QUESTION:
David,
I read your Nov 2001 article on making your mortgage interest deductible,
and it makes great sense to me! I live in the US, and my question concerns
the form of the loan used for those expenses (investment in my case) that
make the interest deductible. For example, if I use a credit card for paying
these expenses, and that is the only thing I use that card for, will it
raise red flags with the IRS when I claim the interest on that card as a
deduction? Is a bank/credit union line of credit more acceptable to the IRS
for this purpose? If so, does it need to be at a different bank/credit union
than my other (non-deductible) lines of credit to avoid any question of
co-mingling of funds?
Thanks, Lxxxxxx
----------------------------------
david ingram replies:
I am flattered at your interest but you do not have the same problem in the
USA in general because you can borrow any amount up to the original purchase
price of the house and the interest is a Schedule A deduction.
However, you can use the techniques in that newsletter to get more
deductions in the USA because Credit card and other interest expense has not
been deductible in general in the US since they started phasing it out in
1986. Prior to 1986, ALL interest in the US was deductible, no matter what
the purpose was.
Today you do have to show source and application of funds so if you did use
a credit card to buy an investment and kept it for that purpose only, the
interest would be deductible on schedule A, C, E, or F.
In the USA, if you had paid $200,000 for a house and had $150,000 equity and
wanted to finance a new boat for $75,000, the loan would be deductible if
you increased the mortgage on the house, but if you borrowed $75,000
specifically to buy the boat and used the boat as security, the interest on
the boat would NOT be deductible.
Any loan you make for investment (a stock market portfolio as an example) is
also deductible in the US on Schedule A. If the loan was for a rental house
or a business, the interest would be deducted on the Schedule E or Schedule
C.
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