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Interest allocated to a passive activity within the meaning
of section 469 will be taken into account in determining the
income or loss from such activity and, therefore, is not subject
to the limitations of section 163(h). Sec. 163(h)(2)(C).
However, the interest expense will be subject to possible
disallowance under the passive activity loss limitation of
section 469.
For the purposes of applying the passive loss limitation of
section 469 and the nonbusiness interest limitations of section
163(d) and (h), section 1.163-8T, Temporary Income Tax Regs., 52
Fed. Reg. 24999 (July 2, 1987), prescribes rules for the proper
allocation of an interest expense. In general, an interest
expense is allocated in the same manner as the related debt is
allocated; i.e., tracing the proceeds of the debt. Sec. 1.163-
8T(a)(3), Temporary Income Tax Regs, supra. Section 1.163-
8T(c)(1), Temporary Income Tax Regs., 52 Fed. Reg. 25000 (July 2,
1987), provides:
Debt is allocated to expenditures in accordance with
the use of the debt proceeds and, except as provided in
paragraph (m) of this section, interest expense
accruing on a debt during any period is allocated to
expenditures in the same manner as the debt is
allocated from time to time during such period. Except
as provided in paragraph (m) of this section, debt
proceeds and related interest expense are allocated
solely by reference to the use of such proceeds, and
the allocation is not affected by the use of an
interest in any property to secure the repayment of
such debt or interest. * * *
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