Betty borrows $30,000 and uses the proceeds as follows: $10,000 to purchase stoc

Question

Betty borrows $30,000 and uses the proceeds as follows: $10,000 to purchase stock, $15,000 to purchase a new car, and $5,000 to purchase tax-exempt securities. Interest paid on the loan for the year was $3,600. How should this interest be reported on the tax return? A. Report S1,200 as investme B. Report S1800 as nondeductible personal interest and $1,800 as investment interest expense C. Report $3,000 as investment interest expen ent interest expense: $2,400 is nondeductible S600 is niondeductible o D. Report $3,600 as investrment interest expense

Explanation / Answer

Loan amount = $30,000

Interest = $3,600

Therefore,

Interest in respect of loan amount used to purchase stock that is not tax-exempt = $3,600 x $10,000/$30,000 = $1,200

Interest in respect of loan amount used to purchase car = $3,600 x $15,000/$30,000 = $1,800

Interest in respect of loan amount used to purchase tax-exempt securities = $3,600 x $5,000/$30,000 = $600

Now,

Interest in respect of loan amount used to purchase car and tax-exempt securities are nondeductible.

Thus,

Report $1,200 as investment interest expense and $2,400 ($1,800 + $600) is nondeductible.

The correct answer is A.

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