Where are fees and commissions for investments deducted?

If they are deductible, investment expenses other than investment interest are taken as miscellaneous deductions on Form 1040, Schedule A (PDF), Itemized Deductions. These deductions must be reduced by 2% of your adjusted gross income.

Commissions and fees for the acquisition or sale of an asset are added to the basis of that asset and are not deductible. For example, acquisition fees, sales commissions, and load charges paid in connection with the purchase or selling of mutual fund shares are not deductible. They can usually be added to the basis of the shares.

Fees for managing investments, such as custodial fees and management fees, are deductible. Fees you pay a broker to collect taxable bond interest or stock dividends are deductible. Fees that pass through to you from non-publicly offered mutual funds, partnerships, or trusts are deductible. All of these fees are subject to the 2% limit. For more information, refer to Publication 529, Miscellaneous Deductions; Publication 550, Investment Income and Expenses; and Publication 564, Mutual Fund Distributions.

References:

• Publication 17, Your Federal Income Tax for Individuals
• Publication 529, Miscellaneous Deductions
• Publication 550, Investment Income and Expenses
• Publication 564, Mutual Fund Distributions

Is a real estate investment considered investment property? Is the interest deductible as investment interest if you cannot deduct it as mortgage interest?

If you borrow money and use it to buy property you hold for investment, the interest you pay is deductible as investment interest subject to certain limits. However, you cannot deduct interest you incurred to produce tax-exempt income. Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. For more information, refer to, Publication 550 Investment Income and Expenses; Tax Topic 505, Interest Expense; and Publication 925, Passive Activity and At-Risk Rules.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 505, Interest expenses
• Publication 925, Passive Activity and At-Risk Rules

We took a margin loan from our investment money market account. Can the interest we paid be deducted?

If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you pay it. You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. You cannot deduct any interest on money borrowed for personal reasons. Investment interest deductions are limited to the extent of investment income. The deductions amount is reported on Form 4952 (PDF), Investment Interest Deduction. The deduction is then taken as an itemized deduction on line 13 of Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 550, Investment Income and Expenses.

References:

• Publication 17, Your Federal Income Tax
• Tax Topic 505, Interest Expenses
• Publication 550, Investment Income and Expenses
• Form 4952 (PDF), Investment Interest Deduction

If I don't itemize my deductions can I still deduct my investment expenses such as margin interest?

Investment expenses for individuals must be taken as itemized deductions. Investment expenses (other than interest expenses) are deducted on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions subject to the 2% of your Adjusted Gross Income (AGI) limit. Investment Interest, such as margin interest, is reported on Form 4952 (PDF) , Investment Interest Deduction, and on Form 1040, Schedule A Itemized Deductions, but is not subject to the 2% of your Adjusted Gross Income (AGI) limit. For more information, refer to Publication 550, Investment Income and Expenses; Publication 529, Miscellaneous Deductions; and Tax Topic 508, Miscellaneous Expenses.

References:

• Publication 550, Investment Income and Expenses
• Form 4952 (PDF), Investment Interest Deduction
• Tax Topic 508, Miscellaneous Expenses
• Publication 529, Miscellaneous Deductions

I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment and the interest you paid on the second mortgage would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions. For more information, refer to Publication 550, Investment Income and Expenses, and Publication 936, Home Mortgage Interest Deduction.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 505, Interest expense

Is the interest paid on the loan for a lot (with no home on it) deductible as mortgage interest?

Generally, the interest paid on the loan incurred for purchasing a lot is not deductible as mortgage interest.

If you are planning to build a house, you can start deducting mortgage interest once construction begins. The following is from Publication 936, Home Mortgage Interest Deduction:

You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. The 24-month period can start any time on or after the day construction begins. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expenses

We purchased land to build a home on. Is the interest on the mortgage secured by the land deductible?

Interest on the mortgage secured by bare land is not, generally, deductible as mortgage interest. In order for interest to be deductible as home mortgage interest, the loan must be secured by a qualified residence. A qualified residence is your principal residence or one other residence selected by you that you use as a residence.

Once you start construction of your home, you may treat the home under construction as a qualified residence for a period of up to 24 months, but only if the home becomes a qualified residence at the time it is ready for occupancy. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

Can I deduct my investment expenses as business expenses?

In order to properly determine the correct treatment income and expenses, it is first necessary to classify the type of investment activity occurring.

An Investor buys and sells securities solely for their own account. They are not engaged in a trade or business. An investor's investment expenses are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF) , subject to the 2% AGI limitations (with the exception of investment interest which is not a miscellaneous deduction but subject to its own special limitations). An investor's sale of securities results in capital gains and losses.

A Dealer in securities has inventories of securities that they hold for sale to customers in the ordinary course of their trade or business. Their business expenses are deductible as ordinary business expenses. A dealer doing business as a sole proprietor would deduct their expenses on 1040 Schedule C. A Dealer's sale of securities is reported as ordinary income.

A third classification is Trader . A Trader is in the trade or business of buying and selling securities for their own account. You are a trader in securities if you meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.

Your activity must be substantial.

You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold.

The frequency and dollar amount of your trades during the year.

The extent to which you pursue the activity to produce income for a livelihood

The amount of time you devote to the activity.

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A trader's business expense are reported on Form 1040, Schedule C (PDF) , not as itemized deductions on 1040 Schedule A. The deductions are not subject to the limitations that apply to Schedule A (2% AGI limitation and special limits on investment interest). A trader gain or loss on sale of securities is reported as capital gain or loss on Form 1040, Schedule D (PDF) unless they have made the mark-to-market election.

If a trader has made a mark-to-market election, gains and losses are reported on part II of Form 4797 (PDF) as ordinary income. For information regarding the manner and timing of making the mark-to-market election, see Publication 550 , Investment Income and Expense or Revenue Procedure 99-17, 1999-1 CB 503.

The proper classification of your investment activities is important to determine how income and expenses are to be reported. Investors trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions. Dealers sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses.

Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. An investor trades for profit-motivated reasons such as long-term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case. These distinctions have been established through court cases.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.

References:

• Publication 535, Business Expenses
• Form 3115 (PDF), Application for Change in Accounting Method

I buy and sell stocks as a day trader using an online brokerage firm. Can I treat this as a business and report my gains and losses on Schedule C?

A business is generally an activity carried on for a livelihood or in good faith to make a profit. Rather than defined in the tax code, exactly what activities are considered business activities has long been the subject of court cases. The facts and circumstances of each case determine whether or not an activity is a trade or business. Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of assets, if your income is primarily from the sale of securities rather than from dividends and interest paid on securities, and if you expect this income to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, then your trading activity might be a business.

For details about not-for-profit activities, refer to Publication 535, Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) , instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses , unless you file an election to change you method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses and your trading expenses in Part II of Form 4797, Sale of Business Property. See Publication 550, Investment Income and Expenses , for details.

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.

References:

• Publication 535, Business Expenses
• Publication 550, Investment Income and Expenses
• Form 3115 (PDF), Application for Change in Accounting Method