Investment Income Limitations
For individuals, investment interest is tax deductible, but only to the extent that it does not exceed net investment income. Net investment income, in turn, incurs a tax surcharge to the extent that a taxpayer’s income exceeds a certain threshold. First, some definitions:
Investment interest is an interest expense paid on property (stocks, real estate) that is held for investment. This includes income-producing property not derived in the ordinary course of business that generates interest, dividends, annuities, or royalties.
Net investment income includes:
• interest, dividends, and royalties not earned from a trade or business (portfolio income)
• investment income from a trade or business that is a passive activity (passive income)
• investment income from the sale of property held in a trade or business (may be passive income or otherwise)
Net investment income does not include gains from th