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IRS RULES THAT TRADING PARTNERSHIPS MUST SEGREGATE INVESTMENT INTEREST

February 20, 2008

If you have an interest in a trading partnership, like a hedge fund, your K-1 may get slightly more complicated. The IRS issued a ruling yesterday (Rev. Rul. 2008-12) that requires such partnerships to break out their interest expense separately so that non-active partners can report it as "investment interest."

The tax law allows taxpayers to deduct "investment interest" to the extent of investment income -- that is, to the extent of taxable interest income, and to the extent of dividend income and capital gains subject to ordinary income rates. If investment interest expense exceeds investment income, it carries forward to future years. The deduction is computed on Form 4952.

Link: Publication 550 (2006), Investment Income and Expenses

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