What Is Form 4952: Investment Interest Expense Deduction?

Form 4952: Investment Interest Expense Deduction is a tax form distributed by the Internal Revenue Service (IRS) used to determine the amount of investment interest expense that can be deducted, as well as any interest expense that can be carried forward to a future tax year.

The IRS has different rules taxpayers must follow depending on where interest comes from and whether it is investment, personal, business, or mortgage related. If an investor pays or accrues interest on a loan and then uses the proceeds for several different purposes, the taxpayer may have to allocate the interest to ensure that the right interest rule is used.

The IRS limits the investment interest expense deduction to the taxpayer's net income from investment.

Who Can File Form 4952: Investment Interest Expense Deduction?

Form 4952: Investment Interest Expense Deduction must be filed by individuals, estates, or trusts seeking a deduction for investment interest expenses. That means if you borrow money for an investment, you may be able to get a tax break. You can claim the interest on the investment as a deduction. Interest income may result from money borrowed specifically to purchase investments like parcels of land, commercial or residential investment properties, stocks, and non-tax-exempt bonds.

How to File Form 4952: Investment Interest Expense Deduction

There are three parts to Form 4952:

  • Part I: Total Investment Interest Expense. Here, the taxpayer calculates the total investment interest expense.
  • Part II: Net Investment Interest. This figure is calculated after adjustments are made following the input of your gross income from property held for investment.
  • Part III: Investment Interest Expense Deduction. Here, you calculate any disallowed expense that can be carried forward to future years, and you figure out the current year's net investment interest expense deduction.

The final figure from Part III is transferred to line 14 of Schedule A.

Exceptions That Don't Qualify for Form 4952: Investment Interest Expense Deduction

According to the IRS, the following instances serve as exceptions to filing the form:

  • If the investment interest expense is less than your investment income from interest and ordinary dividends minus any qualified dividends.
  • If you don't have any other deductible investment expense.
  • There is no carryover of disallowed investment interest expense from the previous year.

In addition, the following investments do not qualify:

  • Home mortgage interest.
  • Interest used to generate tax-exempt income such as a municipal bond.
  • Interest expenses that are properly allocable to passive activities. The IRS defines these as rental activities or any businesses in which taxpayers do not materially participate.
  • Qualified dividends or long-term capital gains. Taxpayers are already receiving tax breaks on these items, which are taxed at rates lower rates than most other income.

Download Form 4952: Investment Interest Expense Deduction

Click this link to download a copy of Form 4952: Investment Interest Expense Deduction.

Key Takeaways

  • Form 4952 determines the amount of deductible investment interest expense as well as interest expense that can be carried forward.
  • The form must be filed by individuals, estates, or trusts seeking a deduction for investment interest expenses.
  • Certain expenses cannot be deducted such as home mortgage interest and qualified dividends.