The short answer
Interest on money you borrow to buy investments — such as margin interest or an investment loan — is investment interest. If you itemize, you can deduct it on Schedule A, but only up to your net investment income for the year. You figure the limit on Form 4952, and any amount you cannot deduct carries forward.
What counts as investment interest
Investment interest is interest paid or accrued on a loan, or part of a loan, that is allocable to property held for investment — property that produces interest, dividends, annuities, or royalties, or that you hold for gain, outside a trade or business. It does not include:
- home mortgage interest (qualified residence interest) or other personal interest;
- interest allocable to a passive activity, such as most rental activities;
- interest that is capitalized;
- interest on debt used to buy or carry tax-exempt investments.
What matters is how the borrowed money was used. If a loan was used for more than one purpose, the interest may have to be allocated.
The net investment income limit
Your deduction is limited to net investment income: investment income minus investment expenses other than interest. On Form 4952:
- Investment income includes taxable interest and ordinary dividends from investment property, but not qualified dividends or net capital gain unless you elect to include them.
- Investment expenses are deductible expenses directly connected with producing investment income. Most expenses such as advisory fees are miscellaneous itemized deductions, which are not deductible.
The qualified dividend and capital gain election
You can elect to include part or all of your qualified dividends and net capital gain in investment income (Form 4952, line 4g). This raises your deduction limit, but the elected amount is no longer eligible for the 0%, 15%, or 20% capital gain rates and is taxed at ordinary rates. The election can be revoked only with IRS consent, so compare the tax both ways first. If you make it, use the Schedule D Tax Worksheet to figure your tax.
Example (illustrative, 2025)
Ana and Ben file jointly and itemize. They paid $8,000 of margin interest. Their investment income was $2,000 of taxable interest and $5,000 of ordinary dividends, of which $4,000 were qualified dividends, plus a $10,000 long-term capital gain. They have no other investment expenses and no carryover.
| Form 4952 line | No election | Elect $5,000 |
|---|---|---|
| 3 — total investment interest expense | $8,000 | $8,000 |
| 4a — interest and ordinary dividends | $7,000 | $7,000 |
| 4b — qualified dividends included on line 4a | $4,000 | $4,000 |
| 4c — line 4a minus line 4b | $3,000 | $3,000 |
| 4d and 4e — net gain and net capital gain | $10,000 | $10,000 |
| 4f — line 4d minus line 4e | $0 | $0 |
| 4g — amount elected | $0 | $5,000 |
| 4h and 6 — net investment income | $3,000 | $8,000 |
| 8 — deduction (smaller of line 3 or line 6) | $3,000 | $8,000 |
| 7 — carried forward to 2026 | $5,000 | $0 |
Without the election they deduct $3,000 and carry $5,000 forward. With the election they deduct all $8,000 now, but $5,000 of qualified dividends or capital gain is taxed at ordinary rates instead of the lower rates. Which is better depends on their tax brackets and whether they expect investment income in later years.
When you don't need Form 4952
You don't have to file Form 4952 if all of these apply:
- your investment income from interest and ordinary dividends, minus qualified dividends, is more than your investment interest expense;
- you have no other deductible investment expenses; and
- you have no carryover of disallowed investment interest from the prior year.
2025 vs. 2026
| 2025 | 2026 | |
|---|---|---|
| Form 4952 limit and carryforward | Apply | Apply (no change identified) |
| Miscellaneous investment expenses (advisory fees) | Not deductible | Not deductible — made permanent by P.L. 119-21, section 70110 |
| Section 68 overall limit on itemized deductions | Not applicable to investment interest | Enacted law (P.L. 119-21, section 70111): investment interest is no longer exempt from the section 68 limit |
What is enacted and what is draft: the change for 2026 is enacted law. How to apply it on the return comes from the 2026 draft Instructions for Form 8960, which describe a new section 68 worksheet and say the limitation generally applies to people in the highest tax bracket. For 2026, Rev. Proc. 2025-32 says the 37% bracket begins at taxable income over $640,600 for single filers and heads of household, $768,700 for married couples filing jointly, and $384,350 for married filing separately. Check the final 2026 forms and instructions before filing; this guide does not compute the 2026 limitation.
Common mistakes
- Deducting home mortgage interest as investment interest, or the reverse.
- Counting qualified dividends as investment income without making the election.
- Making the election without comparing the tax with and without it.
- Losing track of the carryforward from Form 4952, line 7.
- Deducting advisory fees as investment expenses.
Allocating interest when borrowed money is used for several purposes follows detailed tracing rules that this guide does not cover. The 2026 section 68 worksheet is described only in draft instructions. State tax treatment is not covered.