Form 4952 is used to determine the amount of investment interest expense you can deduct for the current year and the amount you can carry forward to future years.
Your investment interest expense deduction is limited to your net investment income. If you borrow money to purchase property you hold for investment, the interest paid is investment interest. However, if you borrow money for business or personal use as well as for investment, you must allocate the debt among those instances. Only the interest expense on the part of the debt used for investment purposes can be treated as investment interest. The amount of investment interest that you cannot deduct this year can generally be carried forward to be deducted on next year's tax return.
Investment property includes property that produces income from interest, dividends, annuities, or royalties. For it to qualify as investment property, this income should not be income that is derived in the ordinary course of a trade or business. It also includes property that produces gain or loss from the sale or trade of property producing these types of income. Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity).
The IRS does not allow taxpayers to deduct investment interest incurred to produce tax-exempt income. You are also unable to deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment companies that distributes only exempt-interest dividends.
Additional Interest That CANNOT Be Deducted on Form 4952
- Home mortgage interest
- Any interest expense that is capitalized, such as construction interest subject to Section 263A
- Interest expense related to tax-exempt interest income under section 265
- Interest expense, disallowed under section 264, on indebtedness with respect to life insurance, endowment, or annuity contracts issued after June 8, 1997, even if the proceeds were used to purchase any property held for investment
- Interest expense that is properly allocable to a passive activity. Generally, a passive activity is any trade or business activity in which you do not materially participate and any rental activity.
To locate Form 4952 within your account, from the 'My Account' screen after signing in, click on:
- Federal Refund
- Enter Myself
- Itemized Deductions
- Less Common Deductions
- Investment Interest
For additional information pertaining to Investment Interest Expense Deduction, please see IRS Publication 550.