[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.163-1]

[Page 826-827]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.163-1  Interest deduction in general.

    (a) Except as otherwise provided in sections 264 to 267, inclusive, 
interest paid or accrued within the taxable year on indebtedness shall 
be allowed as a deduction in computing taxable income. For rules 
relating to interest on certain deferred payments, see section 483 and 
the regulations thereunder.
    (b) Interest paid by the taxpayer on a mortgage upon real estate of 
which he is the legal or equitable owner, even though the taxpayer is 
not directly liable upon the bond or note secured by such mortgage, may 
be deducted as interest on his indebtedness. Pursuant to the provisions 
of section 163(c), any annual or periodic rental payment made by a 
taxpayer on or after January 1, 1962, under a redeemable ground rent, as 
defined in section 1055(c) and paragraph (b) of Sec. 1.1055-1, is 
required to be treated as interest on an indebtedness secured by a 
mortgage and, accordingly, may be deducted by the taxpayer as interest 
on his indebtedness. Section 163(c) has no application in respect of any 
annual or periodic rental payment made prior to January 1, 1962, or 
pursuant to an arrangement which does not constitute a ``redeemable 
ground rent'' as defined in section 1055(c) and paragraph (b) of Sec. 
1.1055-1. Accordingly, annual or periodic payments of Pennsylvania 
ground rents made before, on, or after January 1, 1962, are deductible 
as interest if the ground rent is redeemable. An annual or periodic 
rental payment under a Maryland redeemable ground rent made prior to 
January 1, 1962, is deductible in accordance with the rules and 
regulations applicable at the time such payment was made. Any annual or 
periodic rental payment under a Maryland redeemable ground rent made by 
the taxpayer on or after January 1, 1962, is, pursuant to the provisions 
of section 163(c), treated as interest on an indebtedness secured by a 
mortgage and, accordingly, is deductible by the taxpayer as interest on 
his indebtedness. In any case where the ground rent is irredeemable, any 
annual or periodic ground rent payment

[[Page 827]]

shall be treated as rent and shall be deductible only to the extent that 
the payment constitutes a proper business expense. Amounts paid in 
redemption of a ground rent shall not be treated as interest. For 
treatment of redeemable ground rents and real property held subject to 
liabilities under redeemable ground rents, see section 1055 and the 
regulations thereunder.
    (c) Interest calculated for costkeeping or other purposes on account 
of capital or surplus invested in the business which does not represent 
a charge arising under an interest-bearing obligation, is not an 
allowable deduction from gross income. Interest paid by a corporation on 
scrip dividends is an allowable deduction. So-called interest on 
preferred stock, which is in reality a dividend thereon, cannot be 
deducted in computing taxable income. (See, however, section 583.) In 
the case of banks and loan or trust companies, interest paid within the 
year on deposits, such as interest paid on moneys received for 
investment and secured by interest-bearing certificates of indebtedness 
issued by such bank or loan or trust company, may be deducted from gross 
income.
    (d) To the extent of assistance payments made in respect of an 
indebtedness of the taxpayer during the taxable year by the Department 
of Housing and Urban Development under section 235 of the National 
Housing Act (12 U.S.C. 1715z), as amended, no deduction shall be allowed 
under section 163 and this section for interest paid or accrued with 
respect to such indebtedness. However, such payments shall not affect 
the amount of any deduction under any section of the Code other than 
section 163. The provisions of this paragraph shall apply to taxable 
years beginning after December 31, 1974.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6821, 30 FR 
6216, May 4, 1965; T.D. 6873, 31 FR 941, Jan. 25, 1966; T.D. 7408, 41 FR 
9547, Mar. 5, 1976]