Question

Creed works for a local paper company as a quality control representative and earns $45,000.00 per year as a W-2 wage employee. He also dabbles in investments during his spare time. In 2018, Creed took out a loan to purchase 10,000 shares of a particular stock. He paid interest on the loan used to purchase that stock. The stock appreciated in value and Creed sold it at a $2.00 per share gain in December 2018. Also, Creed owns a rental property that pays $15,000.00 per year before expenses. What income, if any, can Creed offset by deducting the interest expense paid on the loan?

Answer 1

Person C is a salaried person and in spam time engaged in investment business. Therefore, for investment business, Person C can maintain the separate books of accounts to keep records of all the transactions and estimation of actual profit during a particular time.

In books of accounts, Person C can show the loan taken in the liabilities side of the balance sheet. In addition, interest paid on the loan is shown under expenses and gain on sale of shares is shown under income in statement of profit and loss. In this way, the gain earned of $20,000 offsets the interest paid on the loan and remaining amount is considered as the profit for the Person C.