- 69 -
Prior Law
* * * * * * *
Other interest
Under prior law, no limitation was imposed under
section 163(d) on the deductibility of interest on
indebtedness incurred for other purposes, e.g. to purchase
or carry consumption goods. Under prior and present law,
interest on indebtedness incurred in connection with the
taxpayer’s trade or business is also not subject to the
limitation on the deductibility of interest expense under
section 163.
Reasons for Change
* * * * * * *
Personal interest
Prior law excluded or mismeasured income arising from
the ownership of housing and other consumer durables.
Investment in such goods allowed consumers to avoid the tax
that would apply if funds were invested in assets producing
taxable income and to avoid the cost of renting these items,
a cost which would not be deductible in computing tax
liability. Thus, the tax system under prior law provided an
incentive to invest in consumer durables rather than assets
which produce taxable income and, therefore, an incentive to
consume rather than save.
* * * * * * *
Explanation of Provisions
In general
In general, under the Act, personal interest is not
deductible, and the deduction for investment interest is
limited to investment income for the year with an indefinite
carryforward of disallowed investment interest. The
personal interest limitation does not apply to interest on
debt secured by the taxpayer’s principal residence (to the
extent of its basis plus the amount of such debt used to pay
certain educational or medical expenses) and interest on
debt secured by a second residence of the taxpayer (to the
Page: Previous 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 NextLast modified: May 25, 2011