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Using investment income to offset investment interest

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  • Using investment income to offset investment interest

    My husband and I took out a loan to buy-in to a surgery center, and over the course of the year we paid $6,200 in interest on the loan. It's my understanding that the interest is only deductible as an offset to investment income. Please forgive my naiveté, but how can I find out if we have any investment income to apply to this? We have our retirement accounts (I assume that's no help here) and a small taxable account with Betterment. We also got distributions from the surgery center each quarter, which I'm assuming will be reported on a K1. Would I have to sell my Betterment investments to get the "investment income"? And if so, wouldn't the tax I'd pay on the gains offset any potential benefit?

  • #2
    It's complicated, no apologies necessary. Retirement account distributions don't count. If you invested in a passive activity (say, the SC is an investment only, in which you don't materially participate), you can deduct the interest only against income from the passive activity and you must itemize to do so. Otherwise, you can use your investment interest expense to reduce income from interest and ordinary dividends.

    You can elect to use capital gains and qualified dividends to reduce investment income. If it works out that you elect to use gain from your Betterment account, you are electing to have qualified dividends and LTCG taxed at your top marginal rate instead of the preferable lower tax rates. You wouldn't pay tax on the gains if you sell only enough to yield $6,200 in LTCG.

    This is a year you probably should consult with an experienced CPA.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Thanks so much @jfoxcpacfp. We're meeting with our CPA in March, and I'm trying to bone up on the topic as much as possible before then.

      It seems like the active income vs. passive income issue is complicated. FWIW, my husband is a partner in a private practice. He does cases at the SC (as well as another hospital), but the dividends we get each quarter aren't directly tied to how many cases he does there. (I could see it argued either way... if he does more cases, the SC makes more money and our distributions are higher.) From a tax perspective, is it more advantageous for the SC income to be classified as active or passive?

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      • #4


        From a tax perspective, is it more advantageous for the SC income to be classified as active or passive?
        Click to expand...


        This really depends on your specific situation - how you can make the best use of the deductions and income. Passive v. Active v. Investment v. Non-investment is one of the most complex areas of tax planning (imo). For questions beyond the basics, I still have to refresh my memory on the rules every time the topic comes up. My partner, Laura, is better with this area. And probably @spiritrider, too  !
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          This is a great thread for me. I am in a similar situation in that I'm carrying forward "investment losses" from the accumulated interest I've paid so far on my practice buy-in loan over the past 3 years. I have now paid the loan off. We are an S corp. I was told by my local CPA that this carries forward indefinitely and can be used to offset realized capital gains (from my taxable account) and/or dividends. My plan was to carry this forward until I'm ready to sell some taxable account assets.

          However, she sent me a text today that her impression of the new tax law is that these accumulated "losses" won't be able to be carried forward anymore into 2018, although guidance has not yet been released. I'm really hoping she's wrong on this! Any other knowledgable CPA's out there have an update?

           

           

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