Investment Expenses

To encourage taxpayers to invest, tax laws allow a deduction for interest on loans used to purchase a taxable investment. You can deduct all of your interest up to the total of your net investment income (gross investment income less investment expenses).

Dividends and net capital gain from the disposition of investment property are not considered investment income. However, you may elect to treat dividends and new capital gains as investment income by subjecting them to ordinary income tax rates. This would make more of your investment interest deductible. We can calculate which is best in your situation — capital gains and dividend rate or interest deduction.

You can deduct ordinary and necessary investment expenses (except those related to tax-exempt investments) as miscellaneous itemized deductions, subject to the 2% of AGI limitation. Deductible expenses in this category may include costs of research (i.e., relevant subscriptions and professional advice) and security measures (i.e., safe-deposit boxes).

Expenses not directly deductible include stockbrokers' fees, legal fees, or title insurance. These are usually treated as adjustments to the investment's purchase or sale price.