The Final, Definitive Thread on Margin Loans

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Steve Reading
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The Final, Definitive Thread on Margin Loans

Post by Steve Reading »

[Moved into a new thread from: The Final, Definitive Thread on Brokerage Transfer Bonuses --admin LadyGeek]
RocketShipTech wrote: Wed Aug 19, 2020 10:28 pm
Steve Reading wrote: Wed Aug 19, 2020 10:00 pm
RocketShipTech wrote: Wed Aug 19, 2020 9:08 pm 3. The margin loan is not tax deductible unless you use it to buy taxable securities. Now there is a way around this, you could use the margin loan to buy securities and then buy the house with another $800k you had laying around that you would have put into securities. In this particular case money is not fungible.
I can bring 200K in equity to IBKR, then withdraw 100K in cash and keep it a Bank of America for 1 year. The interest on the 100K margin loan for that year is tax-deductible AFAIK.

It looks to me like you're saying that's not the case?
Bank interest does count as taxable income, so you can deduct the margin interest paid to generate it (although borrowing at 1.1% to earn 0.1% is probably a bad idea for other more obvious reasons).

What you can’t do is use the $100k margin loan to pay down a mortgage balance (or buy a house free and clear) and then deduct the 1.1% margin interest.
Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by RocketShipTech »

Steve Reading wrote: Wed Aug 19, 2020 10:32 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:28 pm
Steve Reading wrote: Wed Aug 19, 2020 10:00 pm
RocketShipTech wrote: Wed Aug 19, 2020 9:08 pm 3. The margin loan is not tax deductible unless you use it to buy taxable securities. Now there is a way around this, you could use the margin loan to buy securities and then buy the house with another $800k you had laying around that you would have put into securities. In this particular case money is not fungible.
I can bring 200K in equity to IBKR, then withdraw 100K in cash and keep it a Bank of America for 1 year. The interest on the 100K margin loan for that year is tax-deductible AFAIK.

It looks to me like you're saying that's not the case?
Bank interest does count as taxable income, so you can deduct the margin interest paid to generate it (although borrowing at 1.1% to earn 0.1% is probably a bad idea for other more obvious reasons).

What you can’t do is use the $100k margin loan to pay down a mortgage balance (or buy a house free and clear) and then deduct the 1.1% margin interest.
Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
Disagree. The margin interest can only be deducted against income generated by the securities purchased with the margin loan, not against other pieces of your portfolio.

https://www.schwab.com/resource-center/ ... deductible
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds).
...or used the loan to buy a Tesla.

But again, there’s an easy way around this. Most of us itemizing deductions are already buying taxable securities with every paycheck. You can take out the $100k margin loan to buy your standard securities, and then redirect the paycheck funds (that would have otherwise gone into your brokerage account) to buy the Tesla.
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Steve Reading
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by Steve Reading »

RocketShipTech wrote: Wed Aug 19, 2020 10:45 pm
Steve Reading wrote: Wed Aug 19, 2020 10:32 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:28 pm
Steve Reading wrote: Wed Aug 19, 2020 10:00 pm
RocketShipTech wrote: Wed Aug 19, 2020 9:08 pm 3. The margin loan is not tax deductible unless you use it to buy taxable securities. Now there is a way around this, you could use the margin loan to buy securities and then buy the house with another $800k you had laying around that you would have put into securities. In this particular case money is not fungible.
I can bring 200K in equity to IBKR, then withdraw 100K in cash and keep it a Bank of America for 1 year. The interest on the 100K margin loan for that year is tax-deductible AFAIK.

It looks to me like you're saying that's not the case?
Bank interest does count as taxable income, so you can deduct the margin interest paid to generate it (although borrowing at 1.1% to earn 0.1% is probably a bad idea for other more obvious reasons).

What you can’t do is use the $100k margin loan to pay down a mortgage balance (or buy a house free and clear) and then deduct the 1.1% margin interest.
Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
Disagree. The margin interest can only be deducted against income generated by the securities purchased with the margin loan, not against other pieces of your portfolio.

https://www.schwab.com/resource-center/ ... deductible
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds).
...or used the loan to buy a Tesla.

But again, there’s an easy way around this. Most of us itemizing deductions are already buying taxable securities with every paycheck. You can take out the $100k margin loan to buy your standard securities, and then redirect the paycheck funds (that would have otherwise gone into your brokerage account) to buy the Tesla.
Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by RocketShipTech »

Steve Reading wrote: Wed Aug 19, 2020 11:23 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:45 pm
Steve Reading wrote: Wed Aug 19, 2020 10:32 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:28 pm
Steve Reading wrote: Wed Aug 19, 2020 10:00 pm

I can bring 200K in equity to IBKR, then withdraw 100K in cash and keep it a Bank of America for 1 year. The interest on the 100K margin loan for that year is tax-deductible AFAIK.

It looks to me like you're saying that's not the case?
Bank interest does count as taxable income, so you can deduct the margin interest paid to generate it (although borrowing at 1.1% to earn 0.1% is probably a bad idea for other more obvious reasons).

What you can’t do is use the $100k margin loan to pay down a mortgage balance (or buy a house free and clear) and then deduct the 1.1% margin interest.
Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
Disagree. The margin interest can only be deducted against income generated by the securities purchased with the margin loan, not against other pieces of your portfolio.

https://www.schwab.com/resource-center/ ... deductible
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds).
...or used the loan to buy a Tesla.

But again, there’s an easy way around this. Most of us itemizing deductions are already buying taxable securities with every paycheck. You can take out the $100k margin loan to buy your standard securities, and then redirect the paycheck funds (that would have otherwise gone into your brokerage account) to buy the Tesla.
Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
Not exactly, I would:

1. Move the 200k bond etf to IKBR
2. Take out the 100k margin loan but keep it in the account and use it to buy the bond ETF.
3. Buy the Tesla with other moneys you have laying around or cash flow it from your paycheck.

Yes it’s ridiculous but thems the laws
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Steve Reading
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by Steve Reading »

RocketShipTech wrote: Wed Aug 19, 2020 11:29 pm
Steve Reading wrote: Wed Aug 19, 2020 11:23 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:45 pm
Steve Reading wrote: Wed Aug 19, 2020 10:32 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:28 pm

Bank interest does count as taxable income, so you can deduct the margin interest paid to generate it (although borrowing at 1.1% to earn 0.1% is probably a bad idea for other more obvious reasons).

What you can’t do is use the $100k margin loan to pay down a mortgage balance (or buy a house free and clear) and then deduct the 1.1% margin interest.
Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
Disagree. The margin interest can only be deducted against income generated by the securities purchased with the margin loan, not against other pieces of your portfolio.

https://www.schwab.com/resource-center/ ... deductible
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds).
...or used the loan to buy a Tesla.

But again, there’s an easy way around this. Most of us itemizing deductions are already buying taxable securities with every paycheck. You can take out the $100k margin loan to buy your standard securities, and then redirect the paycheck funds (that would have otherwise gone into your brokerage account) to buy the Tesla.
Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
Not exactly, I would:

1. Move the 200k bond etf to IKBR
2. Take out the 100k margin loan but keep it in the account and use it to buy the bond ETF.
3. Buy the Tesla with other moneys you have laying around or cash flow it from your paycheck.

Yes it’s ridiculous but thems the laws
Why would you do that? Then you'd end up with 300k in bond ETFs (which isn't necessarily what I wanted), and would have to get a car loan (which is what the margin loan was supposed to be for). I thought the question is "given I have 200k in bond ETFs, nothing else, and want to buy a Tesla for 100k, how do I take out a 100K margin loan to buy the Tesla, but still keep the margin interest deductible?"

In that case, I think the method I offered above accomplishes it no? You'd then use your paychecks to pay down the margin loan.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
tj
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by tj »

Steve Reading wrote: Wed Aug 19, 2020 11:54 pm
RocketShipTech wrote: Wed Aug 19, 2020 11:29 pm
Steve Reading wrote: Wed Aug 19, 2020 11:23 pm
RocketShipTech wrote: Wed Aug 19, 2020 10:45 pm
Steve Reading wrote: Wed Aug 19, 2020 10:32 pm

Ok maybe my initial scenario was confusing. I'll simplify:
I move 200K in bond ETFs to IBKR. I withdraw 100K in cash. I spend that 100K to buy a Tesla Model X. I am claiming I can deduct the margin interest against the interest rate I receive on my 200K of bond ETFs.

Agreed?
Disagree. The margin interest can only be deducted against income generated by the securities purchased with the margin loan, not against other pieces of your portfolio.

https://www.schwab.com/resource-center/ ... deductible
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds).
...or used the loan to buy a Tesla.

But again, there’s an easy way around this. Most of us itemizing deductions are already buying taxable securities with every paycheck. You can take out the $100k margin loan to buy your standard securities, and then redirect the paycheck funds (that would have otherwise gone into your brokerage account) to buy the Tesla.
Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
Not exactly, I would:

1. Move the 200k bond etf to IKBR
2. Take out the 100k margin loan but keep it in the account and use it to buy the bond ETF.
3. Buy the Tesla with other moneys you have laying around or cash flow it from your paycheck.

Yes it’s ridiculous but thems the laws
Why would you do that? Then you'd end up with 300k in bond ETFs (which isn't necessarily what I wanted), and would have to get a car loan (which is what the margin loan was supposed to be for). I thought the question is "given I have 200k in bond ETFs, nothing else, and want to buy a Tesla for 100k, how do I take out a 100K margin loan to buy the Tesla, but still keep the margin interest deductible?"

In that case, I think the method I offered above accomplishes it no? You'd then use your paychecks to pay down the margin loan.

Why would you buy a car with a margin loan when auto loan rates super low?
shess
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by shess »

Steve Reading wrote: Wed Aug 19, 2020 11:23 pm Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
I think that's right.

It's the same with home mortgage interest. If you start with $1M in cash, you can take $200k and get a $800k mortgage to purchase a $1M house, and then invest your other $800k into BTC, the mortgage interest is deductible (if you itemize). But if you buy the house with all $1M in cash and then take out a $800k mortgage to buy BTC, the mortgage interest is _not_ deductible. Though you have a grace period of like 60 or 90 days where you can take out the mortgage and still have it considered as used for purchase (I think).
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by xerxes101 »

shess wrote: Thu Aug 20, 2020 10:57 pm
Steve Reading wrote: Wed Aug 19, 2020 11:23 pm Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
I think that's right.

It's the same with home mortgage interest. If you start with $1M in cash, you can take $200k and get a $800k mortgage to purchase a $1M house, and then invest your other $800k into BTC, the mortgage interest is deductible (if you itemize). But if you buy the house with all $1M in cash and then take out a $800k mortgage to buy BTC, the mortgage interest is _not_ deductible. Though you have a grace period of like 60 or 90 days where you can take out the mortgage and still have it considered as used for purchase (I think).
Hypothetically, if you wanted to purchase a 1 million dollar house, since the interest on the 1st 750K of mortgage is tax deductible only, then if you had 500K of marginable securities, could you borrow 250K against it to make the balance tax deductible as well? Is it allowed to do it this way?
shess
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by shess »

xerxes101 wrote: Sat Aug 22, 2020 8:03 am
shess wrote: Thu Aug 20, 2020 10:57 pm
Steve Reading wrote: Wed Aug 19, 2020 11:23 pm Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
I think that's right.

It's the same with home mortgage interest. If you start with $1M in cash, you can take $200k and get a $800k mortgage to purchase a $1M house, and then invest your other $800k into BTC, the mortgage interest is deductible (if you itemize). But if you buy the house with all $1M in cash and then take out a $800k mortgage to buy BTC, the mortgage interest is _not_ deductible. Though you have a grace period of like 60 or 90 days where you can take out the mortgage and still have it considered as used for purchase (I think).
Hypothetically, if you wanted to purchase a 1 million dollar house, since the interest on the 1st 750K of mortgage is tax deductible only, then if you had 500K of marginable securities, could you borrow 250K against it to make the balance tax deductible as well? Is it allowed to do it this way?
No, because if you borrow against your investment, you can only deduct interest if you use that money to buy an investment. You could SELL $250k of stock, and then take a margin loan to buy it back, then that margin interest is deductible (though you'll be paying taxes on any gains from the sale).
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by xerxes101 »

shess wrote: Sat Aug 22, 2020 9:26 am
xerxes101 wrote: Sat Aug 22, 2020 8:03 am
shess wrote: Thu Aug 20, 2020 10:57 pm
Steve Reading wrote: Wed Aug 19, 2020 11:23 pm Gotcha, thanks. So you'd move the 200K in bond ETFs to IBKR, sell 100K, withdraw that 100K of cash (to buy a Tesla), and then buy 100K worth of the same bond ETF after that cash is withdrawn. In that case, the situation is identical, but now the margin interest is deductible.

It's hilariously absurd that it works that way haha.
I think that's right.

It's the same with home mortgage interest. If you start with $1M in cash, you can take $200k and get a $800k mortgage to purchase a $1M house, and then invest your other $800k into BTC, the mortgage interest is deductible (if you itemize). But if you buy the house with all $1M in cash and then take out a $800k mortgage to buy BTC, the mortgage interest is _not_ deductible. Though you have a grace period of like 60 or 90 days where you can take out the mortgage and still have it considered as used for purchase (I think).
Hypothetically, if you wanted to purchase a 1 million dollar house, since the interest on the 1st 750K of mortgage is tax deductible only, then if you had 500K of marginable securities, could you borrow 250K against it to make the balance tax deductible as well? Is it allowed to do it this way?
No, because if you borrow against your investment, you can only deduct interest if you use that money to buy an investment. You could SELL $250k of stock, and then take a margin loan to buy it back, then that margin interest is deductible (though you'll be paying taxes on any gains from the sale).
This is interesting, what if in order to avoid capital gains tax on the sale of stocks, you borrow 250K on margin, buy 250K worth of bonds, then cash out the bonds and buy your house?
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Re: The Final, Definitive Thread on Brokerage Transfer Bonuses

Post by whodidntante »

I think we could use a final, definitive thread on margin loans. :happy
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Re: The Final, Definitive Thread on Margin Loans

Post by LadyGeek »

^^^ OK, we now have a thread on margin loans.

(Thanks to the member who reported the post.)
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Re: The Final, Definitive Thread on Margin Loans

Post by bingunginter »

question, why can't I simply use cash for margin loan ? to me seem like for the broker, cash is safer than securities.
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Re: The Final, Definitive Thread on Margin Loans

Post by Doc »

"Special Considerations
A key aspect of investment interest expense is the property held for investment, which the proceeds from the loan were used to purchase. According to the tax code, this includes property that produces a gain or a loss. In addition to interest and dividends, this can also include royalties that were not derived from the ordinary course of trade or business."

https://www.investopedia.com/terms/i/in ... xpense.asp

Read the Investopedia article.
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Re: The Final, Definitive Thread on Margin Loans

Post by shess »

bingunginter wrote: Tue Sep 01, 2020 1:02 pm question, why can't I simply use cash for margin loan ? to me seem like for the broker, cash is safer than securities.
Not exactly sure where you're going, here. If you had $100k in cash to take a $100k margin loan against ... why not just use that $100k in cash to buy the thing in the first place? The loan is likely to have a higher rate than the cash is likely to generate.
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Re: The Final, Definitive Thread on Margin Loans

Post by bingunginter »

shess wrote: Tue Sep 01, 2020 6:13 pm
bingunginter wrote: Tue Sep 01, 2020 1:02 pm question, why can't I simply use cash for margin loan ? to me seem like for the broker, cash is safer than securities.
Not exactly sure where you're going, here. If you had $100k in cash to take a $100k margin loan against ... why not just use that $100k in cash to buy the thing in the first place? The loan is likely to have a higher rate than the cash is likely to generate.
I thought of using that $100k in cash to take $200k or more cash loan.
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Steve Reading
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Re: The Final, Definitive Thread on Margin Loans

Post by Steve Reading »

bingunginter wrote: Tue Sep 01, 2020 10:02 pm
shess wrote: Tue Sep 01, 2020 6:13 pm
bingunginter wrote: Tue Sep 01, 2020 1:02 pm question, why can't I simply use cash for margin loan ? to me seem like for the broker, cash is safer than securities.
Not exactly sure where you're going, here. If you had $100k in cash to take a $100k margin loan against ... why not just use that $100k in cash to buy the thing in the first place? The loan is likely to have a higher rate than the cash is likely to generate.
I thought of using that $100k in cash to take $200k or more cash loan.
Step 1: Deposit $1.
Step 2: Withdraw $2.
Step 3: Deposit those $2.
Step 4: Withdraw $4.
.
.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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