California Investment Interest Expense Deduction

Investment Interest Expense Deduction
2023 Form 3526 Investment Interest Expense Deduction
TAXABLE YEAR

2023

CALIFORNIA FORM

Investment Interest Expense Deduction

3526

Attach to Form 540, Form 540NR, or Form 541.
Name(s) as shown on tax return

1

SSN, ITIN, or FEIN

Investment interest expense paid or accrued in 2023. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

2 Disallowed investment interest expense from 2022 form FTB 3526, line 7. If zero or less, enter -0- . . . . . . . . . . . . . . . . . .
2
3 Total investment interest expense. Add line 1 and line 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4a Gross income from property held for investment (excluding any net gain from the disposition of property held for
investment). See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4a
00
4b Net gain from the disposition of property held for investment. See instructions . . . . . . . . . . .4b
00
4c Net capital gain from the disposition of property held for investment. See instructions . . . . . .4c
4d Subtract line 4c from line 4b. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4d
4e Enter all or part of the amount on line 4c that you elect to include in investment income. Do not include more
than the amount on line 4b. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4e
4f Investment income. Add line 4a, line 4d, and line 4e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4f
5 Investment expenses. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6 Net investment income. Subtract line 5 from line 4f . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7 Disallowed investment interest expense to be carried forward to 2024. Subtract line 6 from line 3.
7
If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 Investment interest expense deduction. Enter the smaller of line 3 or line 6. Form 541 filers, stop here and
8
see instructions. All other filers, go to line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 Enter the amount from federal Form 4952, line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10 California investment interest expense deduction adjustment. Enter the difference between line 8 and line 9.
10
See instructions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General Information
In general, for taxable years beginning on or
after January 1, 2015, California law conforms
to the Internal Revenue Code (IRC) as of
January 1, 2015. However, there are continuing
differences between California and federal
law. When California conforms to federal tax
law changes, we do not always adopt all of
the changes made at the federal level. For
more information, go to ftb.ca.gov and search
for conformity. Additional information can
be found in FTB Pub. 1001, Supplemental
Guidelines to California Adjustments, the
instructions for California Schedule CA (540),
California Adjustments — Residents,
or Schedule CA (540NR), California
Adjustments — Nonresidents or Part-Year
Residents, and the Business Entity tax booklets.
The instructions provided with California
tax forms are a summary of California tax
law and are only intended to aid taxpayers in
preparing their state income tax returns. We
include information that is most useful to the
greatest number of taxpayers in the limited
space available. It is not possible to include
all requirements of the California Revenue
and Taxation Code (R&TC) in the instructions.
Taxpayers should not consider the instructions
as authoritative law.

A

Purpose

Use form FTB 3526, Investment Interest
Expense Deduction, to figure the amount of
investment interest expense deductible for the
current year and the amount, if any, to carry
forward to future years. Interest expense paid
by an individual, estate, or trust on a loan
For Privacy Notice, get FTB 1131 EN-SP.

allocable to property held for investment may
not be fully deductible in the current year.
Net capital gain from the disposition of property
held for investment is excluded from investment
income when figuring the investment interest
limitation. However, taxpayers may elect to
include in their investment income as much of
their net capital gain investment income as they
choose, if they also reduce the amount of net
capital gain eligible for the special federal capital
gain tax rate.
This form allows you to make a separate
California election to include net capital gain
investment income in the calculation of the
investment interest limitation. However,
California taxes all income at the same rate.
Consider the effect on your California tax before
making a separate California election or applying
the federal election for California purposes.

B

Who Must File

If you are an individual, estate, or trust and
you claim a deduction for investment interest
expense, you must complete and attach form
FTB 3526 to your tax return.
Exception: You do not have to file form
FTB 3526 if all of the following apply:
• Your only investment income was from
interest or dividends.
• You have no other deductible expenses
connected with the production of interest or
dividends.
• Your investment interest expense is not
more than your investment income.
• You have no disallowed investment interest
expense from 2022.

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Specific Line Instructions
Generally, California law for the investment
interest expense deduction follows federal law.
Get the instructions for federal Form 4952,
Investment Interest Expense Deduction, for
more information. Get federal Pub. 550,
Investment Income and Expenses, to
determine your investment interest expense
deduction if you have interest income or
expense attributable to a working interest in
oil or gas property or if you paid or accrued
interest on a loan and you used the proceeds
of the loan for more than one purpose.
Line 1
Enter the investment interest paid or accrued
during the taxable year, regardless of when you
incurred the indebtedness. Investment interest
expense is interest paid or accrued on a loan
(or part of a loan) that is allocable to property
held for investment.
Include investment interest expense reported
to you on Schedules K-1 (100S, 541, 565,
or 568), Share of Income, Deductions,
Credits, etc. Include amortization of bond
premiums on taxable bonds purchased after
October 22, 1986, but before January 1, 1988,
unless you elected to offset amortizable bond
premiums against the interest payments on the
bond. A taxable bond is a bond on which the
interest is includible in gross income.
Investment interest expense does not include:
• Qualified residence interest.
• Interest expense that is properly allocable
to a passive activity. See “Passive
Activities.”

FTB 3526 2023 Side 1

• Interest expense that is capitalized, such

as construction interest subject to IRC
Section 263A.
• Interest expense related to tax-exempt
interest income under R&TC Section 17280.
Property Held for Investment. Property held
for investment includes property that produces
investment income (unless derived in the ordinary
course of a trade or business). It also includes
property that produces gain or loss, not derived in
the ordinary course of a trade or business, from
the disposition of property that produces these
types of income or is held for investment.
However, it does not include an interest in a
passive activity. See “Passive Activities.”
Property held for investment also includes an
interest in an activity of conducting a trade
or business in which you did not materially
participate and that is not a passive activity.
For example, a working interest in an oil or
gas property that is not a passive activity is
property held for investment if you did not
materially participate in the activity.
Passive Activities. Generally, a passive activity
is any business activity in which you do not
materially participate and any rental activity
regardless of your level of participation.
Investment interest expense does not include
any interest expense that is included when
determining your income or loss from a
passive activity. However, interest expense
that is properly allocable to portfolio income is
investment interest expense and is not included
when determining your income or loss from
a passive activity. Portfolio income includes
income (not derived in the ordinary course of
a trade or business) from interest, dividends,
annuities, royalties, and net gain from the
disposition of property held for investment.
For federal purposes only, rental real estate
activities conducted by persons in a real
property business are not automatically treated
as passive activities. California does not
conform to this provision. For more information
about passive activities, get the instructions for
federal Schedule E (Form 1040), Supplemental
Income and Loss.
Line 4a
Enter your gross income from property held
for investment. This includes income (not
derived in the ordinary course of a trade or
business) from interest, dividends, annuities,
and royalties. Net income from the following
passive activities is also treated as investment
income:
• Rental of substantially nondepreciable
property.
• Equity-financed lending activities.
• Acquisition of certain interests in a
pass-through entity licensing intangible
property.
Also, include on line 4a (or line 4b, if applicable)
net passive income from a passive activity of a
publicly traded partnership, as defined in IRC
Section 469(k)(2), investment income reported
to you on Schedules K-1 (100S, 541, 565, or
568), and net investment income from an estate
or trust.

Page 2 FTB 3526 Instructions 2023

Line 4b
Enter your net gain from the disposition of
property held for investment. This is the
excess of total gains over total losses from the
disposition of property held for investment.
When figuring this amount, include capital gain
distributions from mutual funds.
Line 4c
Enter your net capital gain from the disposition
of property held for investment. This is the
excess of your net long-term capital gain over
net short-term capital loss from the disposition
of property held for investment. Capital gain
distributions from mutual funds are treated as
long-term capital gains.
Line 4e
Net capital gain from the disposition of
property held for investment, line 4c, is
excluded from investment income. However,
you may elect to include in investment income
all or part of the net capital gain from the
disposition of property held for investment.
Make the election no later than the due date
(including extensions) of your California
income tax return. Once made, the election
may not be revoked without the consent of the
Franchise Tax Board.
To make the election, enter all or part of the
amount on line 4c, but not more than the
amount on line 4b, that you elect to include in
investment income.
Line 5
Investment expenses are your allowed
deductions, other than interest expense,
directly connected with the production of
investment income. For example, depreciation
or depletion allowed on assets that produce
investment income is an investment expense.
Include investment expenses reported to you
on Schedules K-1 (100S, 541, 565, or 568).
Investment expenses do not include any
deductions taken into account in determining
your income or loss from a passive activity.
If you have investment expenses that
are included as a miscellaneous itemized
deduction on Schedule CA (540), Part II,
line 21 or Schedule CA (540NR), Part III,
line 21, the 2% adjusted gross income
limitation on Schedule CA (540), Part II,
line 24 or Schedule CA (540NR), Part III,
line 24, may reduce the amount you include
on form FTB 3526, line 5. If you are a military
servicemember domiciled outside of California,
recalculate the amount on Schedule CA (540),
Part II, line 24 or Schedule CA (540NR),
Part III, line 24, excluding your active duty
military pay.
Include on form FTB 3526, line 5, the smaller
of either the investment expenses included
on Schedule CA (540), Part II, line 21;
Schedule CA (540NR), Part III, line 21; or the
total on Schedule CA (540), Part II, line 25;
Schedule CA (540NR), Part III, line 25.
If you made adjustments to your miscellaneous
expenses on Schedule CA (540 or 540NR), be
sure to include the adjustments in the calculation.

If you reported investment expenses on a form
or schedule other than federal Schedule A
(Form 1040), Itemized Deductions, include
those expenses when figuring investment
expenses for line 5.
Line 8
Form 541, California Fiduciary Income Tax
Return, filers should enter the amount from
line 8 on Form 541, line 10. All other filers
must complete line 9.
At-Risk Activities. If any portion of the
deductible investment interest expense on
line 8 is attributable to an activity for which you
are not at risk, complete federal Form 6198,
At-Risk Limitations, (using California
amounts) to figure your deductible investment
interest expense.
After you figure the allowable investment
interest expense on form FTB 3526, enter
the portion attributable to the at-risk activity
on federal Form 6198, line 4. Reduce form
FTB 3526, line 8 by the same amount.
Refer to federal Form 6198 and its instructions
for more details, especially the instructions for
line 4 of that form.
Line 10
The amount on line 10 is the difference
between the deduction allowed by California
and federal law.
If line 8 is more than line 9, subtract
line 9 from line 8. Enter the result on
line 10 and on Schedule CA (540), Part II,
line 9, column C, or Schedule CA (540NR),
Part III, line 9, column C. Be sure to write
“FTB 3526” on Schedule CA (540), Part II or
Schedule CA (540NR), Part III, line 9.
If line 9 is more than line 8, subtract line 8
from line 9. Enter the result on line 10 and on
Schedule CA (540), Part II, line 9, column B, or
Schedule CA (540NR), Part III, line 9, column B.
Write “FTB 3526” on Schedule CA (540), Part II
or Schedule CA (540NR), Part III, line 9.
If any portion of your investment interest
expense on line 8 is attributable to royalties,
enter the difference between the California and
federal amounts on Schedule CA (540), Part I,
or Schedule CA (540NR), Part II, Section B,
line 5, column B or column C, as appropriate.
Alternative Minimum Tax (AMT). Deductible
investment interest expense may be an AMT
adjustment. Get Schedule P (540, 540NR,
or 541), Alternative Minimum Tax and Credit
Limitations, for more information.
Franchise Tax Board Privacy Notice on
Collection
Our privacy notice can be found in annual tax
booklets or online. Go to ftb.ca.gov/privacy
to learn about our privacy policy statement,
or go to ftb.ca.gov/forms and search for
1131 to locate FTB 1131 EN-SP, Franchise Tax
Board Privacy Notice on Collection – Aviso de
Privacidad del Franchise Tax Board sobre la
Recaudación. To request this notice by mail,
call 800.338.0505 and enter form code 948
when instructed.