This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Investment Interest Deduction

By: John Pitlosh

Understanding the investment interest deduction can pay big dividends. The purpose of this article is to get individuals up to speed on how the investment interest deduction works, and how it can benefit their own situation. Whether someone is looking to manage the tax consequences of a stock sale or they want to leverage their investment dollars, people borrow money to invest all the time. Even though investors use borrowed money to invest, most do not realize they can deduct the interest from these loans and even fewer understand how to comply with the deduction rules.

Investment Interest

The starting point for the investment interest deduction is knowing that the source of the money isnt as critical as the purpose for the borrowed money. For example, if an investor take's a margin loan from their investment portfolio to buy his girlfriend a car with the proceeds, the interest from this loan won't qualify as investment interest. However, if the investor borrows money from his credit card to buy Google stock, then the interest on his credit card bill due to the purchase of the Google stock would be deductible as investment interest.

Taking a loan to buy a stock and deducting the interest is pretty straight forward, but there are some types of borrowed investment purchases that will generate interest that won't qualify under the investment interest deduction rules due to specific exemptions outlined in the code and regulations.
  • Tax Exempt Securities - Interest expenses attributable to the purchase of tax exempt securities like municipal bonds will not qualify for the investment interest deduction.
  • Passive Activity Investments - Interest expenses related to a passive activity such as rental real estate are not considered investment interest, and they are covered by their own set of rules and regulations.


Once the interest can be traced to a qualified investment the next step is determining the amount of interest that is deductible in a given year. Since virtually everyone is a cash basis taxpayer, the investment interest is deducted in the year that the interest is actually paid. However, a cash basis taxpayer is not allowed to prepay interest for a future year and collect a deduction for the prepaid interest payment in the current year.

Deduction Limitations

The amount of investment interest deduction that is allowed for any given year is limited to the amount of investment income that is produced in that year. For example, if taxpayer Mr. Xs available deduction for the year is $12,000 and he only has investment income of $8,000 than his deduction is limited to $8,000 for that year. Fortunately for Mr. X, the remaining $4,000 will carry over indefinitely until its used up.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%
YHOO $36.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs