Investment Interest Expense and Form 4952: Basics
Published November 6, 2026
Some people borrow money to buy investments. The interest on that loan may be a deduction, but only within a limit. Publication 550 explains the rules. This guide is general information. It is not advice about your return.
What counts as investment interest
Publication 550 says that if you borrow money to buy property you hold for investment, the interest you pay is investment interest. Investment property includes property that produces interest, dividends, annuities, or royalties. It also includes gain or loss from selling that kind of property.
Some interest is never investment interest. You cannot deduct interest you incurred to produce tax-exempt income. Qualified home mortgage interest is not investment interest either.
When a loan is used for more than one purpose
A loan can be split. Publication 550 uses an example. A person borrows $10,000 and uses $8,000 to buy stock. The other $2,000 buys items for the home. Because 80% of the debt is used for investment, 80% of the interest is investment interest. The other 20% is personal interest, and it is not deductible.
The split can change over time. If you repay part of a loan, Publication 550 says you must reallocate the rest of the debt. The example is made up. Your own split depends on how you used each dollar.
The limit: net investment income
Your deduction is generally limited to your net investment income. Publication 550 explains it this way. Start with your investment income, such as interest, dividends, annuities, and royalties. Subtract your investment expenses, other than interest. What is left is net investment income.
Qualified dividends and net capital gain are usually left out of investment income. You can choose to include some or all of them. If you make that choice, Publication 550 says you complete Form 4952, line 4g, and you must reduce the qualified dividends that get the lower capital gains rates by the same amount.
Carrying the rest forward
If the limit blocks part of the interest, you can carry the rest to the next tax year. Publication 550 says that carried-over amount is treated as investment interest paid in that next year. You can carry it over even if it is more than your taxable income in the year you paid it.
When you can deduct it
Timing depends on your accounting method. Publication 550 says that if you use the cash method, you must pay the interest before you can deduct it. If you use an accrual method, you can deduct interest over the period it accrues, whether or not you paid it that year.
Interest paid in advance for a period that goes past the end of the year must be spread over the years it covers.
Form 4952 and your records
Form 4952, Investment Interest Expense Deduction, is where the limit is figured. Keep the loan papers that show what the money was used for. Keep the statements that show interest paid, investment income, and investment expenses. Those papers support each number on the form.
Investment sales and losses have their own rules. Our guide to stock and crypto sales on your return covers the sale side. If a loss is limited in a different way, our guide to the capital loss limit and carryover explains that rule. Our guide to the net investment income tax covers a separate tax that uses the same kind of income.
Simple steps
- Confirm the loan money went to property held for investment.
- Add up your investment income, then subtract investment expenses other than interest.
- Complete Form 4952 to find the deductible amount.
- Carry any unused amount to the next year, and keep the records.
Upload your documents and answer a few simple questions. Your preparer reviews every deduction and credit and lets you know when your return is ready to sign.
Sources: Sources: IRS, Publication 550 (2025), Investment Income and Expenses (https://www.irs.gov/pub/irs-pdf/p550.pdf) This is general information, not advice about your specific return.
