Josephine Norton
Investment interest expenses can be deducted from your taxes, but only if they are equal to or less than your net investment income. The deduction is also limited to the amount of taxable investment income earned in the same year. For example, if you have $3,000 in margin interest but net investment income of only $1,000, you can only deduct the $1,000 in investment interest in the current year. You can only claim investment interest by itemizing deductions on Schedule A and filing Form 4952.
| Characteristics | Values |
|---|---|
| How to claim investment interest expenses | By itemizing deductions on Schedule A and filing Form 4952 |
| Amount that can be deducted | Limited to the amount of taxable investment income earned in the same year |
| Interest on money borrowed to buy property | Deductible if the property will produce investment income (interest, dividends, annuities or royalties) or is expected to appreciate in value |
| Interest on money borrowed to buy property | Not deductible if the property produces nontaxable income, such as tax-exempt bonds |
| Interest on a loan taken to buy a house to rent out | Not deductible as investment interest but can usually be deducted as an expense item for operating costs of the rental property on Schedule E |
| Interest incurred for an investment in a "passive activity" | Generally doesn't qualify for the investment interest deduction |
| Home-equity interest | Deduction is suspended from 2018-2025 |
| Alternative Minimum Tax (AMT) | May not be able to use the investment interest deduction if subject to this |
What You'll Learn
Investment interest expenses
The deduction for investment interest expenses is limited to the amount of taxable investment income earned in the same year. Investment interest can only be claimed by itemizing deductions on Schedule A and filing Form 4952.
If you borrow money from a firm to buy stocks or other investments, the interest you pay on that loan is qualifying investment interest. However, interest incurred for an investment in a "passive activity" generally doesn't qualify for the investment interest deduction.
Additionally, if funds from a home equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest. It is important to note that the deduction for home-equity interest is suspended from 2018 to 2025.
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Home-equity loans
If you have taken out a home-equity loan to purchase taxable investment securities, you may be able to deduct the interest as investment interest. However, this is only possible if you have sufficient investment income to do so.
To classify the interest as investment interest, you should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T. This is because the deduction for home-equity interest has been suspended from 2018 to 2025 (Sec. 163(h)(3)(F)(i)). It is important to note that no guidance has been issued on using the tracing rules of Temp. Regs. Sec. 1.163-8T to reallocate home-equity interest that has been disallowed by Sec. 163(h)(3)(F)(i). Practitioners should be alert for future developments in this area.
Investment interest is deductible as an itemized deduction, but it is limited to net investment income. This means that you can only deduct the amount of investment interest that is equal to or less than your net investment income. For example, if you have $3,000 in investment interest but only $1,000 in net investment income, you can only deduct $1,000 in the current year.
It is important to seek professional advice when dealing with tax matters, as the rules and regulations can be complex and subject to change. By consulting a tax professional, you can ensure that you are claiming deductions correctly and maximizing your tax benefits.
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Margin interest
If you borrow money to invest, you may be able to deduct the interest on that loan from your taxes. This is called 'investment interest'. However, there are some limitations. For example, the deduction for investment interest expenses is limited to the amount of taxable investment income earned in the same year. You can only deduct investment interest expenses that are less than or equal to your net investment income.
One of the most common examples of investment interest expense involves the use of a margin loan at a brokerage. If you borrow money from your stockbroker to buy stocks or other investments, the interest you pay on that loan is qualifying investment interest.
For example, if you have $3,000 in margin interest but net investment income of only $1,000, you can only deduct the $1,000 in investment interest in the current year.
To claim investment interest, you must itemise deductions on Schedule A and file Form 4952. If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest.
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Passive activity investments
Investment interest can be claimed by itemising deductions on Schedule A and filing Form 4952. However, interest incurred for an investment in a "passive activity" generally doesn't qualify for the investment interest deduction.
If you are subject to the Alternative Minimum Tax (AMT), you might not be able to use the investment interest deduction. Only certain types of investment interest qualify for the deduction, and the amount that you can deduct is limited to the amount of your net investment income.
One of the most common examples of investment interest expense involves the use of a margin loan at a brokerage. If you "go on margin" with your stockbroker, it means you're borrowing money from the firm to buy stocks or other investments. The interest you pay on that margin loan is qualifying investment interest.
If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest.
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Tax-exempt bonds
You can only deduct investment interest expenses if they are equal to or less than your net investment income. For example, if you have $3,000 in margin interest but net investment income of only $1,000, you can only deduct the $1,000 in investment interest in the current year. The deduction for investment interest expenses is limited to the amount of taxable investment income earned in the same year.
Investment interest is deductible as an itemized deduction but is limited to net investment income. You might not be able to use the investment interest deduction if you're subject to the Alternative Minimum Tax (AMT). Only certain types of investment interest qualify for the deduction.
One of the most common examples of investment interest expense involves the use of a margin loan at a brokerage. If you "go on margin" with your stockbroker, it means you're borrowing money from the firm to buy stocks or other investments. The interest you pay on that margin loan is qualifying investment interest.
You can't deduct interest when the property you buy produces non-taxable income, such as tax-exempt bonds.
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Frequently asked questions
The investment interest deduction applies to interest on money borrowed to buy property that will produce investment income, such as interest, dividends, annuities or royalties.
You can only deduct an amount equal to or less than your net investment income. For example, if you have $3,000 in margin interest but net investment income of only $1,000, you can only deduct the $1,000 in investment interest in the current year.
You can carry forward your "disallowed" investment interest to the next year.
Only certain types of investment interest qualify for the deduction. One of the most common examples involves the use of a margin loan at a brokerage. If you "go on margin" with your stockbroker, it means you are borrowing money from the firm to buy stocks or other investments. The interest you pay on that margin loan is qualifying investment interest.
The deduction for investment interest expenses can be claimed by itemizing deductions on Schedule A and filing Form 4952.
