🎯Interest deduction on Schedule A T/F

Responses

1. 

   Lidiya Kovaleva 7 February 2025

   Question 3. The deduction of points is only allowed if the buyer is acquiring his personal residence. But if the buyer is acquiring his second residence and paid points. Could he capitalize it and spread out over the loan’s duration? Thank you!

   1. 

      Maroun, CPA 15 February 2025

      Hello Lidiya,

      Yes, if a taxpayer pays points on a loan for a second home, those points cannot be deducted immediately as they can for a principal residence. Instead, they must be capitalized and amortized over the life of the loan.

      This is because the IRS only allows an immediate deduction for points paid on a principal residence acquisition loan, while points paid on a second home or investment property must be spread out over the loan term.

      I hope this helps!

2. 

   Lidiya Kovaleva 7 February 2025

   Question 10. Jimmy cannot deduct investment expenses of $17,000, because these expenses were suspended. On tax return he will show investment income of $20,000. So he can deduct the whole amount of investment interest expenses of $8,000. I think so. Why it is not right?

   1. 

      Maroun, CPA 15 February 2025

      Hello Lidiya,

      Investment expenses are not suspended; rather, they are deducted when computing net investment income (NII) for the purpose of the investment interest expense deduction. The correct calculation follows:

      Net Investment Income = Gross Investment Income – Investment Expenses
      $20,000 – $17,000 = $3,000

      Since the investment interest expense deduction is limited to net investment income, Jimmy can only deduct $3,000 of his $8,000 investment interest expense, not the full amount. The remaining $5,000 of interest expense is carried forward to future years until it can be deducted against sufficient net investment income.

      Could you please let me know where you learned that investment expenses are suspended? I’d be happy to clarify further!

      1. 

         Lidiya Kovaleva 20 February 2025

         Hello

         If you rewatch the video Interest Expense Deduction around the 1-minute Professor Farhat says that employees and investment expenses are suspended from 2018- 2025. This is where I learned that investment expenses are suspended.

         1. 

            Maroun, CPA 21 February 2025

            Hello Lidiya,

            Now I understand your concern and it’s valid.
            It all comes down to what kind of investment expenses you have. When Professor Farhat says “investment expenses are suspended,” he’s referring to certain “miscellaneous itemized deductions” (like investment advisory fees and custodial fees) that can’t be claimed as a separate deduction from 2018 to 2025. If the $17,000 of investment expenses fall under those suspended deductions, then they don’t reduce your net investment income for calculating how much investment interest expense you can deduct. In that case, you could deduct all of the $8,000 interest.

            However, if the $17,000 represents allowed expenses (for example, depreciation on an asset you use to earn investment income) instead of the suspended kind, then those expenses do reduce your net investment income—and that’s why you’d only be able to deduct $3,000 of interest, with $5,000 carried forward.

            I’ve updated the question because it should specify whether the expenses are the ones the law has “suspended”, or if they’re deductible. If they’re suspended, they won’t reduce your net investment income and won’t limit your interest deduction; if they’re not suspended, they do reduce your net investment income, which limits how much interest you can currently deduct.

            Thank you for pointing this out and keep up the great work!

3. 

   Joon Kim 11 January 2026

   Sometimes i get told by the bank that you can change your primary resident from one home to another if you live in the second home and claim that was primary. In that case, does the second home (that becomes the primary)’s points can be deductible?

   1. 

      Maroun, CPA 13 January 2026

      Hello Joon,

      The short answer depends entirely on when the home becomes your primary residence. To deduct the points in full in the year you pay them, the home must be your principal residence at the time you take out the mortgage.

      If you buy a home and move in immediately, making it your main home, then yes, you can generally deduct the points right away. However, if you originally buy the house as a second home or vacation property, you are required to spread the deduction of those points over the life of the loan (amortization).

      If you later decide to move into that second home and make it your primary residence, you cannot suddenly deduct the remaining points all at once. Since it wasn’t your primary home when the loan originated, you must continue to deduct the points slowly over the remaining years of the mortgage.

      I hope this distinction helps clarify things!