What is an Investment Interest Expense?

An investment interest expense is any type of interest that is generated on borrowed funds used to acquire different investments. Interest of this type is sometimes eligible for use as a tax deduction, depending on the nature of the investment and the current tax laws that apply in the nation where the investor resides. In situations where the investment interest expense can be claimed, it is often limited by the total amount of investment income that is actually received in the tax period under consideration.

One of the most common situations where investment interest expense is generated has to do with the use of a margin account to make investments. Brokers and dealers sometimes allow clients with solid credit ratings and a good track record of payment to essentially purchase securities on a type of credit that is extended by the brokerage. This is known as buying on margin. Known as margin interest, this form of investment interest expense is based on the amount of resources drawn from the margin account to cover the purchases, and how long it takes the investor to pay off that borrowed amount.

Many investors offset investment interest expense by purchasing securities that are anticipated to increase in value in the short term, then sell them at a significant profit once that increase is actually realized. This makes it possible to quickly settle the margin account and keep the margin interest at a minimum. At the same time, the investor is able to conduct the transactions in a manner that does not require the use of his or her financial assets, and still make money from the effort.

Many nations do allow investors to utilize investment interest expense as a tax deduction. It is important to note that the conditions that must be met in order to declare the interest expense will vary somewhat from one country to the next. Typically, the expense must have to do with dividends or other types of interest that are actually received during the tax period. In addition, if the investor held the investment for both personal and business gains, then the amount of the investment interest expense must be based on the percentage or proportion of the investment that is relevant to each type of gain. In order to make sure that the calculation is in compliance with current tax laws, it is advisable to consult a tax professional who will be up to date on current laws on how to properly calculate and claim this type of deduction.