Margin Loan Interest Deduction
One area of confusion in the area of tax deductions comes from interest. Is there a margin loan interest deduction? How does a margin loan fit into the overall interest deduction situation?
A margin loan is a loan taken out mainly for the purposes of investment. It uses stocks and other investment securities as collateral. The main benefit of a margin loan is that it allows you to keep your investments intact while at the same time using them to provide additional funds for investment. There are some drawbacks to margin loans as well as the potential for good. Like all investments, there is risk that is almost always directly connected to the potential rate of return. However, is there a margin loan interest deduction?
Is the interest paid on the margin loan deductible as investment interest? Ultimately, the answer is going to lay in the use of the loan funds. The IRS allows interest as a deduction when the loan proceeds are used for the purpose of income producing investments. If the loan is for personal purposes, the interest is not deductible. Since the purpose of the margin loan, by definition almost, is to provide investment capital, any interest will be deductible.
Of course, you must make sure that the loan proceeds are used for income generating investments. If you take the proceeds from the loan and deposit it in a savings account until the time you are ready to make the investment, this is not considered a personal purpose. Since the funds are basically on hold until being invested, the interest on them might still be considered investment interest.
The amount of investment interest that you are allowed to deduct, including margin loan interest, can not exceed the total amount of your investment income in any given year. If you pay more investment interest than you have investment income, you can carry over the excess to subsequent years. The investment interest is calculated on IRS Form 4952, the Investment Interest Expense Deduction form. This form is fairly easy to complete and must be attached to your tax return.
The margin loan interest deduction is actually just a form of the general allowable deduction for interest paid for any income producing investment. It does not matter if the loan proceeds are used for any time of investment including real estate. The only difference will be in the way the deduction is recorded and calculated on the Form 4952 and other Schedules that must be included with your tax return.