What is Form 4952: Investment Interest Expense Deduction?
IRS Form 4952 determines investment interest expense deductions and carryforwards for future tax years.
IRS regulations vary based on the source of interest: investment, personal, company, or mortgage. Taxpayers may need to allocate interest if an investor pays or accrues interest on a loan and utilizes the proceeds for multiple purposes to follow the correct interest rule.
Who Can Deduct Investment Interest Expenses on Form 4952?
Individuals, estates, and trusts seeking investment interest expense deductions must complete Form 4952. Borrowing money for investment may result in a tax advantage. Investment interest is deductible. Interest income can come from borrowing money to buy land, commercial or residential properties, stocks, and non-tax-exempt bonds.
For Form 4952: Investment Interest Expense Deduction
Three parts make up Form 4952:
- First: total investment interest cost. The taxpayer estimates the total investment interest expense.
- Part II: Net Investment Interest Adjustments are performed after entering the gross income from investment property.
- See Part III for investment interest expense deductions. Calculate the current year’s net investment interest deduction and any carryover disallowed expenses here.
Line 9 of Schedule A receives Part III’s final figure.
The IRS website has Form 4952.
The IRS limits the investment interest expense deduction to net investment income.
Exemptions from Form 4952: Investment Interest Expense Deduction
The IRS lists the following exclusions for filing the form:
- If investment interest expense is less than interest and dividend income minus qualified dividends,
- If no other investment expense is deductible,
- There is no carryover of disallowed investment interest expenses from last year.
Additional investments that don’t qualify:
- Home loan interest.
- Municipal bond interest generates tax-exempt revenue.
- They correctly allocated passive activity interest expenses. The IRS describes them as rental activities or enterprises in which taxpayers are not materially involved.
- Long-term capital gains or qualified dividends. These things are already taxed at lower rates than typical income, giving taxpayers tax advantages.
- IRS Form 4952 calculates carryforward investment interest expense.
- Individuals, estates, and trusts seeking investment interest deductions must complete the form.
- Mortgage interest and qualifying dividends are not deductible.