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I receive distributions annually from a limited partnership.

If that is my only...
I receive distributions annually from a limited partnership. If that is my only income, is mortgage interest deductible against that category of income? (Trying to figure out if there is any reason why I would want to maintain a mortgage if I didn't have to...besides having cash to invest in other places)

As a side note, are limited partinership distributions considered passive income or unearned income (or are the two one and the same?)? And is passive income calculated as part of your "gross" income?
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9/28/2013
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4,778
Experience: 35 years tax experience, including four years at a Big 4 firm.
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Welcome to the site. I'm PDtax, and will be helping you today.

Mortgage interest is deductible as an itemized deduction, but only after you net your income from this LP and other sources on your 1040.

Limited partnership distributions are considered passive income and is part of your gross income. Unearned income can include this kind of distribution, and will include other investment types, such as interest and dividends.

Thanks for asking at Just Answer. Please advise if you need anything more, or leave positive feedback to close out your question. I'm PDtax.
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Customer reply replied 4 years ago
After I "net" the income? Are you saying for instance, that if I am in a 15 percent tax bracket, I will get a small benefit for this deduction whereas if I am in a 39 percent bracket I will receive a greater benefit? If not, what are the implications of what you are saying?

You also say lp distributions are passive and "can" be considered unearned income. Can you please clarify?
After I "net" the income? Are you saying for instance, that if I am in a 15 percent tax bracket, I will get a small benefit for this deduction whereas if I am in a 39 percent bracket I will receive a greater benefit? If not, what are the implications of what you are saying?

If your only income is a LP distribution, you can't match your mortgage debt against it unless you took out the mortgage specifically to make the LP investment. I meant that reporting your LP income and mortgage interest on your personal tax return (Form 1040) would give some netting. If you are in a low bracket, mortgage interest likely produces a marginal tax benefit at your bracket, so low income (15% bracket) will only allow low tax benefits (15%) with mortgage interest. Include the notion that a standard deduction is part of the math, and your mortgage interest may generate much less than the 15% bracket savings.

Standard planning advice suggests that having deductible mortgage interest is a good idea when you are in the higher brackets, such as 39%. I do not give this advice.

If your investment portfolio generates a higher return than paying off a mortgage, one can see the wisdom of retaining a net higher return. Since your question does not refer to higher portfolio returns, this is not applicable.

Unearned income is a larger class of income, and includes LP distributions as well as portfolio income, like interest and dividends. Unearned income is a more prominent class of income now because this income class will be subject to a Medicare 3.8% surtax. LP income like yours is also considered passive. Both passive and portfolio incomes are considered unearned.

Thanks again for asking at Just Answer.
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Customer reply replied 4 years ago
Thank you pdtax. For all intents and purposes, my only income is from various lp distributions. The mortgage is on my primary residence which has nothing to do with my lp investments. So, since I can't deduct this type of mortgage interest against that type of income, it doesn't make sense to have a mortgage if I can pay it off or down ( assuming money is sitting in cash gaining close to nothing at the moment). Did I get that right?

And, I'm going to get hit with an additional 3.8 percent tax for Medicare...because all of my income is also unearned :)
It makes sense to pay it down or off. Think of it as a risk-free return on your $. Paying off 4% mortgage debt is just like getting that return over the remaining life of the debt.

And, the 3.8% surtax does not apply to you unless your income is substantial ($200,000 or more as a single taxpayer). It applies only to high income taxpayers.

I hope that covers it for you. Positive feedback lets site management know you are pleased with my work and closes out your question.
PDtax
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