prepaid interest

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

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

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

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.