Is interest paid for credit card cash advance tax deductible as investmentment interest?
Question:
Answer:
No, that would not be deductible. You must take out a loan for the express purpose of purchasing an investment. The deduction is primarily intended for margin accounts but a loan that pledges the investment as security would be deductible. A credit card cash advance would not be deductible since it cannot be tied to the investment.
According to the interest tracing rules, this interest is deductible as investment interest. This is assuming that you literally used the proceeds of the cash advance to purchase the stock. There is no requirement that investment interest be secured by the investment. (Qualified home mortgage interest must be secured by the home, but that is a different animal.)
Assuming that your credit card debt does NOT get paid off, you will need to keep track of the stock you purchased with the loan. If you sell the stock and do not use the proceeds to purchase another investment, the credit card debt will become nondeductible personal interest from that point forward.
Investment interest paid is only deductible to the extent that you have investment income during the year. The portion that is not deducted gets carried forward to following years. The portion that is deductible gets carried to Schedule A, Itemized Deductions, and is limited by those rules.
The link below is to Form 4952, Investment Interest Expense Deduction.
Incidentally, margin interest is NOT automatically deductible as investment interest. If, for example, you use a margin loan in your brokerage account to purchase a cruise, that interest is personal, nondeductible interest.
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