Interest expense

[Max W]

I have a client that has a note he is still paying for an interest as a general partner as an insurance broker.  The business is gone and he is now an employee of a new company.  Any ideas on how I can deduct the interest he is still paying?  Investment interest is the only thing I can think of, even though it was business interest originally.

[qbteachmt]

"he is still paying for an interest as a general partner as an insurance broker."

"even though it was business interest originally"

An interest in the Entity? Or, the "book" of the business? Who is carrying the loan note: a bank or a partner or?

[Max W]

My client bought into an existing insurance partnership which subsequently was bought out by a large firm.  But my client still has about a half million dollar loan with the person he purchased the interest in the partnership from.  My client was an active general partner and now is an employee of the corporation that acquired the partnership.

[qbteachmt]

This business interest debt wasn't paid off, or some sort of partner pay out wasn't done, or the inclusion to satisfy this debt wasn't negotiated at the time the original entity was purchased by the corporation? Or, there was buyout consideration and this person just didn't use it to pay off this debt?

[Max W]

The facts are as previously stated.

[qbteachmt]

"The facts are as previously stated."

Okay; but, perspective helps. No one on the internet can see the paperwork or ask your client anything.

"The business is gone"

Apparently not; the entity got purchased, not shut down.

"and he is now an employee of a new company"

With no equity position or other carry-over value for that partnership position?

If he got nothing for something, that would be a bad investment. If he got something for something, and didn't pay off the debt, then he used it for other purposes.

[Max W]

OK Thanks,  That helps me see that the interest should now be considered investment interest.  He did receive payment for his partnership interest and he did not pay off the debt related to the partnership interest.  He is an employee of the corporation that purchased the partnership.  Are you saying I should trace how he used the money received on the sale to determine how the interest is deducted?

[qbteachmt]

"He did receive payment for his partnership interest and he did not pay off the debt related to the partnership interest."

Okay, then 🙂

Assuming this was an unsecured debt, then? Or, he renegotiated to keep the debt as personal, since he "cashed out" but didn't pay off this debt? Or, the debt is now secured by something other than the original partnership position?

"Are you saying I should trace how he used the money received on the sale to determine how the interest is deducted?"

Well, if he lived on the purchase funds or went on vacation using them, there isn't any reason to trace anything, and there is no longer business interest and there sure isn't investment interest.

It does seem you have a bit more research to do with the person and then for the person.