Interest deductible for investment interest income?

[user17701421036]

If I borrow with a personal loan and lend that money to real estate developers (flippers) for fixed interest income, is the interest I pay for the personal loan deductible?  

[LaShaunA3]

Yes, interest you pay on a personal loan is deductible if the borrowed funds are used for investment purposes, such as the situation you described. 

Under IRC guidelines, this would be treated as investment interest expense and is deductible on Schedule A as an itemized deduction, limited to your net investment income. It can't exceed your investment income for the year, but any excess carries forward.

There are some key requirements:

• You must be able to trace the loan proceeds directly to the investment through clear documentation. 
• The income you earn must be taxable investment income (not tax-exempt).
• The deduction is only available if you itemize deductions.

For more information, see Publication 550, Investment Income and Expenses

[user17701421036]

Thank you.  What about the passive activity thing?

What if I invest through my "business"?   Can I deduct the interest then even if I don't itemize?  What actually constitutes a business?   I also rent out an investment property and have a registered business for that.   

[CesarJ]

Simply having a registered business doesn't automatically make something a trade or business for tax purposes. The IRS looks at what the activity is, not just whether you formed an LLC.

• If you are actively running a trade or business (Schedule C activity), interest related to the business is generally deductible on Schedule C and does not require itemizing.
• If the activity is a rental property, that is typically reported on Schedule E and is usually considered a passive activity unless you qualify as a real state professional.  
• Rental property is usually passive unless you materially participate,  which affects how losses are treated, but it doesn't automatically prevent ‌interest from being deducted.
• It just means losses may be limited depending on income and level of participation.

@user17701421036