Legal Definitions - investment indebtedness

Investment indebtedness refers to any money borrowed by an individual or entity specifically for the purpose of acquiring or holding assets that are expected to generate income or appreciate in value.

Essentially, it's debt taken on to fund investments. The interest paid on such debt is often subject to specific limitations regarding its deductibility for tax purposes, as outlined by tax laws.

• Example 1: Stock Market Investment

  A person takes out a personal loan from their bank to purchase a diversified portfolio of dividend-paying stocks and growth stocks. They anticipate earning dividends and seeing their stock values increase over time.

  This illustrates investment indebtedness because the loan was incurred directly to acquire assets (stocks) that have the potential to produce income (dividends) and capital gains.

• Example 2: Rental Property Purchase

  An individual secures a mortgage to buy a small apartment building, intending to rent out the units to tenants. Their goal is to generate rental income and benefit from the property's long-term appreciation.

  Here, the mortgage represents investment indebtedness because the debt was taken on to acquire a property specifically for its income-generating potential (rent) and investment growth.

• Example 3: Margin Trading Account

  A sophisticated investor uses a margin account with their brokerage firm to borrow funds against their existing securities. They then use these borrowed funds to purchase additional shares of a promising technology company, hoping for significant capital appreciation.

  This scenario demonstrates investment indebtedness because the investor is incurring debt (the margin loan) to acquire more assets (additional shares) with the explicit intention of generating investment returns.