Limitation on investment interest

The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year.

For purposes of this subsection—

(A) In general The term “investment interest” means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment.

(B) Exceptions The term “investment interest” shall not include— (i) any qualified residence interest (as defined in subsection (h)(3)), or (ii) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer.

(C) Personal property used in short sale For purposes of this paragraph, the term “interest” includes any amount allowable as a deduction in connection with personal property used in a short sale.

For purposes of this subsection—

(A) In general The term “net investment income” means the excess of— (i) investment income, over (ii) investment expenses.

(B) Investment income The term “investment income” means the sum of— (i) gross income from property held for investment (other than any gain taken into account under clause (ii)(I)), (ii) the excess (if any) of— (I) the net gain attributable to the disposition of property held for investment, over (II) the net capital gain determined by only taking into account gains and losses from dispositions of property held for investment, plus (iii) so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause. Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.

(C) Investment expenses The term “investment expenses” means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income.

(D) Income and expenses from passive activities Investment income and investment expenses shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity.

For purposes of this subsection—

(A) In general The term “property held for investment” shall include— (i) any property which produces income of a type described in section 469(e)(1), and (ii) any interest held by a taxpayer in an activity involving the conduct of a trade or business— (I) which is not a passive activity, and (II) with respect to which the taxpayer does not materially participate.

(B) Investment expenses In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469.

(C) Terms For purposes of this paragraph, the terms “activity”, “passive activity”, and “materially participate” have the meanings given such terms by section 469.