Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 22

Interest Payments

Interest paid on personal debt generally is not deductible unless the debt is qualified home mortgage debt or a qualified student loan. Interest on personal loans, such as revolving credit agreements or credit cards, cannot be deducted.

Interest related to investments may be deductible up to set limits (generally, the amount of investment income). Interest related to a trade or business may also be deductible.

The deductibility of interest expense depends on how the proceeds of the related loan are used. For example, interest on a personal loan used to make a taxable investment is treated as investment interest, not personal interest, and may be deductible. However, interest on a margin loan (borrowing against investments held in a brokerage account) used to take a vacation is nondeductible personal interest.

Home Mortgage Interest

Interest paid on acquisition debt is deductible. Acquisition debt is debt that is incurred to buy, build, or substantially improve a principal residence (main home) or a second home belonging to the taxpayer. Except for grandfathered loans (loans that were taken out on or before October 13, 1987), only the interest on a mortgage up $1 million ($500,000 if married filing separately) can be taken into account. There is no dollar limit on the amount of the interest that can be deducted.

Similarly, interest on home equity debt, including lines of credit secured by the home, may be deductible regardless of how the proceeds are ...