Investment Interest Expense

Investment interest expense is an often missed deduction. It is not reported on any 1099, so taxpayers often forget about it. What is investment interest? It is interest paid on money borrowed (including margin interest) to buy investment property including stocks, bonds and mutual funds.

Types of investment interest include:

  • Property that produces interest, dividends, annuities or royalties (not from trade or business)
  • Property that produces gain or loss from the sale or trade of property held for producing these types of income or held for investment (other than passive activities)
  • An interest in a trade or business in which the taxpayer does not materially participate (other than passive activities)
  • Investment income of a child under age 14 reported on the parent’s return (form 8814).

The following are not included in investment interest expense:

  • Mortgage interest
  • Interest expense from a passive activity
  • Interest expense that is capitalized
  • Interest expenses related to tax-exempt interest income
Investment interest is deductible up to the amount of net investment income received. The allowable amount of investment interest (after the net investment income limit) is fully deductible on your Schedule A and is not limited by the AGI phase-out of itemized deductions for high-income taxpayers. Amounts not allowed due to the income limit may be carried forward indefinitely. Net investment income equals the excess of investment income over investment expenses (other than interest expense). This includes:
  • Income from property held for investment (such as interest, annuities and royalties
  • Excess of net gains over any net capital gain from the sale of investment property

It does NOT include:

  • Net capital gains, unless elected 
  • Qualified dividend income, unless elected 
  • Alaska Permanent Fund dividends

So if this wonderful deduction is not reported on a 1099, how do you find it? Investment interest expense is normally listed on your annual year end summary of investment transactions. Form 4952, Investment Interest Expense Deduction, must generally be filed to show total investment interest expense, net investment income, current allowable deduction for investment interest and any carryover to future years.
 
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