IANACPA, but I don’t believe this is true in the US. I’m pretty sure that the only interest an individual can deduct is mortgage interest. Time was when you could deduct credit card interest, auto loan interests, etc. but those days ended long ago.
So far as I know this is not true in the US. Estates have to be pretty large – over $5 million currently – to be subject to an federal estate tax. It doesn’t matter if the heir is a surviving spouse or not.
I’m not sure what impact jointly-owned property such as real estate has on the tax picture for large estates. However, two people don’t have to be married to own property jointly.
You are right though that an unmarried surviving partner can’t get some benefits.
No, an individual in the US can also deduct business and investment interest as well as some mortgage interest. For example, see Form 4952. See also Publication 535 (“Interest You Can Deduct”) and Publication 550 (“Interest Expenses”).
It’s true that until the Tax Reform Act of 1986, individuals could deduct ANY form of interest paid, whether it was for credit cards, car loans, appliance store loans, or mortgages. Originally, Congress was going to eliminate the entire deduction for personal interest (interest other than business or investment), but that would have cost homeowners a huge chunk of money and a big stink was raised. The home-building and real estate lobbies flexed their political muscle. President Reagan said in a speech to a convention of realtors that “we will preserve the part of the American dream which the home-mortgage-interest deduction symbolizes.” Congress relented and added an exception for a limited home mortgage deduction.
And so the home-equity loan industry was born. Sure, people used to be able to get what were called “second mortgages.” But generally, they were regarded as a shameful thing that only people really down on their luck would get. But now they were renamed “home equity loans” and marketed as a way to get a tax break and the industry took off.
All of this conceptual confusion about deductibility arises from a single simple fact.
A business is taxed not on its revenue, but on its profit. So the legitimate and necessary expenses the business has in operation are “deductible” from revenue to determine the profit upon which tax is based.
For ordinary people we’d like to have a similar concept: taxing them not on their total revenue as employees, savers, and investors, but rather on their profit.
The logical and political problem then lies in deciding which expenses of ordinary life are “legitimate and necessary” versus which are optional, frivolous, or excessive.
At bottom the standard deduction, as well as allowances for dependents, and many of the itemizable deductions are attempts to more or less reflect the legitimate “cost of doing business” for ordinary living, having dependents, etc.
To be sure, all this is modulo the impact of politics, lobbying, social inertia, government busy-bodying, etc.
But if you approach it all with the conceptual framework of trying to convert a household’s gross revenue into a concept akin to profit you’ll be way ahead in understanding what’s going on.
So how does this work? Can you deduct the interest in the years in which you paid it, or only when you sell the investment you bought with the money?
Suppose Lee wants to buy $20,000 worth of stock and go on a $20,000 vacation, but has only $20,000 in the brokerage cash account. Why wouldn’t Lee withdraw the cash for the vacation and then borrow the money for the stock and therefore get a deduction for it?
You know, none of the brokers/financial advisors I’ve had over the years has ever suggested borrowing money for an investment. Why haven’t they? I assume you’re talking about getting a loan and paying it off at $x per month, as opposed to buying a stock on margin (which is frankly an activity about which I have limited knowledge).
It’s probably no surprise that the answer varies. 
But at least one scenario (probably the most likely) is that you deduct the investment in the year in which you paid it, up to the limit of your investment income.
You also have to keep in mind that it is the USE of the money and not just the source that determines its deductibility. Use homes as an example, you can deduct interest on up to $1,000,000 of “acquisition indebtedness” but only on up to $100,000 of home equity debt which is unrelated to the acquisition or improvement of the home. Of course, most people don’t even realize this limitation and the IRS is lousy about auditing for it. (And it is yet another example of the ridiculous clout the mortgage/real estate industry has in Congress.)
So going back to your example with stocks: if it was clear that the economic substance of your loan was to pay for a vacation, you might not qualify for a deduction. But in general, there’s nothing wrong with margin loans or deductions for interest on them.
As for why advisers usually don’t recommend borrowing to acquire an investment: many investments pay less in returns than the interest. Plus, it doubles your risk. If you pay $100,000 for stock and the company tanks, you are only reduced to $0 in assets. If you borrow $100,000 for stock and the company tanks, you still owe $100,000.
On the other hand, your statement is at least partly wrong. Talk to any real estate or mortgage agent and they’ll assure you that real estate is the best investment you’ll ever make and that you should borrow as much as you possibly can.
I’m sure that if Lee had any equity in his house and went to the bank to ask about a loan, the banker would encourage Lee to take out a home equity loan because it’s tax deductible. No reason in principle that if Lee were looking to take a vacation and buy stock at the same time that Lee couldn’t take out a loan to buy the stock, thereby making it deductible.
If you were wondering how the IRS could tell whether the borrowed money was used to buy stock or a vacation, well there’s a regulation for that: Treas Reg §1.163-8t. It explains the tracing rules to figure out where the money went.
“Margin” simply means a loan made by a broker using stock as collateral.
But note that if you want to borrow money to buy a stock, there are severe limitations on the lending practices of both brokers and banks.