Question

eorge 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 $37,000 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, 2018, he decided to invest $22,200 in stock and to use the remaining $14,800 to purchase a four-wheel recreation vehicle. George is unsure how he will treat the interest paid on the $37,000 loan. In 2018, George paid $2,220 interest expense on the loan. (Hint: Visit www.irs.gov and consider IRS Publication 550.) What amount may he deduct as interest in 2018?

Answer 1

Total interest for the year = 2,220

Interest allocable to amount invested in stocks = 2,220 * 22,200/37,000 = 1,332

Interest on amount allocable to investments are treated as investment interest expense.

Investment interest expense of 1,332 is deductible itemized deduction. Remaining interest expense of $888 is personal in nature and not deductible