"Why is interest reported in Box 1 of K-1 (Form 1041) not considered part of investment income on Form 4952"
It is the figure on Line 14E (E Code) of your K-1 that gets transferred to Line 4a on your Form 4952 (see screenshot).
Note that investment interest expense can be deducted at the entity level and, if so, will be deducted at that level first.
