The tax laws make a big distinction between interest on loans you take out for personal purposes, and loans you take out for your business, or to produce income through investments.

Interest on loans used for personal purposes is not deductible unless it's qualified home mortgage interest or, in some cases, interest on student loans.

However, you can deduct interest on loans taken out to purchase business assets or inventory, for working capital, or for some other business-related reason. Interest on business-related loans would be deductible on your Schedule C.

If you take out a mortgage or other loans related to your ownership of investment real estate, the interest would be deductible on Schedule E.

You may also be able to deduct interest on margin loans from your broker, or other loans you took out in order to purchase investments. These loans are the focus of our discussion in this section.

Before you deduct investment interest, you need to determine that:

• The loan proceeds were spent on investments.
• You didn't exceed the limit on deductible interest.

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