Form 4952 Investment Interest Expense Deduction

[Mezmorize3]

I am a partner in a partnership and have a net section 1231 Gain of 2,000,000 and I have investment interest that I am personally paying. Can I use that amount of investment interest deduction to reduce my 1231 Gain?

[Anonymous_]

See https://www.thetaxadviser.com/issues/2022/mar/maximizing-investment-interest-deduction.html

I will also page @Rick19744 

[Mike9241]

investment interest expense is an itemized deduction, assuming you itemize, that can offset investment income but not long-term capital gains (LTCG) or qualifying dividends (QD) unless an election is made to treat a portion of LTCG and/or QD as not qualifying for their preferential tax treatment. 

first, the $2M flows to form 4797 where it's reduced by any unrecaptured 1231 losses from the prior 5 years and any 1231 losses from the current year. the balance flows to schedule D as LTCG 

[Rick19744]

Is this interest expense related to the purchase of your partnership interest?

[Mezmorize3]

Does it make a difference if I used the money to purchase my partnership interest or not? @Rick19744

[Rick19744]

I wouldn't have asked the question if it didn't matter.

There are a number of other issues that need to be addressed as well, all of which will impact how this gets reported.

You should have a one on one with a tax professional as this forum is not conducive to having a back and forth "dialog".

You can also review IRS publication 550 in advance of your meeting.

[Mezmorize3]

@Rick19744  Apologies, I did not mean for that to come off rude. I meant it to mean that if I didn't use it for my partnership interest then can I not take it as a deduction towards my gain. Thank you for all your help. 

[Rick19744]

The current facts are limited and the interest expense can be:

• business interest expense reflected on Sch E
• passive activity interest expense
• investment interest expense

That's why I am recommending a one on one dialog where it is much easier to talk through the facts and determine the correct reporting of the interest expense.  All three will have different ramifications on your tax return.

[Mezmorize3]

@Rick19744  ok, I understand. I will get with a tax advisor. thank you again for your help.