Investment Interest

[solomon]

Do the tracing rules in Reg. 1.163-8T apply to investment interest? For example, a person buys a piece of land to hold for appreciation and eventual sale - it is not generating investment income. However, this person has substantial dividends and interest income from stocks and bank accounts.

Do the dividends and interest income apply to the investment interest being paid on the piece of land? Thanks.

Assuming the interest paid on the land as an investment is deductible and is deducted for a few years, what happens if in a few years the person decides to build a qualified residence on it.

[Chief]

Solomon

You raise an in interesting point.
I would be interested in conversing with you about software thru email. My email address is

affordabletaxes@tampabay.rr.com

I'll wait on some other responses on your original question, however.

[JAinNC]

Solomon,
Interest paid on land held for investment can't be deducted. The interest expense must be capitalized and is added to the basis of the land.

Jeannie

[solomon]

Jeannie

I don't doubt you but would you cite Code or a Reg.? I know it is permissible to do that under Sec. 266 but in this case he does not want to capitalize it.

[JG EA]

Solomon,
Interest paid on land held for investment can't be deducted.

Then what do you do with Form 4952?

The interest expense must be capitalized and is added to the basis of the land.

Jeannie

Must be? Rather an election must be made to do it. It would be nice if it "must be" then everyone who sells a piece of land and didn't take any deductions through the years we could reconstruct it and take it all off on the end. Well, no we can't do that can we?

[solomon]

Jg

I agree it is deductible investment interest, but do the tracing rules apply?

[Kram BergGold]

tracing

Taxpayer borrows $20,000 on a home equity line of credit to buy land, then you could deduct as home equity debt or choose to file the election not to treat as home equity and trace to treat as investment interest to be deducted as such or capitalized if you make the election to capitalize. If the taxpayer already has 100k of home equity debt or the money was borrowed on a credit card then you just have to show the money was used to buy the land and then deduct as investment interest or capitalize. I hope my response is on target.

[solomon]

In this case

the land is mortgaged and secured by the land. My basic question is: this will be treated as investment interest if the tracing rules do not apply. He will have much interest and dividend income but does that income apply to the investment interest on the land. That is to say, Sec. 163(d) discusses net investment income which must exceed investment interest. Does "net investment income" apply to income from the land or does it include the dividend and interest income thus allowing the investment interest from the land to be deducted.

What troubles me is Reg. 1.163-8T clearly addressing investment interest in the context of Sec. 163(d).

[JAinNC]

Obviously I need to be doubted. Thanks for helping me learn.
I have been searching for my reference on that. And yes, I did not include that an election is required.

Cannot find the code or reg. -- But am I wrong in my interputation of "what property held for investment includes"? Page 4-13 TheTax Book ( right hand column - beginning one third way down) .... In the last sentence of the paragraph " It does not include an interest in a passive activity, except for certain oil or gas property ............. "


Is a parcel of land held with no activity and that does not produce interest, dividend, annuuity, or royalty income, considered a passive activity? I understood that real property held for investment falls under that meaning. I await corrections.

Jeannie

[solomon]

No

not a passive activity.

[Corduroy Frog]

Original Question

Solomon, I'm going to stick my neck out on your original question.

I believe the offset of investment interest and investment income
"nets out" - i.e. total investment interest is limited by total investment income.
I don't think the limit is applied piecemeal to individual investments.

The basis for my answer is not any specific knowledge of a cite which allows
this to be done. Instead, the basis for my answer is based on not knowing a
cite which disallows it. So I wouldn't place a lot of confidence in this answer.

If this client were my customer, I would deduct interest on the land even though
there is no income from the land. Provided there was enough interest and dividends to
accommodate.

[JG EA]

Just take it a little more simply.

Form 4952 instructions:

If you are an individual, estate, or a trust, you must file Form 4952 to claim a deduction for your investment interest expense.
Exception. You do not have to file Form 4952 if all of the following apply.
Your investment income from interest and ordinary dividends minus any qualified
dividends is more than your investment interest expense.
You do not have any other deductible investment expenses.
You do not have any carryover of disallowed investment interest expense from 2005.

So, it doesn't have anything to do with the thing that has interest is the same thing that has income.

Maybe your use of tracing is different than we are thinking. It occurs to me you are saying tracing has a relationship with income and interest. Usually when the word "tracing" is used it means tracing a particular loan to a particular endeavor or property. (As Kram was explaining.)

[solomon]

Kram & JG

Thanks much - your responses turned on the light for me. I was trying to read too much into the tracing rules. And thanks to Frog too - all helpful.