Form 4952: Investment Interest Deduction Rules and IRS Data

The instructions are on the form, and the form is the 2025 one

Search results and a few tax sites point to “Instructions for Form 4952” at irs.gov/instructions/i4952. On October 22, 2026 that address and irs.gov/pub/irs-pdf/i4952.pdf both returned “not found.” The IRS publishes the form and its instructions as one PDF (irs.gov/pub/irs-pdf/f4952.pdf): page 1 is the form, page 2 is blank, and pages 3 and 4 carry “General Instructions” and “Specific Instructions.” The version at that address is the 2025 form (“Created 5/28/25”), the one used for returns filed in 2026. We did not find a 2026 form on irs.gov, so the line numbers below are the 2025 lines; check them when the 2026 form appears.

The form says an individual, estate or trust “must file Form 4952 to claim a deduction for your investment interest expense,” with one exception: no form is needed if investment income from interest and ordinary dividends, minus qualified dividends, is more than the interest, you have no other deductible investment expenses and you have no carryover from 2024. Publication 550 (2025) repeats the same three tests.

What counts as investment interest, case by case

Section 163(d)(3) defines investment interest as interest on debt “properly allocable to property held for investment,” and removes qualified residence interest and interest taken into account for a passive activity under section 469. The allocation follows what the borrowed money was spent on, not what secures the loan: Publication 550 says “The allocation is not affected by the use of property that secures the debt,” and Treasury Regulation 1.163-8T(c)(1) says the same. A home equity line used to buy investments is therefore traced to the investment (our reading of those two sentences; see our guide to a HELOC on investment property).

Treasury's own pass-through rule is not written down: Regulation 1.163-8T(h), “Debt allocated to expenditures for interests in passthrough entities,” reads “[Reserved].” The working guidance is Publication 550 and Notice 89-35, which the Form 4952 instructions cite; we read Publication 550 and did not locate the text of the Notice. Borrowing to buy a syndication interest is the case where the label on the loan matters least and the assets inside the partnership matter most.

What counts as investment income, and the K-1 codes

Line 4a takes “interest, ordinary dividends (except Alaska Permanent Fund dividends), annuities, and royalties,” plus investment income reported on a Schedule K-1 from a partnership or S corporation. The Partner's Instructions for Schedule K-1 (Form 1065) tie three codes to the form: box 13 code H, “Investment interest expense,” to line 1; box 20 code A, “Investment income,” to line 4a; box 20 code B, “Investment expenses,” to line 5. Our guide to K-1 boxes covers code A; the box 13 code H line is the one that starts the interest side.

What does not count matters as much for a real estate investor:

• Passive income. Section 163(d)(4)(D) says investment income and investment expenses “shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity.” Rent from a limited partner interest in a syndication does not raise your net investment income for Form 4952. Publication 550's own example leaves $2,000 of passive partnership income out of the calculation.
• Return of capital. A nondividend distribution (Form 1099-DIV box 3) “reduces the basis of your stock” and is not taxed until basis is recovered, so it is not investment income (Publication 550). See our guide to REIT return of capital.
• Qualified dividends and long-term gain, unless elected. Section 163(d)(4)(B): qualified dividend income is included “only to the extent the taxpayer elects.”
• Investment expenses must be deductible. Line 5 takes expenses “only if you are allowed a deduction on your return.” The 2025 form's caution says miscellaneous itemized deductions are not allowed in years “beginning after December 31, 2017, and before January 1, 2026,” and that end date is now out of date: Public Law 119-21 section 70110(a) struck “and before January 1, 2026” from section 67(h). A fee paid for investment advice is a miscellaneous itemized deduction and stays out (our reading).

The line 4g election: what it buys and what it costs

If your investment income is smaller than your interest, you can raise line 4h by electing to treat part or all of your qualified dividends and net capital gain as ordinary investment income. The form warns that the amount elected “aren't eligible to be taxed at the qualified dividends or capital gains tax rates,” and that the election, once made, “can be revoked only with IRS consent.” It must be made on a timely filed return, including extensions, or on an amended return filed within 6 months of the due date (excluding extensions), marked “Filed pursuant to section 301.9100-2.”

The trade is simple to state. Electing $10,000 adds $10,000 of deduction, worth your ordinary rate, and taxes that $10,000 at your ordinary rate instead of 0%, 15% or 20%. The net of the two is the capital gains rate times $10,000. The rates below are the 2026 tables in Rev. Proc. 2025-32 (single filer ordinary brackets from Table 3; the capital gains 0% band ends at $49,450 and the 15% band at $545,500 of taxable income for a single filer, $98,900 and $613,700 for a joint return).

All figures are our arithmetic on the 2026 rates, and they ignore the 3.8% tax, state tax and any bracket the elected amount pushes you across. The last column is the point of the table: without the election the unused interest is not lost, it waits, and if you will have enough ordinary investment income next year the nominal value of waiting is the ordinary rate, not the capital gains rate. The election wins in the years when you do not expect to use the carryforward, or when your rate is lower now than it will be then. It is a question for a return preparer with your numbers, and the form itself tells you to “consider the tax effect” first.

A worked example (our assumptions and arithmetic). A single filer with an ordinary rate of 24% and a capital gains rate of 15% paid $14,000 of margin interest in 2025 and carries $2,000 from 2024, so line 3 is $16,000. Line 4a is $15,000 ($4,000 of interest and $11,000 of ordinary dividends, of which $2,500 are qualified, line 4b), so line 4c is $12,500. She sold shares for a $20,000 net long-term gain (lines 4d and 4e) and paid $1,500 of deductible investment expenses (line 5). With no election, line 4h is $12,500, line 6 is $11,000, line 8 is $11,000 and $5,000 carries to 2026. Electing $5,000 on line 4g makes line 4h $17,500, line 6 $16,000, line 8 $16,000 and the carryforward zero. The election costs $450 of extra tax ($5,000 taxed at 24% instead of 15%) and saves $1,200 (the extra $5,000 of deduction at 24%), a net of $750 now, which is 15% of $5,000. Whether that is better than a $5,000 carryforward depends on next year.

What changed for 2026, and what did not

• Section 163(d) did not change. The U.S. Code text on Cornell's Legal Information Institute shows its last amendment in 2018, and the Public Law 119-21 notes on section 163 concern subsections (h) and (j), not (d). The limit, the carryforward and the election are the same as in 2025.
• Miscellaneous itemized deductions are gone for good. Section 67(h) now reads “no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017.” Interest is outside that category (section 67(b)(1) lists “the deduction under section 163 (relating to interest)”), so investment interest survives, but investment expenses that are miscellaneous do not reach line 5.
• A new haircut on itemized deductions. Section 68(a), as amended by Public Law 119-21 section 70111, reduces itemized deductions “by 2/37 of the lesser of” the itemized deductions or the taxable income above where the 37% bracket begins. For 2026 that bracket begins at $640,600 for a single filer and $768,700 for a joint return (Rev. Proc. 2025-32). For a taxpayer whose itemized deductions are the lesser amount, 37% times 35/37 is 35%: a dollar of investment interest saves 35 cents, not 37 (our arithmetic).
• You have to beat the standard deduction. Investment interest is a Schedule A item. The 2026 standard deduction is $16,100 for a single filer and $32,200 for a joint return (Rev. Proc. 2025-32), so interest that does not lift your itemized total above those amounts gives no federal benefit.
• Timing. A cash-method taxpayer deducts interest only when paid (Publication 550), so interest for 2026 has to be paid by December 31, 2026 to count on the 2026 return.

The 3.8% tax and Form 4952

Treasury Regulation 1.1411-4(f)(3)(i) lists, as a deduction taken into account in net investment income, “Investment interest (as defined in section 163(d)(3)) to the extent allowed under section 163(d)(1).” The Form 8960 instructions say to enter on line 9a the investment interest “deducted on Schedule A (Form 1040), line 9.” Two things follow, both our reading. Interest you cannot deduct this year does not reduce net investment income this year; and an election that makes more interest deductible lowers the 3.8% base by the same amount where net investment income, not the income over the threshold, is the smaller number. The mechanics of that tax are in our guide to the net investment income tax on real estate.

What the IRS counts: who deducts investment interest

IRS Statistics of Income Publication 1304, Table 2.1, reports returns with itemized deductions by size of adjusted gross income, including an “Investment interest expense deduction” column. Money amounts are in thousands of dollars in the table; we show dollars. Only itemizers are in it.

Shares, averages and the bands that combine rows are our arithmetic on the table. For tax year 2022 the same table shows 823,414 returns and $23.46 billion on 15,290,841 itemized returns, an average of $28,496 (our arithmetic). From 2022 to 2023 the number of claimants rose 2.6% and the dollars 52.4% (our arithmetic), so the growth came from larger deductions per return, not many more filers. The pattern is leverage at the top: about two in three itemized returns with AGI of $10 million or more deduct investment interest, against fewer than one in fifty under $100,000. For a reader with $250,000 or more to invest, the useful comparison is the $200,000 to $500,000 band: 7.0% of itemizers, an average of $12,154.

What a reader can do with this

These are the levers the rules create, not recommendations for any one return.

• Know where you stand before you borrow. Net investment income is the ceiling. Interest, ordinary dividends (REIT and BDC distributions that are not return of capital or qualified) and royalties raise it; passive rental income and return of capital do not.
• Keep the paper trail the allocation rules ask for. Interest follows the use of the proceeds: keep the date the loan was funded, where the money went and any repayment. Mixed-use loans are split.
• Read your K-1 for box 13 code H and box 20 codes A and B before filing. A fund that borrowed reports its share of interest in code H; you add it to your own margin interest on line 1.
• Decide on the election after the numbers, not before. The table shows what it buys at each rate; the form makes it hard to undo. A late election is allowed only by amended return within 6 months of the due date, excluding extensions.
• Check the 2026 hurdles. The standard deduction ($16,100 single, $32,200 joint) and the new 2/37 limit on itemized deductions both change what a deducted dollar is worth.
• Pay 2026 interest by December 31, 2026 if you use the cash method and want it on the 2026 return.

Deciding whether to borrow against a portfolio or a home to hold REITs, BDCs or private real estate funds is a decision about risk, cash flow and the whole balance sheet, and the tax deduction is a small part of it. The box below connects readers with fee-only or fee-based advisers through WiserAdvisor. We are paid if you request a match, we have not vetted any adviser, and the match is for the money decision, not for preparing Form 4952 (our reading of what the box offers).

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 22, 2026: 26 U.S.C. 67, 68, 163 and 1411 (Legal Information Institute, Cornell); 26 CFR 1.163-8T and 1.1411-4 (Legal Information Institute, Cornell); Form 4952 (2025) with its printed instructions, Instructions for Form 8960 (2025), Partner's Instructions for Schedule K-1 (Form 1065) (2025) and Publication 550 (2025), irs.gov; Rev. Proc. 2025-32, irs.gov; IRS Statistics of Income, Publication 1304, Table 2.1, tax years 2022 and 2023 (irs.gov/pub/irs-soi). Public Law 119-21 sections 70110 and 70111 as shown in the amendment notes of the U.S. Code. Our arithmetic is marked and its script is saved with the data. This is analysis of public documents, not investment, legal or tax advice.