It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, you won’t want to miss it.

I is for Investment Interest Expense.

Investment interest is interest paid on money you borrowed that is allocable to property held for investment purposes. Property held for investment purposes includes those that produce interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business.

Investment interest doesn’t include any interest allocable to passive activities or any interest you paid to produce tax-exempt income. Investment interest also does not include any qualified home mortgage interest.

If you borrowed funds for business and personal use, you must allocate the debt accordingly. That’s because only the interest expense on the part of the debt used for investment purposes is deductible: you cannot deduct any interest on money borrowed for personal reasons.

Your accounting method determines when you may properly deduct the interest. Most taxpayers use the cash method for accounting purposes: if you use the cash method, you must pay the interest before you can deduct it. However, if you use the accrual method, you can deduct interest over the period it accrues.

Generally, your deduction for investment interest expense is limited to your net investment income. You may be able to carry over amounts you could not deduct to the next tax year.

Investment interest is deductible if you itemize your deductions on a Schedule A. You’ll report it at line 14:

Schedule A
To claim the expense, you generally must complete and attach federal form 4952, Investment Interest Expense Deduction (downloads as a PDF). There are some exceptions: check the instructions for more information.
You don’t have to file a form 4952 if all three of the following apply:

  • Your investment interest expense isn’t more than your investment income from interest and ordinary dividends less any qualified dividends.
  • You have no other deductible investment expenses.
  • You have no disallowed investment interest expense from the prior tax year.

Note: Under the TCJA, there are no Pease limitations for the tax years 2018 through 2025.

For more Taxes A to Z, check out:

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

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