Deducting the interest on a loan I got from a relative, that I am using to invest in stocks

[mguardos]

I got a loan from a relative that I am fully using to invest in stocks. It is my understanding that I could deduct the interest of the loan if I got it from a financial institution

Can I still deduct the interest if coming from a relative? What documentation do I need to provide to justify the loan?

PS: The loan rate is above the Applicable Federal Rate and my relative lives abroad

[Anonymous]

Because of the variety of limits imposed on interest deductions, the IRS provides special rules for allocating interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds.

Under the tracing rules, interest expense is allocated in the same way as the debt on which the interest is paid. The debt, in turn, is allocated by tracing payouts of the debt proceeds to specific expenditures.

if you can trace the loan proceeds going into the investment account, you can deduct the interest as investment interest expense (form 4952)    you should know that investment interest allocable to tax exempt securities is not deductible.     other investment interest is deductible only to the extent of investment income - non-qualified dividends, net short term capital gains, royalties and other interest income.  you can elect to allocate qualified dividends and long-term gains to investment income but then you don't get the lower rate on them.   in addition you must be able to itemize your deductions 

[mguardos]

Thanks Hackitoff for the reply,

Do you know if there is any particular document I need to provide to document the loan? Or a standard promissory note would make it?