163(a) Interest Deduction Intro

[Eric Williams]

In real estate there are plenty transfers with a promise to repay later.

However, to take an interest deduction under the IRC, it would be wise to remember that all deductions are created by the will of Congress. They expand and contract over time.

The key is that deductions are an allowance, meaning that we are allowed to deduct them only when we have met the conditions as provided in various authoritative sources.

163(a) provides our allowance for interest deduction for all amounts paid or accrued in the tax year on indebtedness.

The four basic requirements are:

1) It must constitute interest for tax purposes

2) The amount must be paid or accrued in the tax year

3) It must be paid on valid, existing indebtedness

4) The indebtedness must belong to the one seeking the deduction

Case law has defined interest as the amounts paid for the use, forbearance, or detention of money.

Paid or accrued refers to the method of accounting. Paid means there needs to be an actual cash outflow to claim a deduction, generally. Further, there are substantiation requirements that left undone have unraveled many debts and their benefits. Document!

A valid existing indebtedness is one that is an unconditional, existing, legally enforceable obligation to pay a fixed sum of principal. No valid indebtedness, no deduction.

The existence of a valid debt at the state level is generally respected at the Federal level per Bosch.

Following these won't guarantee anything but they increase the value of transactions simply by increasing the chance the benefits will be obtained.