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Tracking Down Interest Deductions


Is the interest you pay on borrowed funds tax deductible? As with many tax-related questions, the answer is, "It depends."

Different Types

Different categories of interest expenses have different deductibility rules.

Personal interest, such as interest paid by consumers on their personal credit cards, is generally not deductible.

Student loan interest of up to $2,500 is potentially deductible (requirements apply).

Qualified interest on home mortgages of up to $750,000. This applies to properties financed after December 15, 2017. Previously, the limit was $1 million. Interest paid on home equity loans and lines of credit are no longer tax deductible unless they are used to buy, build, or substantially improve the home that secures the loan.

Investment interest is deductible to the extent of "net investment income."

Trade or business interest is generally deductible in full.

Passive activity interest that is incurred in the course of business or income-producing activities in which you do not materially participate is generally deductible against passive activity income (but rules limit deductions for losses from passive activities).

Tracing

Determining whether interest is deductible may require tracing the loan proceeds to their ultimate use. For example, if you take out a loan secured by business property but then use the entire proceeds to purchase a car for your personal use, the interest on the loan is considered nondeductible personal interest, even though business property is the security for the loan. The rules for matching debt with expenses can get more complicated if you commingle loan proceeds with other, non-loan assets, such as a personal savings account.