IRS Form 4952 – Investment Interest Expense Deduction – If you’re an investor who borrows money to fund your investments, you may be eligible for a valuable tax break through the investment interest expense deduction. IRS Form 4952 helps calculate this deduction, allowing you to offset interest paid on loans against your net investment income. This can lower your taxable income and potentially reduce your tax bill. In this comprehensive guide, we’ll cover everything you need to know about Form 4952, including who qualifies, how to fill it out step by step, and key tips for maximizing your deduction in the 2025 tax year.
Whether you’re dealing with margin loans for stocks or other investment-related borrowing, understanding Form 4952 is essential for accurate tax filing. Let’s dive in.
What Is the Investment Interest Expense Deduction?
The investment interest expense deduction allows taxpayers to deduct interest paid on money borrowed to purchase or carry taxable investments. This includes interest on margin accounts for buying securities or loans for investment property that generates taxable income, such as interest, dividends, or royalties. However, the deduction is limited to your net investment income for the year—any excess can be carried forward to future years.
Common examples of qualifying interest include:
- Margin interest from brokerage accounts.
- Interest on loans used to buy stocks, bonds, or other taxable investment assets.
- Portions of interest from loans allocable to investment property (not personal use).
This deduction does not apply to interest on tax-exempt investments, passive activities, or personal loans. It’s reported as an itemized deduction on Schedule A (Form 1040), line 9 for individuals, or on Form 1041 for estates and trusts. For the 2025 tax year, there are no major changes to the form or rules, making it straightforward for eligible filers.
Who Needs to File IRS Form 4952?
Not every investor needs to file Form 4952. You should use it if:
- You paid or accrued investment interest expense during the tax year.
- You want to claim a deduction for that interest on your federal tax return.
- Your deduction is limited by your net investment income, requiring calculation of carryovers.
This form is typically for individuals, estates, or trusts with investment-related borrowing. If your investment interest expense is less than or equal to your net investment income, you might not need the full form, but it’s still used to verify and report the deduction accurately. Businesses or those with passive activity interest may need to adjust for other rules, such as at-risk limitations via Form 6198.
If you have disallowed interest from prior years (e.g., from your 2024 Form 4952, line 7), include it here to potentially deduct it now. Always consult IRS Publication 550 for detailed eligibility if you’re unsure.
Step-by-Step Guide: How to Fill Out Form 4952
Form 4952 is divided into three parts: Total Investment Interest Expense, Net Investment Income, and Investment Interest Expense Deduction. Download the latest version from the IRS website for the 2025 tax year. Here’s a line-by-line breakdown based on official guidelines.
Part I: Total Investment Interest Expense
This section calculates your total qualifying interest for the year.
- Line 1: Enter investment interest paid or accrued in 2025. Include interest on debt for property held for investment (e.g., producing dividends or gains). Add amounts from Schedule K-1 (Form 1065 or 1120-S). Exclude personal interest, passive activity interest, or interest on tax-exempt bonds.
- Line 2: Input any disallowed investment interest carried forward from 2024 (from last year’s Form 4952, line 7).
- Line 3: Add lines 1 and 2 for your total investment interest expense.
Part II: Net Investment Income
Here, you determine the income cap for your deduction.
- Line 4a: Enter gross income from investment property, such as interest, ordinary dividends (excluding Alaska Permanent Fund dividends), annuities, and royalties. Include Schedule K-1 amounts and certain recharacterized passive income.
- Line 4b: Portion of line 4a that are qualified dividends.
- Line 4c: Subtract line 4b from 4a.
- Line 4d: Net gain from disposing of investment property (gains minus losses, including capital gain distributions).
- Line 4e: Smaller of line 4d or your net capital gain from investment property.
- Line 4f: Subtract line 4e from 4d.
- Line 4g: Amount of qualified dividends (from 4b) and net capital gains (from 4e) you elect to include in investment income. This election can increase your deduction but may affect preferential tax rates—use with caution.
- Line 4h: Add lines 4c, 4f, and 4g for total investment income.
- Line 5: Enter allowable investment expenses (e.g., deductions connected to producing investment income, like depreciation). Exclude miscellaneous itemized deductions suspended after 2017.
- Line 6: Subtract line 5 from 4h for net investment income (enter 0 if negative).
Part III: Investment Interest Expense Deduction
This finalizes your deductible amount.
- Line 7: Subtract line 6 from line 3 for disallowed interest to carry forward to 2026 (enter 0 if negative).
- Line 8: The smaller of line 3 or line 6—this is your 2025 deduction. Report it on Schedule A (Form 1040), line 9.
Pro tip: If electing to include qualified dividends or capital gains (line 4g), adjust your tax calculations using the Qualified Dividends and Capital Gain Tax Worksheet.
Limitations, Carryovers, and Special Rules
Your deduction can’t exceed net investment income, but unused amounts carry forward indefinitely. Special considerations include:
- Elections: Including qualified dividends or capital gains in investment income can boost your current deduction but increase taxes on those items.
- Alternative Minimum Tax (AMT): This deduction may trigger AMT adjustments—check Form 6251.
- At-Risk Rules: If applicable, use Form 6198 before finalizing.
- Partnerships/S Corporations: Allocate interest based on investment use.
For 2025, investment expenses like advisory fees remain non-deductible due to prior tax law changes.
How to Report the Deduction on Your Tax Return
Once calculated, enter the amount from line 8 on Schedule A (Form 1040) as an itemized deduction. If part of it relates to royalties or non-passive business, report accordingly on Schedule E or other forms. Attach Form 4952 to your return if required (e.g., if you have carryovers or elections).
Common Mistakes to Avoid When Filing Form 4952
- Misclassifying interest: Ensure it’s truly for investments, not personal or passive use.
- Forgetting carryovers: Always include prior-year disallowed amounts.
- Overlooking elections: Weigh the trade-off of including qualified dividends/capital gains.
- Ignoring expenses: Deduct only allowable investment expenses on line 5—many are suspended post-2017.
- Not consulting sources: Use IRS instructions or tax software to avoid errors.
Frequently Asked Questions About IRS Form 4952
1. What if my net investment income is zero?
You can’t deduct any interest this year, but carry it forward via line 7.
2. Can I deduct interest on loans for rental property?
Only if it’s investment property generating taxable income—not passive rental unless recharacterized.
3. Is Form 4952 required every year?
Only if you have qualifying interest and need to calculate the limitation.
4. Where can I download Form 4952?
From the IRS website: https://www.irs.gov/pub/irs-pdf/f4952.pdf.
Does this deduction apply to cryptocurrencies or other alternative investments?
Yes, if the borrowing is for taxable investment assets producing income like interest or gains.
Final Thoughts on Maximizing Your Investment Interest Deduction
IRS Form 4952 is a powerful tool for investors to reduce taxes on borrowing costs, but accuracy is key to avoiding audits. By understanding the form’s structure and limitations, you can confidently claim this deduction for 2025. If your situation is complex, consider consulting a tax professional. Stay updated with IRS resources for any future changes, and file on time to make the most of your investments.