Mr. Tolen made the following interest payments. Determine the extent to which he

Question

Mr. Tolen made the following interest payments. Determine the extent to which he can deduct each payment on his Form 1040.

a. $4,600 on credit card debt.

b. $14,100 on a $210,000 mortgage secured by his vacation home in Key West. Mr. Tolen incurred the mortgage to purchase this second home.

c. $1,300 on a $22,000 unsecured loan from a credit union. Mr. Tolen used the loan proceeds to add a boat dock to his Key West home.

d. $3,700 on a $100,000 unsecured loan from his mother-in-law. Mr. Tolen used the loan proceeds as working capital for his business as an independent insurance agent.

e. $2,400 on a $50,000 loan from a bank. Mr. Tolen used the loan proceeds to purchase an interest in Farlee Limited Partnership, which is his only investment asset. This year, Mr. Tolen was allocated a $790 ordinary loss from the partnership.

f. $800 in a $35,000 loan from a car dealership that financed the purchase of Mr. Tolen’s new family automobile.

Explanation / Answer

A. $4,600 on credit card debt

Types of interest not deductible include personal interest, such as:

Hece this Interest is not deductable.

B. $14,100 on a $210,000 mortgage secured by his vacation home in Key West. Mr. Tolen incurred the mortgage to purchase this second home.

If you use the place as a second home—rather than renting it out—interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home.

You can write off 100 percent of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home.) The rules that apply if you rent out the place are discussed later.

Hence if your total mortgage loan is with in the limit of $ 1.1 Million, hence it is deductable.

C. $1,300 on a $22,000 unsecured loan from a credit union. Mr. Tolen used the loan proceeds to add a boat dock to his Key West home.

You can deduct home mortgage interest if all the following conditions are met. You file Form 1040 and itemize deductions on Schedule A (Form 1040). The mortgage is a secured debt on a qualified home in which you have an ownership interest.

Hence unsecured loan interest is not deductable.

D. $3,700 on a $100,000 unsecured loan from his mother-in-law. Mr. Tolen used the loan proceeds as working capital for his business as an independent insurance agent.

Interest you pay on business loans is usually a currently deductible business expense. It makes no difference whether you pay the interest on a bank loan, personal loan, credit card, line of credit, car loan, or real estate mortgage. Nor does it matter whether the collateral you used to get the loan was business or personal property. If you use the money for business, the interest you pay to get that money is a deductible business expense. It’s how you use the money that counts, not how you get it. Borrowed money is used for business when you buy something with the money that’s deductible as a business expense.

Hence interest on this loan is deductable

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