Tax Facts

7649 / Are interest expenses deductible if market discount bonds are purchased or carried with borrowed funds?

If interest is paid on borrowing or is incurred or continued by the taxpayer in order to purchase or carry taxable market discount bonds, deduction of the interest expense may be subject to limitation and deferral.1 Certain short sale expenses (see Q 7529, Q 7530) may be treated as interest within this rule.2 See Q 8046 for details. Any amount deductible under these rules will also be subject to the general limit on the otherwise allowable deduction of investment interest (see Q 8040).

1.   IRC §§ 1277(a), 1278(a)(1)(C).

2.   IRC § 1282(c). See General Explanation–TRA ’84, p. 98.

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