Question

Each of the following independent cases involves interest payments and the issue is interest deductibility.

Case A: Abby Brown borrowed $ 250,000 and invested the entire loan proceeds in publicly traded securities. After 5 months, the securities’ value dropped to $ 150,000. At this point, Abby Brown sold the securities and used the proceeds to reduce the loan to $ 100,000. Since she no longer owns the securities, can Abby Brown deduct the interest on the remaining loan amount of $ 100,000? Explain your conclusion.

Case B: Bob Corner owned securities that had a current fair market value of $ 500,000. Using his margin balance available from his stockbroker, he borrowed $ 55,000 to finance a necklace purchase to give to his mother. During the time period when the margin loan was outstanding, he paid $2,000 interest on it. Can he deduct this interest against the $ 11,000 income earned during this period on his securities? Explain your conclusion.

Case C: Carrie Down borrowed $ 75,000 and used the funds to acquire an income producing property. She then sold the property for $ 190,000. She used the proceeds to acquire two properties: property A cost $ 50,000 and property B cost $ 140,000. How will the $ 75,000 in borrowing be linked to the two properties?

Case D:Donald East borrowed $ 300,000 and used the funds to purchase an income producing property. Later on, he sold the property for $ 140,000. He used the $ 140,000 to acquire two properties: property A cost $ 40,000 and property B cost $ 100,000. How will the $ 300,000 in borrowing be linked to the two properties?

Answer 1

CASE A: Abby borrows $250000 and invested in public traded securities ,here after 5 months securities value were dropped to 150000 even abby will lost it's interest deductibility on $100000.

CASE B: Absolutely the answer is NO ,Because when a loan has been taken for investments on securities purpose interest payable on such loan shall be deductible from any income arising from securities invested ,then if there is any purpose is changed i.e if a loan taken for the purpose of personal needs and if any interset payabel on such loan shall not be deductible from income arising from securities.

CASE C: Here there are loan has been taken for income producing property of $75000 then it has been sale for $190000 ,such proceeds when invested on first property of $50000 shall be affected only , because aggregate of first one of which proceeds from income producing property has been invested in same similar properties.

CASE D: Here there are loan has been taken for income producing property of $300000 then it has been sale for $140000 ,such proceeds when invested on first property of $50000 shall be affected only , because aggregate of first one of which proceeds from income producing property has been invested in same similar properties.But here loan has taken $300000 but he has loss on sale of property of $160000 can be carryforwaded to the next year.