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Tax Law (Questions About Taxes)/Investment interest expense deduction issue

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QUESTION: Assume a taxpayer derives all of his income from investments.  He has a broker margin loan, which funds some of the investments and all of his income tax payments, but no other expenses.  Can all of the interest resulting from the margin loan be deducted as an investment interest expense?

I know that the general rule is that interest expenses are supposed to be allocated between investment and personal interest expenses.  However, the tax code and treasury regulations appear to me to be somewhat ambiguous on my particular question.

26 CFR 1.163-8T - Allocation of interest expense among expenditures (b)(3) could be interpreted to answer the question in the affirmative.  Since (b)(3) states:

“Investment expenditure” means an expenditure (other than a passive activity expenditure) properly chargeable to capital account with respect to property held for investment (within the meaning of section 163(d)(5)(A)) or an expenditure in connection with the holding of such property.

and the taxes were solely a levy on the income obtained from the investment property, 100% of the interest expense should be deductible.

On the other hand, 26 CFR 1.163-9T - Personal interest (b)(1) lists interest expenses that are excluded from personal interest, and interest on loans to pay income taxes is not included.

ANSWER: Todd,

Thanks for your question.

You answered your question by citing this 26 CFR 1.163-9T - Personal interest (b)(1). This section explicitly includes interest on loans to pay income tax as personal interest, thus not deductible.  A specific prohibition overrides the general one in the first cite.

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: So just to be clear, NOT excluding something in a list of exclusions qualifies as a specific inclusion?

Answer
That's one of the problems with tax law.  You can say "always" in all cases. Not excluding it is not a specific inclusion, however.  A specific inclusion would have to mention it specifically.  By not excluding it, the assumption would generally be that it would be included, lacking any other guidance.

John Stancil, CPA

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

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I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

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FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

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DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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