AROUND THE COURTS
Line of credit replaced other loan – is the interest deductible
Interest expense on a loan or debt is deductible for income tax purposes if the loan is used for the purpose of earning income from a business or property.
In addition, there is a rule that states that if you take out a new loan to repay a previous loan that was used to earn income from a business or property, interest on the new loan is deductible.
The recent case of Wesley Brown dealt with these issues. There were a few contentious points. One of the main issues involved the taxpayer taking out personal loans from family members with no interest, to help him purchase an investment property. Subsequently, he used his line of credits to pay off the personal loans.
The personal loans to the taxpayer were at no interest, so there was no interest expense deduction he could claim. However, since he repaid some of those personal loans with his line of credits, which did require him to pay interest, the interest expense on the line of credits was deductible in computing his income.