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Locked out of investment interest deduction

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. I have a client who bought a third home as an investment property. Can he take a tax deduction for the mortgage interest as investment interest, subject to the usual limitations? L.C.R., CPA, Swanzey, N.H.

A. No. First, the IRS doesn’t treat interest as “qualified” mortgage interest. Your client can deduct only interest on a loan secured by a principal residence and one other home on his personal return. Second, investment interest—which can be deducted up to the amount of net investment income—does not include mortgage interest or interest taken into account in computing income or loss from a passive activity. Tip: If the client is renting the property, it’s subject to the “passive activity” rules that limit losses. But the client still can use the mortgage interest to offset rental income.

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