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Tax Law

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Business Glossary

Definitions for: interest deductions (under current tax law)
interest deductions (under current tax law)

Investment Interest. Investment interest deductions are limited to net investment income, which includes interest, dividends, long-term capital gains and income or loss from working interests in oil and gas interests. However, net investment income includes neither rental nor other passive activity income or loss, nor interest paid to buy an ownership in a passive activity.

Construction Interest. Interest incurred during the construction and development of most real estate (but not a personal residence) must be capitalized, and deducted over its depreciable life beginning when the property is ready to be placed in service or sold.

Business Interest. Interest incurred in an active trade or business in which the investor materially participates is fully deductible.

Housing Interest. Interest on up to $1 million of acquisition debt (used to purchase or improve a home) plus $100,000 of home equity debt is tax deductible. This may be claimed for a principal residence plus one vacation home (provided the owner used it personally for the greater of 14 days or 10% of the time it is rented). Debt incurred before October 13, 1987, is not subject to the $1 million limit.

Points paid on a mortgage to acquire a principal residence may be deductible if they are customary in the geographic area; points paid for other purposes such as refinancing are amortized (deducted evenly each year over the life of the loan) rather than deducted currently.

Consumer Interest. Interest on credit cards and auto loans is not deductible.

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