Holding tax-exempts may not necessarily result in loss of interest deduction

Taxpayers who own or intend to purchase tax-exempt obligations risk losing loan interest deductions under Section 265(a)(2) of federal tax law. Taxpayers who borrow against home equity lose their interest deductions if they hold municipal bonds, even though they are in the same economic position as taxpayers buying a home mortgage. Taxpayers can safely incur debt for valid business reasons while conducting an active business, and yet others who earn taxable income through investments can risk interest deductions when they leverage their investments, even for prudent investment goals. Those who must borrow in light of unanticipated events keep a double benefit if they have tax-exempt securities, but no such favorable treatment is available to those who plan for the unexpected.