any interest that is paid or accrued on indebtedness properly allocable to property held for investment.
The deduction of investment interest expense is limited to the net investment income for the year and is deductible as an itemized deduction on Schedule A.
Net investment income is gross investment income less deductible investment expenses. If interest expense exceeds the taxpayer's net investment income, he can carry forward the excess expense to future tax years when net investment income is available.
- ExampleGale borrows $20,000 to buy land and signed a 7%, 15 year note.
- Gale's only investment income is interest of $1,000, she could deduct the interest on the lending institution loan up to a maximum of $1,000 in the current year.
- Any remaining amount of interest would carry forward to future years and would be deducted when additional net investment income becomes available.