8529 / What types of interest are deductible?
Editor’s Note: The 2017 TCJA and 2025 OBBB substantially modified the rules governing the deductibility of business interest (see Q ), and limited the mortgage interest deduction to $750,000 ( Q 8537).
Whether or not interest is deductible depends on its classification as one of the following types of interest: (1) investment interest, (2) trade or business interest, (3) qualified residence interest, (4) interest relating to passive activities, (5) interest incurred on extended payment of estate tax, (6) interest on education loans or (7) personal interest. The deductibility of these seven types of interest is discussed in detail in Q 8530 to Q 8541.
The proper allocation of interest generally depends on the use to which the loan proceeds are put, except in the case of certain qualified residence interest. Detailed rules for classifying interest by tracing the use of loan proceeds are contained in temporary regulations.1
In some cases, the Code may specifically disallow the deductibility of interest. For example, no deduction is allowed for interest paid on a loan used to buy or carry tax-exempt securities.2 The rationale for the disallowance is to prevent the taxpayer from receiving an unwarranted double tax benefit (first, the exclusion of the interest from gross income; and, second, a deduction for the interest on a loan used to purchase the underlying tax-exempt security).
Interest expense that is deductible under the rules outlined in Q 8530 to Q 8541 may also be subject to the additional limitations on itemized deductions (unless it is investment interest, which is not subject to that provision). See Q for a discussion of the limits on itemized deductions.
1. Temp. Treas. Reg. § 1.163-8T.
2. IRC § 265.