MLR

Deducting investment interest has strings

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Investment interest is deductible – with a few strings attached.

Investment interest is interest paid or accrued on indebtedness allocable to property held for investment that is otherwise deductible. 

Some examples of property held for investment would be property that produces interest, dividends, annuities or royalties. This does not include a business in which the taxpayer is an active participant.

When a loan is used to buy stocks and bonds in a brokerage account, the interest on that loan is investment interest. Most people are familiar with investment interest in this context.

The amount of investment interest that is deductible by an individual is limited to the amount of net investment income that person has. That is one of the strings attached. If there is no net investment income, investment interest may not be deducted that year.

Or, if there is more investment interest than net investment income, the difference would be nondeductible in that year.

Investment interest not deductible in the current year is carried forward to the next year and that investment interest can be carried forward indefinitely until a year in which there is enough net investment income to allow a deduction of investment interest.

The amount of net investment income is determined by taking investment income and reducing it by investment expenses.

Brokerage fees would be an example of an investment expense.

Investment interest is deductible as an itemized deduction on Schedule A of Form1040. Those who don't itemize are not allowed a deduction for investment interest. That is the second string.