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Category: Finding Deductions

What CANNOT be included as an investment interest expense?

Investment interest expense does not include any of the following:

  • Home mortgage interest
  • Interest expense that is properly allocable to a passive activity.  Generally, a passive activity is any trade or business activity in which you do not materially participate.
  • Any interest expense that is capitalized, such as construction interest subject to section 263A.
  • Interest expense related to tax-exempt interest income under section 265.
  • Interest expense, disallowed under section 264, on indebtedness with respect to life insurance, endowment, or annuity contracts issued after June 8, 1997, even if the proceeds were used to purchase any property held for investment (see below).

Property held for investment:  Property held for investment includes property that produces income, not derived in the ordinary course of a trade or business, from interest, dividends, annuities, or royalties.  It also includes property that produces gain or loss, not derived in the ordinary course of a trade or business, from the disposition of property that produces these types of income or is held for investment.  However, it does not include interest in a passive activity.