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) to determine the amount of investment interest expense that can be deducted, as well as any interest expense that can be carried forward to future tax years.
The IRS has different rules that taxpayers must follow, depending on the source of the interest and investment, personal, business, or mortgage-related. If an investor pays or accrues interest on a loan and then uses the proceeds for a number of different purposes, taxpayers may have to distribute the interest to ensure the correct interest rules are used.
- IRS Form 4952 determines the deductible investment interest expense and the interest expense that can be carried forward.
- This form must be submitted by the individual, estate or trust seeking to deduct investment interest expenses.
- Certain expenses are not deductible, such as home mortgage interest and qualifying dividends.
Who can file Form 4952: Investment Interest Expenses Deduction?
Form 4952: Investment Interest Expense Deduction must be filed by the individual, estate or trust seeking a deduction for investment interest expense. This means that if you borrow money to invest, you may be able to get tax deductions. You can take investment interest as a deduction. Interest income may come from funds earmarked for investments such as the purchase of land, commercial or residential investment properties, stocks and non-tax-exempt bonds.
How to File Form 4952: Deduction of Investment Interest Expenses
Form 4952 contains three sections:
- first part: Total investment interest expense. Here, the taxpayer calculates the total investment interest expense.
- the second part: Net investment interest. This figure is adjusted after entering the gross income from the investment properties you hold.
- the third part: Investment interest expense deduction.Here you calculate any disallowed expenses that can be carried forward to future years and calculate the net investment interest expense deduction for the year
The final figures for Part III are transferred to Line 9 of Schedule A.
Form 4952 can be found on the IRS webpage.
The IRS limits the investment interest expense deduction to the taxpayer’s net investment income.
Exception to Form 4952: Investment Interest Expenses Deduction
According to the IRS, the following are exceptions for filing the form:
- If the investment interest expense is less than your investment income from interest and ordinary dividends less any qualifying dividends.
- If you do not have any other deductible investment expenses.
- Impermissible investment interest charges are not carried forward to the previous year.
Additionally, the following investments are not eligible:
- Home mortgage interest.
- Interest used to generate tax-exempt income, such as municipal bonds.
- Interest expense that can be appropriately allocated to passive activities. The IRS defines these as rental activities or any business in which the taxpayer has no substantial involvement.
- Eligible dividends or long-term capital gains. Taxpayers already receive tax deductions on these items, which are taxed lower than most other income.