Investment Interest Expense Deduction

§ 163. Interest(a) General ruleThere shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. (b) Installment purchases where interest charge is not separately stated(1) General ruleIf personal property or educational services are purchased under a contract—(A) which provides that payment of part or all of the purchase price is to be made in installments, and (B) in which carrying charges are separately stated but the interest charge cannot be ascertained, then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term “educational services” means any service (including lodging) which is purchased from an educational organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization. (2) LimitationIn the case of any contract to which paragraph (1) applies, the amount treated as interest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year. (c) Redeemable ground rentsFor purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage. (d) Limitation on investment interest(1) In generalIn the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year. (2) Carryforward of disallowed interestThe amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. (3) Investment interestFor purposes of this subsection—(A) In generalThe term “investment interest” means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment. (B) ExceptionsThe term “investment interest” shall not include—(i) any qualified residence interest (as defined in subsection (h)(3)), or (ii) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer. (C) Personal property used in short saleFor purposes of this paragraph, the term “interest” includes any amount allowable as a deduction in connection with personal property used in a short sale.