Form 4952: Investment Interest Expense Deduction Overview

Form 4952 is the IRS form used to figure the amount of investment interest expense you can deduct in the current year and the portion that must be carried forward to future years. Individuals, estates, and trusts use it when they borrow money and pay interest related to investment activities.

What counts as investment interest

Investment interest generally is interest paid on money borrowed to buy investments such as:
* Taxable bonds
* Stocks purchased on margin
* Investment real estate (when the loan proceeds are used for investment purposes)

Excluded from investment interest treatment:
* Home mortgage interest
* Interest used to produce tax-exempt income (for example, muni-bond interest)
* Interest allocable to passive activities (rental activities or businesses in which you do not materially participate)
* Amounts associated with qualified dividends or long-term capital gains (these receive preferential tax rates and are not treated as investment income for this deduction)

Who must file

File Form 4952 if you want to claim a deduction for investment interest expenses and the deduction cannot be determined without the form. If your investment interest expense is fully deductible under Schedule A because it does not exceed your net investment income (see next section), and you have no other deductible investment expenses or carryovers, you likely do not need to file Form 4952.

How the deduction is limited

The investment interest deduction is limited to your net investment income, generally defined by the IRS as interest income and ordinary dividends (excluding qualified dividends). If your investment interest expense exceeds net investment income, the excess is disallowed for the current year but can be carried forward to future years.

How to complete Form 4952 (overview)

Form 4952 has three parts:
* Part I — Total Investment Interest Expense: calculate the total interest expense that qualifies as investment interest.
* Part II — Net Investment Income: compute net investment income after applicable adjustments and including gross income from investment property.
* Part III — Investment Interest Expense Deduction: determine the deductible amount for the current year and any disallowed amount to carry forward.

The allowable deduction from Form 4952 is reported on Schedule A (itemized deductions), typically transferred to line 9 of Schedule A.

Carryforward rules

Disallowed investment interest (the amount that exceeds your net investment income) can be carried forward indefinitely and may be deductible in future years when you have sufficient net investment income.

Where to get the form and official guidance

Form 4952 and IRS guidance on investment interest and interest received are available from the IRS website.

Key takeaways

• Use Form 4952 to determine the deductible portion of investment interest and any carryforward.
• The deduction is limited to net investment income (mainly interest and ordinary dividends, excluding qualified dividends).
• Certain interest (home mortgage interest, interest producing tax-exempt income, passive activity interest) does not qualify for the investment interest deduction.
• Excess investment interest can be carried forward to future tax years.