Tax Facts

3668 / Is interest paid on amounts borrowed to fund an IRA deductible?

The IRS has ruled that interest paid on amounts borrowed to fund an IRA is not allocable to tax-exempt income ( Q 3652). Therefore, the deduction of such interest is not subject to the general prohibition against deducting interest incurred or carried to purchase tax-exempt assets.1 Because such interest is “on amounts borrowed to buy or carry property held for investment,” it would seem that it should be classified as “investment interest expense” and the deduction limited.

Interest paid on money borrowed to buy property held for investment is investment interest. Such interest is deductible but generally limited to the taxpayer’s net investment income for the year.2 Generally, interest incurred to produce tax-exempt income is not deductible.

Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Investment property also includes an interest in a trade or business activity in which the taxpayer did not materially participate (other than a passive activity).3

1.   Let. Rul. 8527082. See IRC §§ 163(a), 265.

2.   IRC § 163(d).

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