Investment Interest

Is interest paid on debt used for investment purposes. Typical examples are interest paid on vacant land held for investment and margin account interest. Investment interest is deductible as an itemized deduction but only to the extent the taxpayer has net investment income and any excess is carried over to future years. Generally, net investment income means investment income less investment expenses. As an example, suppose a taxpayer’s only investment income is $1,000 of taxable interest and dividend income. He also paid property taxes of $400 and interest of $1,300 on some vacant investment land. His net investment income is $600 ($1,000 - $400). Therefore, his investment interest deduction is limited to $600 and the excess $700 is carried over to future years. If the taxpayer had capital gains, he could elect to forgo the special capital gains rates and treat the capital gains as investment income and thereby increase the amount of investment interest he could deduct.