Form 4952: Investment Interest Expense Deduction Overview

KEY TAKEAWAYS

• The amount of deductible investment interest expense and interest expense that may be carried forward are both determined using IRS Form 4952.
• Individuals, estates, or trusts wishing to deduct investment interest expenditures must complete the form.
• Mortgage interest and qualifying dividends are two costs that cannot be excluded.

What Is Form 4952?

Form 4952: Investment Interest Expense Deduction has to be submitted by anybody wishing to deduct investment interest expense, including individuals, estates, or trusts. You might be eligible for a tax break if you borrow money to buy an investment like stocks or bonds. 

The investment’s interest can be written off as a deduction. 

The use of a margin loan at a brokerage is one of the most typical examples of investment interest expenditure.

Who Can File Form 4952?

Form 4952 can be filed by individuals, trusts and estates that wish to deduct interest expense that was paid on money you borrowed to buy property to be held as an investment.

How to File Form 4952?

There are three parts to Form 4952:

1. Total Investment Interest Expense: Here, the taxpayer figures up the overall expense of investment interest. It can include the interest expense paid in the current tax year as well as disallowed interest from the previous year.

2. Net Investment Income: Following the input of your gross income from property held for investment, adjustments are done to arrive at this number. In this section, you can also choose to enter qualified dividends income in case your investment interest income isn’t enough to be able to deduct the whole interest expense. 

3. Investment Interest Expense Deduction: Here, you determine the net investment interest expense deduction for the current year as well as any disallowed expense that can be carried over to subsequent years.

Individuals move the amount from line 8 to line 9 of Schedule A of Form 1040. Estates and Trusts move the amount to line 10 of Form 1041.

What Interest Cannot Be Deducted on Form 4952?

The IRS states that the following situations are exempt from submitting the form:

• If your investment’s interest and dividend income, less any eligible dividends, is less than the investment interest expenditure.
• If you aren’t liable for any other deductible investment expense.
• No unused investment income interest expenditure from the prior year has been carried over.

The following investments are also ineligible:

• Interest on a mortgage.
• Interest earned from tax-exempt investments, such as municipal bonds.
• Interest costs that can be rightfully assigned to passive activities. These are referred to by the IRS as rental activities or any enterprises in which taxpayers have a minimal involvement.

Not all of the interest that a person may pay on any investment loans is allowable as a deduction on Form 4952. Some of them, like interest paid on money borrowed to buy tax-exempt investments cannot be deducted at all, while the interest on a mortgage to buy a real estate investment property can be deducted as a business expense to lower taxable income.

Summary

The Internal Revenue Service (IRS) distributes Form 4952: Investment Interest Expenditure Deduction, which is a tax form used to calculate the amount of investment interest expense that can be written off as well as any interest expense that can be carried over to a subsequent tax year.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.