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Deductible Investment Interest

Deductible Investment Interest

amberp
amberp 138 XP · · 3 replies

I'm using FreeTaxUSA, and I'm offered the Deductible Investment Interest. Setting aside (or not!) how this ever made it into the tax code, does anyone know how to take advantage of it with interest rates where they are today?

Here's the description:

> Deductible investment interest is interest paid on margin accounts or interest paid on loans used to buy or carry investments. For example, if you get a margin loan through your brokerage account and use it to buy more stocks, then the interest you pay is investment interest. Another example would be if you bought land to hold as an investment, then the interest expense you pay on the loan to obtain the land is investment interest.

> Investment interest is deductible up to the amount of your investment income. Investment income includes dividends, interest income, and royalties. Disallowed investment interest is carried forward and can be used on future year tax returns.

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Replies (3)

friedmag

friedmag

483 XP

6 months ago

That's something I hadn't really considered, but I think step 1 is - as usual - do you itemize or are you anywhere near? Because unless you have a huge account to take margin on… and similarly sized investment income to offset… I'm not sure it'd be worth much.

Probably worth a ton to billionaires that live off margin, though (hence it being in the tax code).

Westie

Westie

1,462 XP

6 months ago

I fell down a bit of a rabbit hole on this recently, and your intuition is correct, it's a tax loophole for very rich people. One of the common examples I saw given by private wealth management companies was:

  • you want to buy a $10 million house, you have the cash but you'd rather get a mortgage at low rates and keep the cash in the market
  • Instead of getting a mortgage to buy the house, buy it in cash and THEN take out a mortgage on it for $10 million
  • Invest the $10 million
  • All mortgage interest is now tax-free

There's a few nuances in there but it's basically a tax break for rich people.

friedmag

friedmag

483 XP

6 months ago

Ah, that makes sense. A workaround for the mortgage interest deduction limitations.

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Tax Strategies

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Tax Strategies Guide
Tax Strategy and Planning Guide for Financial Independence

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