The Investment Interest Expense Deduction is limited to Net investment income (Form 4952, line 6), which in turn depends on lines 4e ("Enter the smaller of line 4d or your net capital gain from the disposition
of property held for investment. See instructions") and 4d ("Net gain from the disposition of property held for investment").
I could not find the instructions that are being referred to. For the purposes of calculating net investment income on Form 4952, would net investment income include a very large capital loss carryover, or would only the $3000 limit on capital loss be taken into account? (That is, would a very large capital loss essentially prevent you from taking this deduction?)
It is limited due to the loss ... read the form 4952 where it says to enter the lesser of the expenses/the gain or the gain ... and you don't have a gain so your deductions are limited to zero this year but they an be carried forward.
The deduction is limited to the net investment income, not necessarily the net gain because there are interest and dividends that have to be added to the net gain to arrive at net investment income as well. But my question is basically if you have a large net capital loss (e.g., $20,000), would line 4d/e be $0, -$3000, or -$20,000?
4d would be zero if there are net capital losses.
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