To get the best tax results, you need to know what interest is
deductible and what is not.
Interest is a fee for borrowing money. Tax-deductible interest reduces your cost of borrowing. Today’s low interest rates may make borrowing and refinancing attractive. But to get the best tax results, you need to know what interest is deductible and what is not. Here’s a brief rundown:
Business interest – You can deduct 100 percent of the interest paid on business loans.
Mortgage interest – As a homeowner, you can deduct mortgage interest on your first and second home. This includes interest on a boat or mobile home used as a second home. You can also deduct the interest on home equity loans (where available), regardless of how you used the loan funds. The interest deduction is limited to home mortgage debt up to $1 million and to home equity loans up to $100,000.
Investment interest – If you borrow money to buy investments, you can deduct interest to the extent of your investment income (interest, dividend, and capital gain income). Any disallowed deduction can be used to offset investment income in a future year.
Student loan interest – If you’re paying off college loans, up to $2,500 per year of interest is tax-deductible, subject to income limitations.
Passive activity interest – Passive activities include most rental activities and businesses that you don’t actively manage (for example, limited partnerships). You may be able to deduct interest on passive activity debt, but passive activity losses are limited.
Personal interest – You cannot deduct interest on personal debts, such as car loans, credit card debt, personal lines of credit, and other consumer loans. By consolidating your otherwise non-deductible loans into a home-equity loan, you may be able to deduct the interest. Realize that you stand to lose your home if you can’t make the loan payments.
If you would like planning assistance, please call our office.
Barbara Andres is a CPA and partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.
