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 being held as an investment. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid and deducted $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:
A) $95,000.
B) $18,000.
C) $17,500.
D) $13,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Raul's investment interest expense is limited to his net investment income, which is $18,000. He can also add the $5,000 deduction for real estate taxes to this amount, giving him a total investment interest deduction of $23,000. However, since he is married and filing jointly, the maximum amount of investment interest he can deduct is limited to 30% of his adjusted gross income (AGI), which is $190,000 ($95,000 investment interest expense + $18,000 investment income + $5,000 real estate taxes + $4,500 net long-term capital gain). Thus, his maximum investment interest deduction for the year is $57,000 ($190,000 x 30%). Since he already used $23,000 of that, he can only deduct an additional $17,500 ($57,000 - $23,000) of investment interest expense. Therefore, the correct answer is (C) $17,500.

Raul Is Married and Files a Joint Tax Return