Question

Research Problem 4. On March 5, 2016, Mr. and Mrs. Horton borrowed $100,000 against the equity in their personal residence with the loan secured by that home. For 2016 and 2017, they were able to deduct the interest expense on this loan as home equity interest expense [an itemized deduction on Schedule A (Form 1040)]. The Tax Cuts and Jobs Act of 2017 disallows this interest expense deduction for 2018 through 2025. The Hortons’ CPA has asked them to review their financial records for February and March of 2016. They discover that they sold Disney stock on February 20, 2016, and used the proceeds to purchase Microsoft stock. Why is their CPA asking them for this information? How might this stock purchase in March 2016 help them obtain a deduction for all or part of the interest paid in 2018 and later on this home equity loan?

• Partial list of research aids:

• Reg. § 1.163–8T.

• Notice 89–35, 1989–1 C.B. 675.

Use internet tax resources to address the following questions. Look for reliable websites and blogs of the IRS and other government agencies, media outlets, businesses, tax professionals, academics, think tanks, and political outlets.

Answer 1

Answer :

Reg. § 1.163–8T(c)(4) and (5) provides special 15-day rules for the interest tracing rules. Under this rule, for example, a taxpayer who receives debt proceeds deposited into a bank account can say that the debt proceeds were used for any expenditure made from that account within 15 days of the proceeds being deposited into the account. For example, assume that Joe borrows $25,000 from his bank on March 1 and the bank deposits the funds into Joe’s account. Joe uses the funds immediately to pay his personal credit card bills. As a result, the interest appears to be nondeductible personal interest expense. But assume that on March 5, Joe wrote a check on this account to pay $30,000 of his sole proprietorship (Schedule C) expenses. Under the 15-day rule, Joe can say that the debt proceeds really were used to pay the business expenses, making the interest expense on this loan deductible business interest expense.

Notice 89–35 modifies the 15-day rule to be a period of 30 days before and after the date loan proceeds are deposited into an account or received in cash. Also, the taxpayer may look at any account rather than only the account where the loan proceeds were deposited. As a result, the Hortons can say that the loan proceeds received on March 5, 2016, were used to purchase the Microsoft stock they acquired on February 20, 2016, to the extent of that purchase price. The interest on that much of their home equity loan will produce investment interest expense.