Form 4952 is used to calculate the amount of investment interest expense you can deduct on your federal tax return for the current year, as well as any amount you may carry forward to future years. This form is essential for taxpayers who have paid interest on money borrowed to purchase investment property.
What Qualifies as Investment Interest?
Investment interest is the interest paid on loans used to buy property held for investment purposes. This includes margin interest on brokerage accounts. However, if the borrowed funds are used for both personal and investment purposes, you must allocate the interest accordingly. Only the portion related to investment use qualifies as investment interest.
Your deduction is limited to your net investment income. If your investment interest exceeds your net investment income, the disallowed investment interest expense can generally be carried forward to future tax years.
What Is Considered Investment Property?
Investment property includes:
- Assets that generate income from interest, dividends, annuities, or royalties (excluding income from a trade or business).
- Property that produces capital gains or losses from the sale of such assets.
- Interests in business activities in which you do not materially participate (excluding passive activities).
Note: Interest incurred to produce tax-exempt income is not deductible. This includes interest on loans used to purchase tax-exempt securities or mutual funds that distribute only exempt-interest dividends.
What Interest Cannot Be Deducted on Form 4952?
You cannot deduct the following on Form 4952:
- Home mortgage interest
- Capitalized interest (e.g., construction interest under Section 263A)
- Interest related to tax-exempt income (Section 265)
- Interest on life insurance, endowment, or annuity contracts (Section 264)
- Interest allocable to passive activities
Where to Report Margin Interest on 1040
To report your margin interest or other deductible investment interest expenses on your Form 1040, you must complete Form 4952 and include the allowable deduction on Schedule A (Itemized Deductions) under the section for investment interest. This is where you report margin interest on 1040 if it qualifies.
Where do I enter my deduction?
To locate and complete Form 4952 in the program:
- Sign in to your account.
- Go to Federal.
- Select Deductions > Itemized Deductions.
- Choose Less Common Deductions.
- Click on Investment Interest.
For additional information pertaining to Investment Interest Expense Deduction, please see IRS Publication 550.