GradReady Real-World Finance Exam 2025 – 400 Free Practice Questions to Pass the Exam

Interest payments are tax deductible because they directly relate to the cost of borrowing money, especially in the context of mortgage loans and certain types of credit. In many jurisdictions, the interest on loans used to purchase homes, for business purposes, or for investment can be deducted from taxable income, reducing the overall tax burden. This incentivizes borrowing and can significantly lower the cost of financing.

Principal payments, on the other hand, do not provide a tax deduction because they represent the repayment of the borrowed amount itself, not the cost of borrowing. Insurance payments likewise do not qualify for tax deductions as they are considered personal or business expenses, and down payments are not deductible as they are part of the initial purchase price and not an ongoing cost. This highlights why interest payments are the correct answer to the question regarding tax-deductible expenses.