Is interest on a Portfolio Line of Credit tax deductible? Does purpose of loan matter?

Tax treatment of Portfolio Line of Credit interest depends entirely on how you use the loan proceeds - this is a key distinction many people miss. The IRS follows what's called "tracing rules" to determine deductibility. If you use the funds to buy taxable investments (stocks, bonds, etc.), the interest can be deducted as investment interest expense on Schedule A, limited to your net investment income. However, if you use the money for personal expenses like buying a car or paying off credit cards, that interest is NOT deductible. For real estate, it gets more complex. If you use the funds for rental property, the interest is generally deductible on Schedule E. For a primary residence, the rules follow mortgage interest deduction limitations. The important thing is documentation - keep clear records showing exactly how you used the borrowed money. The IRS can and will trace funds if they question your deduction.

I was confused about this same thing last year and wasted so much time researching. Finally discovered taxr.ai (https://taxr.ai) which analyzed my portfolio line of credit statements and helped me figure out exactly what was deductible. They have this smart scanning thing that looks at how you used the funds and shows what's deductible based on IRS rules. I was shocked when they showed me I was about to incorrectly deduct interest on money I used for my kid's tuition (not deductible!) while missing out on legitimate deductions for money that went into my investment account. Their system even creates documentation for audit protection.

Just wanted to follow up about taxr.ai - I was skeptical in my earlier comment but decided to try it anyway. Holy crap what a timesaver! I uploaded my statements and it immediately identified which portions of my portfolio loan were potentially deductible. The system found about $3,400 in interest I could legitimately deduct that I would have missed because the money had gone through multiple accounts before being used for investments. It even flagged a $12,000 withdrawal I was planning to deduct that actually went to home renovations (not deductible). Definitely using this for my 2025 taxes!

If you're struggling to get ahold of the IRS for clarification on this, try Claimyr (https://claimyr.com). I spent DAYS trying to get through to the IRS about a similar investment interest question last year. Their callback system got me connected to an actual IRS agent in under an hour. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was initially hesitant but desperately needed clarification on how to document my portfolio loan interest deductions after getting conflicting advice from two different CPAs. The IRS agent was surprisingly helpful and walked me through exactly what records I needed to keep.

I have to publicly eat my words about Claimyr. After calling it a scam earlier, I tried it out of desperation because I needed clarification on investment interest deductions for a portfolio loan before filing my extension. Got a call back from an IRS rep in about 45 minutes! The agent confirmed exactly what I needed to document for my situation (using a portfolio line to buy into a partnership). Saved me from making a $4,200 mistake on my taxes. Never been happier to be wrong about something.

Publication 550 from the IRS covers this specifically - interest expenses from investment loans. There's a whole section on "Interest Expense on Investment Debts" which states the purpose of the loan determines deductibility. Here's the direct quote from the IRS: "If you borrow money to buy property you hold for investment, the interest you pay is investment interest." Make sure your loan is actually secured by securities though - some "investment loans" are actually personal loans with different tax treatment.

My tax guy said another gotcha with these portfolio loans is margin interest vs. non-purpose loans - they look similar but have different tax treatment. A true margin loan used to buy securities within the account is more straightforward to deduct than a portfolio line where you take money out of the account.

The documentation aspect everyone's mentioning is crucial. I learned this the hard way during an audit two years ago. The IRS auditor didn't care that I had a portfolio line of credit - they wanted to see exactly where every dollar went and how it connected to investment purchases. What saved me was keeping a separate spreadsheet with three columns: date of withdrawal, amount, and specific investment purchased. I also kept screenshots of my brokerage account showing the investment purchases on the same dates. The auditor accepted this documentation and allowed the full deduction. Pro tip: If you're using the funds for multiple purposes, consider taking separate withdrawals for each purpose rather than one large withdrawal that you split later. Makes the paper trail much cleaner and easier to defend if questioned.

I've been dealing with portfolio line of credit interest deductions for the past three years, and wanted to share a few additional insights that might help others avoid some pitfalls I encountered. One thing that hasn't been mentioned yet is the timing of when you actually use the borrowed funds versus when you take the loan. I made the mistake of taking out a large portfolio line in December but didn't actually purchase investments until February of the following tax year. The IRS considers the interest deductible based on when you actually USE the money for qualifying investments, not when you borrow it. So I had two months of interest that wasn't deductible because the money was just sitting in my checking account. Now I time my withdrawals much closer to when I'm actually making investment purchases. Also, be careful with dividend reinvestment plans (DRIPs) if you're trying to maximize your net investment income for the interest limitation. I learned that you can elect to receive dividends in cash rather than automatically reinvesting them, which increases your investment income and potentially allows you to deduct more interest expense in the current year. The carryforward rules @Tyrone Hill mentioned are definitely important to understand upfront, especially if you're planning a large loan relative to your current investment income.