Updated October 9, 2026. Quick answer: Form 4952 figures how much investment interest expense you can deduct for 2025 and how much carries forward. The IRS puts the limit in one sentence: the deduction is limited to your net investment income. Individuals, estates and trusts file it to claim the deduction, unless a short exception applies. Line 8 is the smaller of total interest (line 3) and net investment income (line 6), and line 7 carries any disallowed amount to 2026.
Related reading on this site: IRS Publication 550.
S corporation return (Form 1120-S) for 2025, read line by line: Form 1120-S Schedule K lines 11 to 13 and Form 1120-S Schedule K lines 17 and 18.
Partnership return (Form 1065) for 2025, read line by line: Form 1065 Schedule K lines 12 to 14 and Form 1065 Schedule K lines 15 to 21.
Schedule D and Schedule E (Form 1040) for 2025, read line by line: Schedule D line 20.
Schedule A and Schedule B (Form 1040) for 2025, read line by line: Schedule A lines 9 and 10.
The shareholder’s Schedule K-1 (Form 1120-S), boxes 13 to 19: Schedule K-1 boxes 14 and 15 and Schedule K-1 box 17 codes A, B and U.
The shareholder’s Schedule K-1 (Form 1120-S), read box by box: Schedule K-1 boxes 4 to 6 and Schedule K-1 box 12.
The partner’s Schedule K-1 (Form 1065), read box by box: Schedule K-1 box 13, Schedule K-1 box 20 A and B and Schedule K-1 box 20 N AE AF.
The partner’s Schedule K-1 (Form 1065), read box by box: Schedule K-1 box 5 and Schedule K-1 box 6.
What Form 4952 does and who must file
The general instructions open with the purpose: “Use Form 4952 to figure the amount of investment interest expense you can deduct for 2025 and the amount you can carry forward to future years.” “Your investment interest expense deduction is limited to your net investment income.” For background the form points to “Pub. 550, Investment Income and Expenses.”
On who files: “If you are an individual, an estate, or a trust, you must file Form 4952 to claim a deduction for your investment interest expense.” The exception is narrow and all three conditions must hold. The form says “You don’t have to file Form 4952 if all of the following apply.”
| Condition | Text of the exception |
|---|---|
| Investment income | “Your investment income from interest and ordinary dividends minus any qualified dividends is more than your investment interest expense.” |
| Other expenses | “You don’t have any other deductible investment expenses.” |
| Carryover | “You don’t have any carryover of disallowed investment interest expense from 2024.” |
The reasoning of the table is that if your interest and ordinary dividend income already exceeds the interest, and nothing carries over, there is nothing for the form to limit. Interest on a loan used for more than one purpose can need splitting: “If you paid or accrued interest on a loan and used the loan proceeds for more than one purpose, you may have to allocate the interest.” “This is necessary because different rules apply to investment interest, personal interest, trade or business interest, home mortgage interest, and passive activity interest.”
Part I: what counts as investment interest expense
Line 1 starts with a definition: “Enter the investment interest expense paid or accrued during the tax year, regardless of when you incurred the indebtedness.” “Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocable to property held for investment (as defined later).” Pass-through interest is included: “Include investment interest expense reported to you on Schedule K-1 from a partnership or an S corporation.”
The instructions then list what is not included. Investment interest expense does not include “Personal interest under section 163(h), including qualified residence interest.”, “Interest expense that is properly allocable to a passive activity.”, “Any interest expense that is capitalized, such as construction interest subject to section 263A.” and “Interest expense related to tax-exempt interest income under section 265.” The passive activity item points to Form 8582, which the form names: “See the Instructions for Form 8582, Passive Activity Loss Limitations, for details.”
The meaning of investment property is spelled out: “Property held for investment includes property that produces income, not derived in the ordinary course of a trade or business, from interest, dividends, annuities, or royalties.” “However, it doesn’t include an interest in a passive activity.” Line 2 is the carryover from the prior year, exactly as the line wording in the table below shows. The sum of lines 1 and 2 is line 3.
Part II: building net investment income, line by line
Net investment income is the number that caps the deduction. The form builds it in steps, shown here with each line’s own wording:
| Line | Wording on the form |
|---|---|
| 1 | “Investment interest expense paid or accrued in 2025 (see instructions)” |
| 2 | “Disallowed investment interest expense from 2024 Form 4952, line 7” |
| 3 | “Total investment interest expense. Add lines 1 and 2” |
| 4a | “Gross income from property held for investment (excluding any net gain from the disposition of property held for investment)” |
| 4b | “Qualified dividends included on line 4a” |
| 4c | “Subtract line 4b from line 4a” |
| 4d | “Net gain from the disposition of property held for investment” |
| 4e | “Enter the smaller of line 4d or your net capital gain from the disposition of property held for investment.” |
| 4f | “Subtract line 4e from line 4d” |
| 4g | “Enter the amount from lines 4b and 4e that you elect to include in investment income.” |
| 4h | “Investment income. Add lines 4c, 4f, and 4g” |
| 5 | “Investment expenses (see instructions)” |
| 6 | “Net investment income. Subtract line 5 from line 4h. If zero or less, enter -0-” |
| 7 | “Disallowed investment interest expense to be carried forward to 2026. Subtract line 6 from line 3. If zero or less, enter -0-” |
| 8 | “Investment interest expense deduction. Enter the smaller of line 3 or line 6.” |
A few notes from the instructions help. Line 4a gross income is “income, unless derived in the ordinary course of a trade or business, from interest, ordinary dividends (except Alaska Permanent Fund dividends), annuities, and royalties.” Net gains are kept apart: “Don’t include on line 4a any net gain from the disposition of property held for investment. Instead, enter it on line 4d.” For line 4d the instructions note “When figuring this amount, include capital gain distributions from mutual funds and capital loss carryovers.”
Line 5 is defined as “Investment expenses are your allowed deductions, other than interest expense, directly connected with the production of investment income.”, and a caution adds that you should not “include any miscellaneous itemized deductions, which aren’t allowed deductions in tax years beginning after December 31, 2017, and before January 1, 2026.”
The line 4g election for qualified dividends and net capital gain
By default the qualified dividends and long-term gains on investments are not counted: “In general, qualified dividends and net capital gain from the disposition of property held for investment are excluded from investment income. But you can elect to include part or all of these amounts in investment income.”
The election has a tax cost, and the form puts it in a caution: “The qualified dividends and net capital gain that you elect to include in investment income on line 4g aren’t eligible to be taxed at the qualified dividends or capital gains tax rates.” “You should consider the tax effect of using the qualified dividends and capital gains tax rates before making this election.” “Once made, the election can be revoked only with IRS consent.”
The mechanics: “To make the election, enter on line 4g the amount you elect to include in investment income (don’t enter more than the sum of lines 4b and 4e).” On timing: “Generally, you must make this election on a timely filed return, including extensions.” The instructions also describe how line 4g is attributed: “The amount on line 4g is generally treated as being attributable first to net capital gain from property held for investment (line 4e), and then to qualified dividends (line 4b).” Whether giving up the lower rates is worth a larger deduction is a tax return calculation; the related Net Investment Income Tax is covered on the 2026 NIIT page and the form is Form 8960.
Part III: the deduction, the carryforward and where it goes
Line 8 is the smaller of two numbers, and line 7 keeps the rest: line 7 reads “Disallowed investment interest expense to be carried forward to 2026.” The following is an illustration with made-up amounts, not an IRS example. A taxpayer has $12,000 of interest on a margin loan, no carryover, $10,000 of qualifying investment income and $1,000 of investment expenses:
| Step | Amount | Note |
|---|---|---|
| Line 1, interest paid on the investment loan | $12,000 | Illustration input |
| Line 2, carryover from last year | $0 | Illustration input |
| Line 3, total investment interest expense | $12,000 | Computed here: $12,000 plus $0 |
| Line 4h, investment income | $10,000 | Illustration input, no gain and no election |
| Line 5, investment expenses | $1,000 | Illustration input |
| Line 6, net investment income | $9,000 | Computed here: $10,000 minus $1,000 |
| Line 7, carried forward | $3,000 | Computed here: $12,000 minus $9,000 |
| Line 8, deduction | $9,000 | Computed here: smaller of $12,000 and $9,000 |
In the illustration the $3,000 on line 7 is the amount that moves to next year, because the deduction on line 8 is limited to the $9,000 of net investment income.
For an individual, line 8 goes on Schedule A: Generally the line 8 amount, less any part on Form 6198, goes “on Schedule A (Form 1040), line 9, even if all or part of it is attributable to a partnership or an S corporation.” Exceptions apply: “However, if any part of the interest expense is attributable to royalties, enter that part on Schedule E (Form 1040).” For estates and trusts, the same line 8 amount goes “on Form 1041, line 10.”
Two cross-references follow. For the alternative minimum tax: “Deductible interest expense may be an adjustment for the AMT.” See Form 6251. For at-risk limits: “If any of your deductible investment interest expense is attributable to an activity for which you aren’t at risk, you must also use Form 6198, At-Risk Limitations, to figure your deductible investment interest expense.” The Schedule A side of the deduction is on Schedule A. The Schedule A instructions define the term: “Investment interest is interest paid on money you borrowed that is allocable to property held for investment.” “Complete and attach Form 4952 to figure your deduction.”
Which revision applies
The edition read for this page is Form 4952 for 2025, which includes its instructions in the same file and is the revision irs.gov served when it was read on 2026-10-09. Check the revision printed on the form you are filing, because a different year can change the line numbers and the carryforward year. On later changes the form says “For the latest information about developments related to Form 4952 and its instructions, such as legislation enacted after they were published, go to www.irs.gov/Form4952.” The form footer reads “Form 4952 (2025) Created 5/28/25”.
Common mistakes
- Treating line 8 as the interest you paid. It is the smaller of line 3 and line 6, and the instructions state that the deduction is limited to net investment income.
- Electing to count qualified dividends or net capital gain on line 4g without checking the rate tradeoff. The form says those amounts are then not eligible for the qualified dividends or capital gains rates.
- Counting interest that the instructions exclude, such as personal interest, qualified residence interest or interest allocable to a passive activity, as investment interest on line 1.
Related: net investment income tax 2026, Form 8960, Form 8582, and Form 6251.
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- Form 4952 (2025) with instructions: https://www.irs.gov/pub/irs-pdf/f4952.pdf
- Instructions for Schedule A (Form 1040) (2025): https://www.irs.gov/pub/irs-pdf/i1040sca.pdf
Read from the IRS documents linked above on October 9, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.