McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 80

{Research} George recently received a great stock tip from his friend, Mason.George didn't have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition.The loan terms are 8 percent interest with interest-only payments due each year for five years.At the end of the five-year period the entire loan principal is due.When George closed on the loan on April 1, 2011, he decided to invest $16,000 in stock and to use the remaining $4,000 to purchase a four-wheel recreation vehicle.George is unsure how he will treat the interest paid on the $20,000 loan.In 2011, George paid $1,200 interest expense on the loan.For tax purposes, how should he treat the 2011 interest expense? (Hint: visit www.rs.ov and consider IRS Publication 550)