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B. Interest Deduction Limitations (Sec. 402 of the bill
and sec. 163(d) of the Code)
Present Law
In general
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Under present law, no limitation is imposed under
section 163(d) on the deductibility of either interest
on indebtedness incurred to purchase or carry
consumption goods, (i.e., personal (consumer)
interest), or interest on indebtedness incurred in
connection with the taxpayer’s trade or business. [H.
Rept. 99-426 at 296 supra, 1986-3 C.B. (Vol. 2) at
296.]
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Explanation of Provision
In general
The bill expands the scope of the interest
limitation, and alters the calculation of the amount of
the limitation. Under the bill, all nonbusiness
interest is subject to the limitation on deductibility,
including consumer interest and certain interest that
is not treated as investment interest subject to
limitation under present law. Nonbusiness interest
subject to the limitation under the bill does not
include interest on debt secured by the taxpayer’s
principal residence (to the extent of its fair market
value), and interest on debt secured by a second
residence of the taxpayer (to the extent of its fair
market value). Interest expense that is paid or
incurred in carrying on a trade or business (except for
interest attributable to certain limited business
interests not involving low-income housing), is not
subject to the interest deduction limitation under the
bill. [Id. at 298.]
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