Similarly, you can't count earnings in your retirement accounts. "That interest is either deferred in a traditional account or tax-free in a Roth," says Hockenberry.

You also are not allowed to deduct more in interest payments than you earned. For example, let's say you took a loan to buy Google stock and paid $1,000 in interest on it. If your total investments produced only $800, that's the maximum investment interest you can deduct.

You can carry the excess interest ($200 in this example) into future tax years and deduct it against those earnings. There is no limit on how long you can carry forward and use up the interest. When you carry forward the deduction, you'll have to file Form 4952 along with your Form 1040 and Schedule A, where you list your interest-deduction amount.

You also need to evaluate whether taking the investment-interest deduction is the right tax move for your situation.

Some dividend payments and capital gains are taxed at lower rates (15 percent for most filers). If you count any of these earnings in order to take the investment interest deduction, you must pay the ordinary tax rates (potentially as much as 35 percent) on the earnings. So be sure to run the numbers before you decide.

Follow the money

The IRS isn't particularly concerned about the source of the loan. What it wants to know is how the loan progressed from the lender to your investment.

"If you borrowed on margin because you needed money to pay personal bills, that's not investment interest," says Rosenberg. "But if you borrowed money from your own home and directly used that money to make an investment, that's going to be investment interest.

"The money has to be directly related to an investment. If you borrowed money from some other source and used it to buy investments, you have to trace the money.

"That's what IRS will do, trace the money trail."

Rosenberg recommends that you put the borrowed funds into a separate account or have the loan check made out directly to the company from which you're going to buy the investment. This will clearly show your investment intention. It also could help prevent unintended transactions that could invalidate your deduction.

"If you put (the loan money) in your bank account, and other checks clear, say your mortgage payment or other bills, before the check to make the investment clears, then you're going to have to deduct those personal amounts and associated interest from the loan money before you can claim it toward investment income," says Rosenberg.