Limits on Deductible Interest

The general rule is that you may deduct interest on investment-related loans, up to the amount of your investment income for the year. If you paid more interest than the income you received, you can carry over the disallowed portion of the income to later years, when you can offset it by other investment income.

Your allowable deduction for investment interest is calculated on IRS Form 4952, Investment Interest Expense Deduction. You must complete this form and attach it to your return unless all of the following are true:

• Your only investment income was from interest or dividends; that is, you had no annuity or royalty income, no rental income from nondepreciable property, no equity-financed lending activities, and no interests in partnerships or LLCs licensing intangible property. In counting investment income, you must include investment income reported to you by any partnerships or S corporations on a K-1, by an estate or trust, or your child's investment income that you elected to report on your own return.
• You have no other deductible expenses connected with the production of interest or dividends.
• Your investment interest is less than or equal to your total investment income.
• You have no carryover interest deductions from previous years.