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Gerri A Harrison CFP EA
Gerri A Harrison CFP EA, Enrolled Agent
Category: Tax
Satisfied Customers: 252
Experience:  27 years of preparing income tax returns - both personal and small business
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I have interest I am paying on a loan that I used specifically

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I have interest I am paying on a loan that I used specifically for investments. Specifically, I was reloaning it at a higher rate on secured loans with a group of other investors. We ended up reposesing some property and had some rental income on it for a while. It was then sold. Since there was some rental income and expense, there was also some depreciation on the home. In 2010 the property was sold and gain was calculated on Part 2 of form 4797 using TurboTax Home & Business (Sales of Business Property). On form 4952 (Investment Interest Expense Deduction), I have the interest amount and some disallowed interest from 2009 as well. TurboTax does not put the gain from the sale of the property on this form, so much of this interest is showing as disallowed.

My question is - Can I put the amount from my form 4797 Line 18b on form 4952 Line 4d so that my investment property gains can be used to offset the interest expense.

Thanks,
Jim
Submitted: 3 years ago.
Category: Tax
Expert:  Gerri A Harrison CFP EA replied 3 years ago.

Likely what is happening is the gain on the 4797 is carrying to Schedule D as capital gain income. Capital gain income is not allowed to be used in the definition of "investment income" when determining the deductibility of investment expense. The reasoning being that capital gains are taxed at a lower rate.

 

If on your 4797 you have any recapture of depreciation in Part II that is considered ordinary income and could be added as investment income for purposes of determining the deductibility of the interest expense.

 

So - if you gain is in Part I or Part III on the 4797, it cannot be used in determining investment expense. If it is Part II it can be used.

 

Hope that clarifies. If you have a further question, please hit the need info button and ask. If you are satisfied with the answer please hit the green accept button to close out the question and allow me to receive payment.

Gerri A Harrison CFP EA, Enrolled Agent
Category: Tax
Satisfied Customers: 252
Experience: 27 years of preparing income tax returns - both personal and small business
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