Investment interest expense deduction. Investment interest expense, such as margin interest, is deductible, but is limited to the amount of taxable investment income that one has. Interest income and dividend income is investment income, but not tax favored capital gains. Unused investment interest expense can be carried forward to future years. Tax strategy: To get a deduction now for unused investment interest expense you can elect to treat a portion of tax favored capital gains and dividends as income taxed at ordinary rates, then the unused investment interest is deductible against it.