Tony is married and files a joint tax return for 2012. He has investment interest expense of $95,000 for a loan made to him in 2012 to purchase a parcel of unimproved land. His income from investments [dividends (not qualified) and interest] totaled $18,000. Tony paid $3,600 of real estate taxes on the unimproved land. Tony also has a $4,500 net long-term capital gain from the sale of stock held as an investment. Calculate Tony's maximum investment interest deduction for 2012.

Question

Quizplus · Accepted Answer

The maximum investment interest deduction that Tony can take for the year is limited to his investment income of $18,000 plus $3,600 in real estate taxes, which equals $21,600. However, Tony also has a net long-term capital gain of $4,500, which is taxed at a lower rate than his investment income. Therefore, he can't use the entire deduction and is limited to $18,900 ($21,600 - $2,700).

Tony Is Married and Files a Joint Tax Return for 2012