Question

For 2018, Thomas, a single parent, reported the following amounts relating to his investments: Net investment income $ 7,000 Interest expense on a loan to purchase stocks 2,000 Interest expense on funds borrowed to purchase land for investment 6,000 What is the maximum amount that Thomas could deduct in 2018 as investment interest expense?

Answer 1

Answer: $7,000

Explanation: Thomas' gross income for the year was $7,000, which consists of investment income. However his total deductions were $8,000 (consisting of $2,000 interest expense on loan to purchase stock + $6,000 interest on borrowings to purchase land).

His deductions exceed his income by $1,000 ($7,000 income - $8,000 deductions). Thomas is not allowed to deduct so much expenses that it will put him in a negative position. I.e. He is limited to only deducting until his income is $0. Once he starts going below $0, and into negative figures, he needs to cap his deductions at $0 on income.

This means that since there is only $7,000 income available, he can only deduct $7,000 of his expenses for that given year. The remaining $1,000 deductions can be carried forward to the next year where it can then be deducted.