INTEREST.

SEC. 221. INTEREST. (a) Limitation on Interest Deduction Attributable to Investment Indebtedness.—Section 163 (relating to interest) is amended by redesignating subsection (d) as (e), and by inserting after subsection (c) the following new subsection: “(d) Limitation on Interest on Investment Indebtedness.— “(1) In general.—In the case of a taxpayer other than a corporation, the amount of investment interest (as defined in paragraph (3)(D)) otherwise allowable as a deduction under this chapter shall be limited, in the following order, to— “(A) $25,000 ($12,500, in the case of a separate return by a married individual), plus “(B) the amount of the net investment income (as defined in paragraph (3)(A)), plus “(C) an amount equal to the amount by which the net long-term capital gain exceeds the net short-term capital loss for the taxable year, plus “(D) one-half of the amount by which investment interest exceeds the sum of the amounts described in subparagraphs (A), (B), and (C). In the case of a trust, the $25,000 amount specified in subparagraph (A) and in paragraph (2)(A) shall be zero. In determining the amount described in subparagraph (C), only gains and losses attributable to the disposition of property held for investment shall be taken into account. “(2) Carryover of disallowed investment interest.— “(A) In general.—The amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year. The amount of the interest so treated which is allowable as a 83 Stat. 575 deduction by reason of the first sentence of this paragraph for any taxable year shall not exceed one-half of the amount by which— “(i) the net investment income for such taxable year plus $25,000, exceeds “(ii) the investment interest paid or accrued during such taxable year (determined without regard to this paragraph) or $25,000, whichever is greater. “(B) Reduction for capital gain deduction.—If— “(i) an amount of disallowed investment interest treated under subparagraph (A) as investment interest paid or accrued in the taxable year is not allowable as a deduction for such taxable year by reason of the second sentence of subparagraph (A), and “(ii) the taxpayer is entitled to a deduction under section 1202 for such taxable year (whether or not the taxpayer claims such deduction), the amount of such disallowed investment interest shall be reduced by an amount equal to the amount of the deduction allowable under section 1202. “(3) Definitions.—For purposes of this subsection— “(A) Net investment income.—The term ‘net investment income’ means the excess of investment income over investment expenses. “(B) Investment income.—The term ‘investment income’ means— “(i) the gross income from interest, dividends, rents, and royalties, “(ii) the net short-term capital gain attributable to the disposition of property held for investment, and “(iii) any amount treated under sections 1245 and 1250 as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231, but only to the extent such income, gain, and amounts are not derived from the conduct of a trade or business. “(C) Investment expenses.—The term ‘investment expenses’ means the deductions allowable under sections 164(a)(1) or (2), 166, 167, 171, 212, or 611 directly connected with the production of investment income. For purposes of this subparagraph, the deduction allowable under section 167 with respect to any property may be treated as the amount which would have been allowable had the taxpayer depreciated the property under the straight line method for each taxable year of its useful life for which the taxpayer has held the property, and the deduction allowable under section 611 with respect to any property may be treated as the amount which would have been allowable had the taxpayer determined the deduction under section 611 without regard to section 613 for each taxable year for which the taxpayer has held the property. “(D) Investment interest.—The term ‘investment interest’ means interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment. “(E) Disallowed investment interest.—The term ‘disallowed investment interest’ means with respect to any taxable year, the amount not allowable as a deduction solely by reason of the limitations in paragraphs (1) and (2)(A). 83 Stat. 576 “(4) Special rules.— “(A) Property subject to net lease.—For purposes of this subsection, property subject to a lease shall be treated as property held for investment, and not as property used in a trade or business, for a taxable year, if— “(i) for such taxable year the sum of the deductions with respect to such property which are allowable solely by reason of section 162 is less than 15 percent of the rental income produced by such property, or “(ii) the lessor is either guaranteed a specified return or is guaranteed in whole or in part against loss of income. “(B) Partnerships.—In the case of a partnership, each partner shall, under regulations prescribed by the Secretary or his delegate, take into account separately his distributive share of the partnership’s investment interest and the other items of income and expense taken into account under this subsection. “(C) Shareholders of electing small business corporations.—In the case of an electing small business corporation (as defined in section 1371(b)), the investment interest paid or accrued by such corporation and the other items of income and expense which would be taken into account if this subsection applied to such corporation shall, under regulations prescribed by the Secretary or his delegate, be treated as investment interest paid or accrued by the shareholders of such corporation and as items of such shareholders, and shall be apportioned pro rata among such shareholders in a manner consistent with section 1374(c)(1). “(D) Construction interest.—For purposes of this subsection, interest paid or accrued on indebtedness incurred or continued in the construction of property to be used in a trade or business shall not be treated as investment interest. “(5) Capital Gains.—For purposes of sections 1201(b) (relating to alternative capital gains tax), 1202 (relating to deduction for capital gains), and 57(a)(9) (relating to treatment of capital gains as a tax preference), an amount equal to the amount of investment interest which is allowable as a deduction under this chapter by reason of subparagraph (C) of paragraph (1) shall be treated as gain from the sale or other disposition of property which is neither a capital asset nor property described in section 1231. “(6) Exceptions.—This subsection shall not apply with respect to investment interest, investment income, and investment expenses attributable to a specific item of property, if the indebtedness with respect to such property— “(A) is for a specified term, and “(B) was incurred before December 17, 1969, or is incurred after December 16, 1969, pursuant to a written contract or commitment which, on such date and at all times thereafter prior to the incurring of such indebtedness, is binding on the taxpayer.” (b) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 1971.