amount borrowed, $960 (1,200*80%) can be claimed as deduction (in the form of investment interest). The remaining $240 cannot be claimed as deduction.

Therefore, The amount may he deduct as interest in 2015 is $960.