§ 163. Interest
(a)
General rule
There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.
(b)
Installment purchases where interest charge is not separately stated
(1)
General rule
If personal property or educational services are purchased under a contract—
(A)
which provides that payment of part or all of the purchase price is to be made in installments, and
then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term “educational services” means any service (including lodging) which is purchased from an educational organization described in section
170
(b)(1)(A)(ii) and which is provided for a student of such organization.
(c)
Redeemable ground rents
For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage.
(d)
Limitation on investment interest
(1)
In general
In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year.
(2)
Carryforward of disallowed interest
The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year.
(3)
Investment interest
For purposes of this subsection—
(A)
In general
The term “investment interest” means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment.
(B)
Exceptions
The term “investment interest” shall not include—
(ii)
any interest which is taken into account under section
469 in computing income or loss from a passive activity of the taxpayer.
(4)
Net investment income
For purposes of this subsection—
(B)
Investment income
The term “investment income” means the sum of—
(i)
gross income from property held for investment (other than any gain taken into account under clause (ii)(I)),
(iii)
so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause.
Such term shall include qualified dividend income (as defined in section
1
(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.
(C)
Investment expenses
The term “investment expenses” means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income.
(D)
Income and expenses from passive activities
Investment income and investment expenses shall not include any income or expenses taken into account under section
469 in computing income or loss from a passive activity.
(E)
Reduction in investment income during phase-in of passive loss rules
Investment income of the taxpayer for any taxable year shall be reduced by the amount of the passive activity loss to which section
469
(a) does not apply for such taxable year by reason of section
469
(m). The preceding sentence shall not apply to any portion of such passive activity loss which is attributable to a rental real estate activity with respect to which the taxpayer actively participates (within the meaning of section
469
(i)(6)) during such taxable year.
(5)
Property held for investment
For purposes of this subsection—
(B)
Investment expenses
In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section
469.
(C)
Terms
For purposes of this paragraph, the terms “activity”, “passive activity”, and “materially participate” have the meanings given such terms by section
469.
(6)
Phase-in of disallowance
In the case of any taxable year beginning in calendar years 1987 through 1990—
(A)
In general
The amount of interest paid or accrued during any such taxable year which is disallowed under this subsection shall not exceed the sum of—
(i)
the amount which would be disallowed under this subsection if—
(ii)
the applicable percentage of the excess of—
(I)
the amount which (without regard to this paragraph) is not allowable as a deduction under this subsection for the taxable year, over
The preceding sentence shall not apply to any interest treated as paid or accrued during the taxable year under paragraph (2).
(e)
Original issue discount
(1)
In general
In the case of any debt instrument issued after July 1, 1982, the portion of the original issue discount with respect to such debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year.
(2)
Definitions and special rules
For purposes of this subsection—
(3)
Special rule for original issue discount on obligation held by related foreign person
(A)
In general
If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allowable as a deduction to the issuer until paid. The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(B)
Special rule for certain foreign entities
(i)
In general
In the case of any debt instrument having original issue discount which is held by a related foreign person which is a controlled foreign corporation (as defined in section
957) or a passive foreign investment company (as defined in section
1297), a deduction shall be allowable to the issuer with respect to such original issue discount for any taxable year before the taxable year in which paid only to the extent such original issue discount is includible (determined without regard to properly allocable deductions and qualified deficits under section
952
(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section
958
(a)) stock in such corporation.
(4)
Exceptions
This subsection shall not apply to any debt instrument described in—
(5)
Special rules for original issue discount on certain high yield obligations
(A)
In general
In the case of an applicable high yield discount obligation issued by a corporation—
(i)
no deduction shall be allowed under this chapter for the disqualified portion of the original issue discount on such obligation, and
(ii)
the remainder of such original issue discount shall not be allowable as a deduction until paid.
For purposes of this paragraph, rules similar to the rules of subsection (i)(3)(B) shall apply in determining the amount of the original issue discount and when the original issue discount is paid.
(B)
Disqualified portion treated as stock distribution for purposes of dividend received deduction
(i)
In general
Solely for purposes of sections
243,
245,
246, and
246A, the dividend equivalent portion of any amount includible in gross income of a corporation under section
1272
(a) in respect of an applicable high yield discount obligation shall be treated as a dividend received by such corporation from the corporation issuing such obligation.
(ii)
Dividend equivalent portion
For purposes of clause (i), the dividend equivalent portion of any amount includible in gross income under section
1272
(a) in respect of an applicable high yield discount obligation is the portion of the amount so includible—
(C)
Disqualified portion
(i)
In general
For purposes of this paragraph, the disqualified portion of the original issue discount on any applicable high yield discount obligation is the lesser of—
(ii)
Definitions
For purposes of clause (i), the term “disqualified yield” means the excess of the yield to maturity on the obligation over the sum referred to [1] subsection (i)(1)(B) plus 1 percentage point, and the term “total return” is the amount which would have been the original issue discount on the obligation if interest described in the parenthetical in section
1273
(a)(2) were included in the stated redemption price at maturity.
(D)
Exception for S corporations
This paragraph shall not apply to any obligation issued by any corporation for any period for which such corporation is an S corporation.
(E)
Effect on earnings and profits
This paragraph shall not apply for purposes of determining earnings and profits; except that, for purposes of determining the dividend equivalent portion of any amount includible in gross income under section
1272
(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the disqualified portion of any original issue discount on such obligation.
(F)
Suspension of application of paragraph
(i)
Temporary suspension
This paragraph shall not apply to any applicable high yield discount obligation issued during the period beginning on September 1, 2008, and ending on December 31, 2009, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an applicable high yield discount obligation and the issuer (or obligor) of which is the same as the issuer (or obligor) of such applicable high yield discount obligation. The preceding sentence shall not apply to any obligation the interest on which is interest described in section
871
(h)(4) (without regard to subparagraph (D) thereof) or to any obligation issued to a related person (within the meaning of section
108
(e)(4)).
(ii)
Successive application
Any obligation to which clause (i) applies shall not be treated as an applicable high yield discount obligation for purposes of applying this subparagraph to any other obligation issued in exchange for such obligation.
(iii)
Secretarial authority to suspend application
The Secretary may apply this paragraph with respect to debt instruments issued in periods following the period described in clause (i) if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets.
(f)
Denial of deduction for interest on certain obligations not in registered form
(1)
In general
Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for interest on any registration-required obligation unless such obligation is in registered form.
(2)
Registration-required obligation
For purposes of this section—
(A)
In general
The term “registration-required obligation” means any obligation (including any obligation issued by a governmental entity) other than an obligation which—
(B)
Certain obligations not included
An obligation is described in this subparagraph if—
(i)
there are arrangements reasonably designed to ensure that such obligation will be sold (or resold in connection with the original issue) only to a person who is not a United States person, and
(C)
Authority to include other obligations
Clauses (ii) and (iii) of subparagraph (A), and subparagraph (B), shall not apply to any obligation if—
(g)
Reduction of deduction where section
25 credit taken
The amount of the deduction under this section for interest paid or accrued during any taxable year on indebtedness with respect to which a mortgage credit certificate has been issued under section
25 shall be reduced by the amount of the credit allowable with respect to such interest under section
25 (determined without regard to section
26).
(h)
Disallowance of deduction for personal interest
(1)
In general
In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.
(2)
Personal interest
For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this chapter other than—
(A)
interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee),
(C)
any interest which is taken into account under section
469 in computing income or loss from a passive activity of the taxpayer,
(E)
any interest payable under section
6601 on any unpaid portion of the tax imposed by section
2001 for the period during which an extension of time for payment of such tax is in effect under section
6163, and
(F)
any interest allowable as a deduction under section
221 (relating to interest on educational loans).
(3)
Qualified residence interest
For purposes of this subsection—
(A)
In general
The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
(B)
Acquisition indebtedness
(i)
In general
The term “acquisition indebtedness” means any indebtedness which—
(I)
is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
(C)
Home equity indebtedness
(D)
Treatment of indebtedness incurred on or before October 13, 1987
(ii)
Reduction in $1,000,000 limitation
The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness.
(iii)
Pre-October 13, 1987, indebtedness
The term “pre-October 13, 1987, indebtedness” means—
(I)
any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or
(II)
any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).
(E)
Mortgage insurance premiums treated as interest
(i)
In general
Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest.
(ii)
Phaseout
The amount otherwise treated as interest under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer’s adjusted gross income for the taxable year exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).
(4)
Other definitions and special rules
For purposes of this subsection—
(A)
Qualified residence
(B)
Special rule for cooperative housing corporations
Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder (as defined in section
216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebtedness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock.
(C)
Unenforceable security interests
Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986, the security interest is ineffective or the enforceability of the security interest is restricted.
(D)
Special rules for estates and trusts
For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the residuary of such estate or trust.
(E)
Qualified mortgage insurance
The term “qualified mortgage insurance” means—
(F)
Special rules for prepaid qualified mortgage insurance
Any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Veterans Administration or the Rural Housing Administration.
(5)
Phase-in of limitation
In the case of any taxable year beginning in calendar years 1987 through 1990, the amount of interest with respect to which a deduction is disallowed under this subsection shall be equal to the applicable percentage (within the meaning of subsection (d)(6)(B)) of the amount which (but for this paragraph) would have been so disallowed.
(i)
Applicable high yield discount obligation
(1)
In general
For purposes of this section, the term “applicable high yield discount obligation” means any debt instrument if—
(B)
the yield to maturity on such instrument equals or exceeds the sum of—
For purposes of subparagraph (B)(i), the Secretary may by regulation (i) permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such higher rate is based on the same principles as the applicable Federal rate and is appropriate for the term of the instrument, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of distressed conditions in the debt capital markets.
(2)
Significant original issue discount
For purposes of paragraph (1)(C), a debt instrument shall be treated as having significant original issue discount if—
(3)
Special rules
For purposes of determining whether a debt instrument is an applicable high yield discount obligation—
(A)
any payment under the instrument shall be assumed to be made on the last day permitted under the instrument, and
(B)
any payment to be made in the form of another obligation of the issuer (or a related person within the meaning of section
453
(f)(1)) shall be assumed to be made when such obligation is required to be paid in cash or in property other than such obligation.
Except for purposes of paragraph (1)(B), any reference to an obligation in subparagraph (B) of this paragraph shall be treated as including a reference to stock.
(5)
Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection and subsection (e)(5), including—
(A)
regulations providing for modifications to the provisions of this subsection and subsection (e)(5) in the case of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, conversion rights, or other circumstances where such modifications are appropriate to carry out the purposes of this subsection and subsection (e)(5), and
(j)
Limitation on deduction for interest on certain indebtedness
(1)
Limitation
(A)
In general
If this subsection applies to any corporation for any taxable year, no deduction shall be allowed under this chapter for disqualified interest paid or accrued by such corporation during such taxable year. The amount disallowed under the preceding sentence shall not exceed the corporation’s excess interest expense for the taxable year.