Jorge received a stock tip from a longtime friend Since he d

Jorge received a stock tip from a long-time friend. Since he did not have enough cash on hand to invest, Jorge decided to take out a $20,000 loan in order to buy the stock. The loan terms were 8 percent interest with interest-only payments due each year for five years. At the end of the five-year period the entire loan principal is due. When Jorge closed on the loan on April 1, 2017, he decided to invest $16,000 in stock and to use the remaining $4,000 to purchase a jet-ski. Jorge is unsure how he will treat the interest paid on the $20,000 loan. In 2017, Jorge paid $1,200 interest expense on the loan. For tax purposes, how should he treat the 2017 interest expense? (Hint: Visit www.irs.gov and consider IRS Publication 550)

Solution

As per IRS publication 550 when a person borrows money for both personal and investment purpose than you need. So for investment interest only the portion of loan taken for investment is deducted. The interest expenses deducted would be calculated as First % portion of investment will be calculated 16000/20000*100 80 % Interest expenses 1200*80% 960 Answer For tax purpose $960 will be deducted and $240 (1200*20%) will not be deducted as it is for personal purpose