Is Portfolio Line of Credit Interest Tax Deductible?

Interest on a portfolio line of credit is deductible only when you can trace the borrowed money to a qualifying use, and even then it comes with caps. The IRS ignores the fact that your brokerage account secures the loan and looks instead at where each dollar actually goes. Spend a draw on taxable investment property and the interest becomes investment interest, deductible up to your net investment income for the year. Spend it on a car, a vacation, or credit card payoff and the interest is personal, meaning no deduction at all.

The Tracing Rule Is What Matters

Internal Revenue Code Section 163 ties the tax treatment of interest to the use of the loan proceeds, not the collateral behind the loan.¹ Temporary Treasury regulation 1.163-8T walks through how to trace borrowed dollars from the credit line to the eventual expenditure.² The interest lands in one of four buckets: investment, business, passive activity, or personal. Each bucket has its own rules, and personal is the default when you can’t document anything else.

The cleanest way to satisfy the tracing rules is to route each draw into a dedicated account and spend it on one category of expenditure. Once you mix borrowed funds with your regular checking balance, the regulation’s ordering rules take over. Debt proceeds sitting in an account are treated as spent before any unborrowed money already there and before any later deposits, which can push your borrowed dollars toward expenditures you didn’t have in mind.²

The 15-Day Safe Harbor

If you spend from the account within 15 days after depositing a PLOC draw, you can treat that expenditure as made from the borrowed funds regardless of the default ordering.² It’s 15 days, not 30. Interest allocation runs on a daily basis, so a single draw used partly for investment on day one and partly for personal spending on day 45 has to be split across categories for the period each use was in effect.

When PLOC Interest Is Deductible: Investment Use

Most PLOC borrowers hoping to deduct interest are aiming for the investment interest bucket under IRC Section 163(d). When the proceeds go toward purchasing or carrying property held for investment, the interest qualifies, but the deduction is capped at your net investment income for the year.¹

Note the boundary: PLOC agreements generally prohibit using proceeds to buy additional securities or pay off a margin loan, so the investment property in question won’t be stocks or mutual funds bought with the draw. It’s other investment property that the line’s terms permit.

The Net Investment Income Cap

Net investment income equals investment income minus investment expenses. Investment income includes taxable interest, non-qualified dividends, royalties, annuities, and short-term capital gains from investment property.³ Income from passive activities is handled under a different regime and doesn’t count here.

On the expense side, miscellaneous itemized deductions subject to the 2-percent floor were suspended by the Tax Cuts and Jobs Act from 2018 through 2025, and the One Big Beautiful Bill Act made that elimination permanent starting in 2026. For most individuals, investment expenses are effectively zero, so net investment income now equals investment income.

Electing to Include Capital Gains and Qualified Dividends

Long-term capital gains and qualified dividends are excluded from net investment income by default, which preserves their preferential tax rates. You can elect on Form 4952 to include some or all of these amounts in net investment income to raise your allowable interest deduction.³ Every dollar you elect in loses its preferential rate and gets taxed as ordinary income, so run the numbers both ways before choosing.

Carryforward of Disallowed Amounts

Investment interest that exceeds net investment income in a given year isn’t lost. It carries forward indefinitely and remains available against future years’ net investment income.⁴ You’ll need to track the running balance for as long as it takes to use up.

You Have to Itemize

Investment interest is claimed on Schedule A, so it does nothing for you if you take the standard deduction.⁵ Check that your combined itemized deductions clear the standard deduction threshold before assuming the write-off will help.

AMT Adjustment

If you’re subject to the Alternative Minimum Tax, the allowable investment interest deduction can differ from the regular tax amount. Any difference is reported on Form 6251.⁶

When It Isn’t Deductible

Personal Spending

PLOC funds used for personal purposes, whether that’s paying off credit cards, funding a vacation, or buying a car, generate personal interest. Personal interest is fully non-deductible under IRC Section 163(h).¹ No carryforward, no workaround. This is also the classification the IRS will apply by default when your documentation doesn’t support anything else.

Tax-Exempt Bond Purchases

If you use PLOC proceeds to buy or carry tax-exempt obligations such as municipal bonds, none of the interest is deductible. IRC Section 265 bars deducting interest on debt incurred to purchase or carry investments whose income is exempt from federal tax.⁷ Mixing taxable and tax-exempt bonds in a portfolio you borrow against creates a real allocation problem.

Business and Passive Activity Uses

When PLOC funds go into a trade or business, the interest becomes business interest. It’s generally deductible but subject to the Section 163(j) limitation, which caps the deduction at business interest income plus 30 percent of adjusted taxable income from the business.¹ Disallowed amounts carry forward indefinitely. Small businesses with average annual gross receipts of $31 million or less over the prior three years (the most recent inflation-adjusted figure) are exempt from the cap.⁸

Proceeds used to fund a passive activity, such as acquiring rental real estate where you don’t materially participate, produce passive activity interest. This interest is deductible only against net income from your passive activities under IRC Section 469.⁹ Any excess is suspended and carries forward until you generate enough passive income or sell the entire activity in a fully taxable transaction.

Mixed-Use Draws and How Repayments Apply

If you use one PLOC for several purposes over time, each draw is traced separately and the interest on the outstanding balance is split across categories daily. The regulation also fixes the order in which repayments reduce the different portions of the debt:¹⁰

Personal expenditures are paid down first.
Investment and general passive activity expenditures come next.
Then amounts tied to rental real estate where you actively participate.
Then former passive activity debt.
Trade or business debt is repaid last.

This ordering actually works in the borrower’s favor. Payments naturally chip away at the non-deductible personal portion first, leaving the deductible categories outstanding longer. Borrowings taken at different interest rates on the same line are treated as separate debts for purposes of this ordering.

Reporting the Deduction

Your brokerage will report total PLOC interest on your statements, but there is no standardized IRS form (like the 1098 for mortgage interest) that breaks the amount out by category. You are responsible for the allocation, and where the interest lands determines the form:

Investment interest: calculate on Form 4952 and claim the deductible amount on Schedule A.⁴¹¹
Business interest: report on Schedule C or the appropriate entity return, subject to Section 163(j).¹²
Passive activity interest: run through Form 8582 to apply the passive loss limitation, then report on Schedule E.¹³¹⁴
Personal interest: not deductible, not reported.

Keep contemporaneous records for every draw: date, amount, account it landed in, and the expenditure it funded, with receipts or transfer confirmations behind it. If the IRS questions your allocation and you can’t produce the paper trail, the fallback is reclassification as non-deductible personal interest.

What Happens If You Get It Wrong

Deducting PLOC interest that should have been personal creates an underpayment. If the resulting understatement is large enough, the accuracy-related penalty under IRC Section 6662 is 20 percent of the underpayment attributable to negligence or a substantial understatement of tax.¹⁵ A substantial understatement exists when the underpayment exceeds the greater of 10 percent of the tax due or $5,000.

Where the IRS can show intentional evasion rather than carelessness, the civil fraud penalty under IRC Section 6663 rises to 75 percent of the underpayment.¹⁶ The 20-percent negligence penalty is the more realistic risk for taxpayers who simply didn’t keep the records needed to substantiate the deductions they claimed.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
govinfo.gov. 26 CFR 1.163-8T Allocation of Interest Expense Among Expenditures (Temporary)
3
Internal Revenue Service. Publication 550 – Investment Income and Expenses
4
Internal Revenue Service. About Form 4952 – Investment Interest Expense Deduction
5
Internal Revenue Service. Topic No. 505 – Interest Expense
6
Internal Revenue Service. Form 4952 – Investment Interest Expense Deduction
7
Office of the Law Revision Counsel. 26 USC 265 – Expenses and Interest Relating to Tax-Exempt Income
8
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
9
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
10
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary)
11
Internal Revenue Service. About Schedule A (Form 1040) – Itemized Deductions
12
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
13
Internal Revenue Service. Instructions for Form 8582 – Passive Activity Loss Limitations
14
Internal Revenue Service. About Schedule E (Form 1040) – Supplemental Income and Loss
15
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
16
Internal Revenue Service. Return Related Penalties