Investment Interest – a Less Well-known Itemized Deduction

March 23, 2015

Did you know that you can deduct your investment interest if you itemize?

“Investment interest” is interest paid or accrued on indebtedness on property held for investment that is otherwise deductible. A good example of investment interest is the interest charged when buying stocks and bonds on margin.

It does not include qualified residence interest, interest that is taken into account in applying the passive activity loss rules, interest expense that is capitalized or interest expense related to tax-exempt income.

Individual taxpayers can deduct investment interest in any tax year only to the extent it does not exceed their net investment income for the year. “Net investment income” is the excess of investment income over investment expenses.

In general, investment income includes gross income derived from property held for investment, such as interest, dividends, annuities and royalties. It generally does not include net capital gain derived from disposing of investment property or capital gain distributions from mutual fund shares.

“Investment expenses” are deductions other than interest that are directly connected with the production of investment income. A good example is a stockbroker’s fee charged for executing a stock trade.

Investment interest that exceeds net investment income is not deductible. If interest is disallowed as a deduction, it is treated as incurred in the next tax year for which deduction is allowed. Thus, any investment interest that is not deducted this year is in effect carried forward indefinitely until it can be used.

To claim investment interest as an itemized deduction, taxpayers must fill out Form 4952. The information from Form 4952 then flows through to Schedule A, where it becomes an itemized deduction.