Investment Interest Deduction

The tax laws make a big distinction between interest on loans you take out for personal purposes, and loans you take out for your business, or to produce income through investments.

Interest on loans used for personal purposes is not deductible unless it's qualified home mortgage interest or, in some cases, interest on student loans.

However, you can deduct interest on loans taken out to purchase business assets or inventory, for working capital, or for some other business-related reason. Interest on business-related loans would be deductible on your Schedule C.

If you take out a mortgage or other loans related to your ownership of investment real estate, the interest would be deductible on Schedule E.

You may also be able to deduct interest on margin loans from your broker, or other loans you took out in order to purchase investments. These loans are the focus of our discussion in this section.

Before you deduct investment interest, you need to determine that:

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax� Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.