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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.

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.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
References in periodicals archive ?
Points are treated as a service fee or prepaid interest, depending on what they cover.
Banque Misr Liban (BML) offers a similar facility to buyers through its Prepaid Interest Housing Loan, which requires clients to pay the interest on their loan up front in cash, instead of over the 25-year loan period as part of the clientAaAaAeA{Es monthly payments.
The car will be given as prepaid interest on the certificate of deposit.
Next, decide whether you want to pay an origination fee or discount points (prepaid interest borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments).
Other special rules may apply under certain circumstances, for example, if the partnership owns property subject to tax credit recapture, if it has made installment sales, or (as might occur in the case of an oil and gas partnership) if it is receiving income in the form of "production payments." See also Q 1326 with regard to prepaid interest.
According to the court, by denying a deduction for prepaid interest, the code authorizes a deduction for all interest paid for the tax year--even if it is paid in advance.
Points are a form of prepaid interest and are typically calculated as a percentage of the mortgage amount.
In general, in determining the year (or years) in which to deduct prepaid interest, IRC Section 461(g) forces cash basis taxpayers to follow the accrual basis method of tax accounting.
Effective after 1984, proposed subsection 18(9.1) of the Income Tax Act requires that "prepaid interest" be deducted during the period over which a debt obligation would have remained outstanding.
461(g) requires prepaid interest (which includes mortgage loan points) to be amortized and deducted over the life of the loan using some reasonable method (e.g., straight-line or in proportion to principal payments).
Internal Revenue Code section 461(g)(2) considers points prepaid interest and says they are deductible as interest if paid directly by taxpayers out of their own funds to a bank or financial institution for the use of money and not for specific services performed in connection with a loan.