Investment Interest deduction limitation

[John of PA]

As we know, the Investment interest (Broker Margin loan interest) is deductibale to the extent of Net Investment Income. We can elect to include capital gains in investment income if we want. My question is, what is someone had a 20,000 gain from the sale of IBM stock, however thier overall net stock activity for the year reasulted in a 80,000 loss. Can they elect to include the 20,000 gain in the computation of investment income, or does the overal Net Capital loss prevent them from doing so.

[DonPriebe]

As we know, the Investment interest (Broker Margin loan interest) is deductible to the extent of Net Investment Income. We can elect to include capital gains in investment income if we want. My question is, what is someone had a 20,000 gain from the sale of IBM stock, however their overall net stock activity for the year resulted in a 80,000 loss. Can they elect to include the 20,000 gain in the computation of investment income, or does the overall Net Capital loss prevent them from doing so.

Form 4952 seems to allow you to elect only a portion of your NET capital gains (zero in this case).

[Snaggletooth]

All Investment Income

It is my understanding that all investment income, including dividends, capital gains, rent, etc. forms the ceiling for 4952 deductions.

If I am reading the question correctly (??) there is an election which denies capital gain rates for investments if interest is deducted on 4952. Not sure whether the election can applied "piecemeal" or not, but I would think so.

In the example given in the original question, it would appear that any favorable capital gain rates would be washed away anyway due to the overwhelming losses.

[John of PA]

Good Point

Good Point, but if you can include the 20,000 IBM gain as investment income, thus trigging a deductible margin interest, that comes at no cost becasue you are still showing an overall capital loss on the tax return's Sch D (80,000 overall loss). In my case here, the deduction of the Margin interest will almost eliminate all the the income tax liability.

[DonPriebe]

But How?

How are you going to include the $20,000 gain on one trade when Form 4952 only allows you to include a portion of your NET capital gains?

From the instructions ...

Line 4d. Net gain from the disposition of property held for investment is the excess, if any, of your total gains over your total losses from the disposition of property held for investment. When figuring this amount, include capital gain distributions from mutual funds and capital loss carryovers. [This is zero in your case]

Line 4g. 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.

What portion of zero do you wish to include?

[John of PA]

Thank you, appears to be clarified

Thank you Don. I just needed to confirm that it is, in fact NET capital gains. Unless I am missing something, I unfortunately have to conculde that there is no way one can deduct 40,000 of margin interest paid when thier dividend income is only 3000 and thier net stock activity is a loss. No election can get them thier deduction of Margin interest beyond the 3,000.

[erchess]

Am I missing something?

This guy borrowed money to invest in the stock market (buying on margin) and he lost money overall? Does that strike anyone else as foolish behavior?

[JohnH]

Doesn't sound foolish to me.
......... Signed B. Madoff

[John of PA]

Maybe, Mabye not..........

His realized gains over the last 3 years using margin leverage is about double the amount he lost in 08. Count me in though, if your point is using margin leverage is dangerous, risky and outright foolish, I would tend to agree. I'm for sitting on Blue Chips long term.

[erchess]

I don't mind

the idea of frequent trades to try and take advantage of relatively short term rises and falls of a stock, blue chip or not, but I personally think it is prudent to do that only with money you could entirely lose without shedding a tear.

[John of PA]

Fyi

Just an FYI, using margin leverage to grow can be with blue chips long-term, no frequent trades or ST market timing are needed.