Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is:

Question

Quizplus · Accepted Answer

The investment interest deduction cannot exceed net investment income, which is the sum of investment income ($18,000) and net capital gains ($4,500) minus investment expenses (which includes the investment interest expense of $95,000 and any other expenses related to producing investment income).

Therefore, Raul's net investment income is $18,000 + $4,500 - $95,000, which equals -$72,500 (a negative number because the investment expenses exceed the investment income).

Since the net investment income is negative, Raul's investment interest deduction is limited to the amount of investment income generated for the year, in this case, $18,000. However, because Raul is subject to the phase-out rules for investment interest expense, his maximum investment interest deduction for the year is limited to 30% of his adjusted gross income, which is not provided in the question.

So, the correct answer is C) $17,500, which is the lesser of the two limits.

Raul Is Married and Files a Joint Tax Return