[jessanqi]

Hi,
A is the answer for the below question.

Investment interest expense is limited to the amount of net investment income.
According to Wiley textbook, net investment income include interest,rents,dividends and royalities, why rental income can not be included? can someone please kindly help! I’m confused.

Thank you in advance!!

An individual taxpayer reports the following information:

U.S. Treasury bond income $100

Municipal bond income $200

Rental income$500

Investment interest expense $1,000

What amount of investment interest can the taxpayer deduct in the current year?

a. $100

b. $1,000

c. $300

d. $800

[murano]

Can anyone explain the answer?

[Anonymous]

The answer is a) $100. Net investment interest behaves in the same way that gambling losses do – deductible up to the point of winnings (investment interest). In this instance U.S. treasury income is the only investment income as rent will appear on Schedule E and the municipal bond income isn't includable in income.

[murano]

can anyone explain this to me?
according to irs,
“8. What is included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). ”
so why is rental income is not considered in that question?

[Anonymous]

Hi Murano, the confusing part is that there are different types of net investment income for different purposes. I believe the definition you used if for purposes of the net investment income tax under §1411, not for purposes of investment interest deduction.

Net investment income for purposes of deducting investment interest is going to be portfolio income ie interest, dividends, capital gains less other investment expenses. (You have to deduct other investment expenses before you can deduct any interest). Rents are considered “passive” income not portfolio income, therefore they are not “investment income” for purposes of investment interest. Obviously, the municipal interest does not count either as it is tax-exempt.

[murano]

@Chandler
thanks for the explanation, again！ ：）

[Author]

Replies