Investment Interest Expenses – Form 4952

 

If you take out a loan to purchase investment property, rules exist limiting the amount of investment interest you can later deduct. The investment interest you can deduct can’t be more than the net investment income you report for the year. Net investment income includes items like:

  • Interest
  • Dividends
  • Short-term capital gains
  • Royalties

Examples of Investment Interest Expenses

In terms of actual investments, here are some examples of what counts as investment interest expense. First, it includes investments purchased with borrowed money, like in a margin account, in a brokerage account. It can include investments like:

  • Stocks
  • Taxable bonds
  • Land or other investment property purchased with borrowed money

The Following Don’t Qualify for Investment Interest Expense Deduction

Investment interest expense deduction doesn’t include interest from money borrowed to purchase, like:

interest income

  • Straddles
  • Tax-exempt income (like municipal bonds)
  • Life insurance
  • Annuities
  • Investments subject to the passive activity rules

You might borrow money and use only part of it for investment purposes. If so, you must allocate the interest between the various uses. The allocation is based on how much of the loan is used for each purpose.

You usually can’t deduct:

  • Interest you haven’t paid if you are a cash method taxpayer
  • Prepaid interest

When you prepare your taxes, you have the option to designate the following types of income as investment income:

  • Qualified dividends
  • Long-term capital gains

If this designation is made you can include these items when figuring your net investment income. However, to avoid a double benefit these items will be taxed at the same rate as your ordinary income instead of the preferred rates of 0%, 15%, or 20%, which typically apply to these income types. You should evaluate whether it would be more beneficial for your situation to use the preferred tax rates and not include these income types in investment income or opt to include them in investment income at a higher rate.

How to Deduct Using Form 4952

You deduct investment interest on Schedule A with your other itemized deductions.

To deduct investment interest, you must file a Form 4952 with your return. On this form, figure these:

  • Amount of investment interest you can deduct
  • Amount of investment income to carry over to future years, if any

This is where you designate the amount of qualified dividends and long-term capital gains you want to treat as investment income.

More Help With IRS Form 4952

Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you complete your Form 4952.

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