prepaid interest

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Prepaid interest

An asset account showing interest that has been paid in advance, which is expensed and charged to the borrower's P & L statement.

Prepaid Interest

Interest on a loan that is paid before it is billed to the borrower. Generally speaking, the IRS does not allow the deduction of prepaid interest even when the interest would be deductible otherwise.

prepaid interest

The interest on a loan that has been paid but is not due until a following period. The Internal Revenue Service does not permit taxpayers to claim an itemized deduction on tax returns for prepaid interest.

prepaid interest

An interest paid in advance of the time it is earned, as with discount points. Prepaid interest is not tax deductible unless all the following specific requirements are met:

1. The loan is secured by the taxpayer's primary residence.
2. Paying discount points is an established business practice in the area.
3. The points paid were not more than customarily charged in the area.
4. The taxpayer uses the cash method of accounting.
5. The points were not a substitute for normally itemized expenses such as the appraisal fee, survey fee, property taxes, and attorneys' fees.
6. The funds provided at closing by the buyer and by the seller, if applicable, were at least equal to the points (in other words, you didn't roll the points into the loan).
7. The loan is used to buy or build the primary residence.
8. The points were computed as a percentage of the loan.
9. The settlement statement (HUD-1) clearly shows the item as points.

Prepaid Interest

Interest paid in advance is deductible only as it accrues. The one exception to this rule is for certain points paid by a cash-basis taxpayer to obtain financing for a loan used to purchase, reconstruct, or improve his or her principal residence.
References in periodicals archive ?
The lender credit granted by the Bank cannot be used to pay fees that are already designated to be paid by the seller or other interested party in accordance with the sales contract and cannot be used to toward pre-paid items such as insurance premiums, taxes, other escrow set-up items, pre-paid interest or to pay discount points.
Points, usually paid at closing, are pre-paid interest that lenders collect upfront - each point equals 1 percent of the total loan value, so on a mortgage of $100,000 one point would tee $1,000.
2 million to reflect pre-paid interest, fees and expenses, and the fair value of the remaining conversion option in the defeased convertible notes.
00 principal amount deposited the amount of the pre-calculated, pre-paid interest paid in advance and specifically used for a Mercedes vehicle purchase from Crown Eurocars Inc.