Investment interest is interest paid to buy or carry investments such as raw land, stocks, etc. It is not interest on a home, rental activity or on business activity.
Investment interest paid during the year is deductible to the extent of the taxpayer?s net investment income. Investment income includes interest, dividends and capital gain on sale of investment assets. However, any income that would get the preferential 15% rate (long term capital gains and qualifying dividend income) are not included in investment income.
Any investment interest expense that could not be deducted in the current year may be carried forward to be used in future years.
An election is available to include long term capital gain and qualifying dividend income in investment income, thereby increasing the amount of the deduction for investment interest paid. The cost of making that election is that the long-term capital gain and qualifying dividends are then taxed at ordinary income tax rates.
The election to include long-term capital gain and qualifying dividends in ordinary income should be considered when the increased current deduction has more value than the benefit of using the preferential rates. That is typically the case in the following two situations:
The amount of other investment expenses is high so a very large amount of qualifying income is needed to get a small deduction
The amount of the investment interest expense carryover is large so that the time value of the investment interest deduction is greater than the difference in tax rates
Please call us if you have any questions about this election.
Morre & Company, LLP
Certified Public Accountants
1682 Novato Blvd, Suite 300
Novato, CA 94947 Phone: (415) 382-5600
