What are some tax effective ways to borrow?

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MrJones
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What are some tax effective ways to borrow?

Post by MrJones »

Looking to borrow some money for home improvement. Looking to minimize what I pay in interest, of course. Tax bracket is 35%+ (fed+state), so I was wondering if there are ways to borrow where the interest is tax deductible.

A cash out refi won't help because of the 750k limit for tax deduction of mortgage interest. Same with a HELOC.

Would either a margin loan or a pledged asset line of credit (from Scwhab, I believe) come with tax deductibility?

Any other alternatives I'm missing? Thank you.
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whodidntante
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Re: What are some tax effective ways to borrow?

Post by whodidntante »

If you can utilize large amounts of realized capital losses, you can borrow an absurd amount of money via short box spreads. The advantage is lower rates than margin or PALs, term-certain rates, and as mentioned, capital losses.

How low?
https://www.boxtrades.com/
toddthebod
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Re: What are some tax effective ways to borrow?

Post by toddthebod »

MrJones wrote: Mon Apr 01, 2024 8:31 pm Looking to borrow some money for home improvement. Looking to minimize what I pay in interest, of course. Tax bracket is 35%+ (fed+state), so I was wondering if there are ways to borrow where the interest is tax deductible.

A cash out refi won't help because of the 750k limit for tax deduction of mortgage interest. Same with a HELOC.

Would either a margin loan or a pledged asset line of credit (from Scwhab, I believe) come with tax deductibility?

Any other alternatives I'm missing? Thank you.
You can deduct margin interest against your investment income, but only if you treat it as ordinary income instead of qualified dividends.

The form & instructions: https://www.irs.gov/pub/irs-pdf/f4952.pdf
Josh5000
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Re: What are some tax effective ways to borrow?

Post by Josh5000 »

What's your federal tax bracket?

Is the tax write-off more beneficial than not having to borrow and pay interest? I never had the luxury of tax-write off, even for the mortgage because I got it for dirt cheap and put enough down. I ran the number and didn't want to pay X in interest only to collect 0.20X in write-off.

Are you able to pay cash for home improvement? You mentioned the $750k limit on interest payment deduction being the reason for no-cash refinance and HELOC. Is that an annual or lifetime value? Let's hope you are not paying that much in interest annually, Mr. T.
Topic Author
MrJones
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Re: What are some tax effective ways to borrow?

Post by MrJones »

whodidntante wrote: Mon Apr 01, 2024 8:34 pm If you can utilize large amounts of realized capital losses, you can borrow an absurd amount of money via short box spreads. The advantage is lower rates than margin or PALs, term-certain rates, and as mentioned, capital losses.

How low?
https://www.boxtrades.com/
Ah yes, I'd noticed this, but like you say, the catch is, it requires being able to utilize large amounts of realized losses. Hmm, perhaps I could borrow for say, a year, use that time to sell stock (and offset gains against losses), and then pay back the spread using the sold stocks. Let me work out the numbers and see where it lands. Thank you!

Edit: so one viable strategy is the above. The raw rates currently aren't hugely better than a mortgage (5.3% vs 5.9%), but it turns out that for every dollar I borrow this way for one year, I can liquidate 50 cents of investments effectively tax free. This allows me to liquidate without paying taxes, and pay down half the loan next year.

At that point, I could rinse and repeat, or choose another option (like cash out refi) depending on the market, interest rates, and such.
Last edited by MrJones on Mon Apr 01, 2024 11:46 pm, edited 1 time in total.
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MrJones
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Re: What are some tax effective ways to borrow?

Post by MrJones »

toddthebod wrote: Mon Apr 01, 2024 8:35 pm You can deduct margin interest against your investment income, but only if you treat it as ordinary income instead of qualified dividends.

The form & instructions: https://www.irs.gov/pub/irs-pdf/f4952.pdf
Interesting, didn't know this. However, my investment income is almost completely qualified dividends, so this might not work for me, if I understood this correctly?
babystep
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Re: What are some tax effective ways to borrow?

Post by babystep »

MrJones wrote: Mon Apr 01, 2024 8:31 pm Looking to borrow some money for home improvement. Looking to minimize what I pay in interest, of course. Tax bracket is 35%+ (fed+state), so I was wondering if there are ways to borrow where the interest is tax deductible.

A cash out refi won't help because of the 750k limit for tax deduction of mortgage interest. Same with a HELOC.

Would either a margin loan or a pledged asset line of credit (from Scwhab, I believe) come with tax deductibility?

Any other alternatives I'm missing? Thank you.
Here is a thread that might be interesting
borrow money and interest is tax deductible
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MrJones
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Re: What are some tax effective ways to borrow?

Post by MrJones »

babystep wrote: Tue Apr 02, 2024 12:20 am Here is a thread that might be interesting
borrow money and interest is tax deductible
Ah, perfect, and that thread is recent too. I searched but failed to find it. Thank you very much for the pointer!
CletusCaddy
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Re: What are some tax effective ways to borrow?

Post by CletusCaddy »

MrJones wrote: Mon Apr 01, 2024 11:39 pm
toddthebod wrote: Mon Apr 01, 2024 8:35 pm You can deduct margin interest against your investment income, but only if you treat it as ordinary income instead of qualified dividends.

The form & instructions: https://www.irs.gov/pub/irs-pdf/f4952.pdf
Interesting, didn't know this. However, my investment income is almost completely qualified dividends, so this might not work for me, if I understood this correctly?
How about bank account interest?

I keep $50k in HYSA earning 5% as my emergency fund, yielding $2,500 for the year. This would be taxed at 50% for me, so I only get to keep $1,250.

I have a margin line available at Schwab that costs 6.75%. If I borrow $50k it would cost me $3,375 for the year.

But $2,500 of that would be tax deductible against the HYSA interest, allowing me to keep an extra $1,250 of the HYSA interest.

Meaning the margin loan would cost me $3,375 - $1,250 = $2,125 which is only 4.25% effective borrowing rate.
Topic Author
MrJones
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Re: What are some tax effective ways to borrow?

Post by MrJones »

CletusCaddy wrote: Tue Apr 02, 2024 9:50 am How about bank account interest?

I keep $50k in HYSA earning 5% as my emergency fund, yielding $2,500 for the year. This would be taxed at 50% for me, so I only get to keep $1,250.
Good to know how this works, thank you. Personally, since I don't keep cash in the bank because of the high tax bracket, it looks like I'm not able to take advantage of this.

I wonder if it's possible to treat qualified dividends as unqualified though. Need to look into this.
toddthebod
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Re: What are some tax effective ways to borrow?

Post by toddthebod »

MrJones wrote: Tue Apr 02, 2024 12:45 pm
CletusCaddy wrote: Tue Apr 02, 2024 9:50 am How about bank account interest?

I keep $50k in HYSA earning 5% as my emergency fund, yielding $2,500 for the year. This would be taxed at 50% for me, so I only get to keep $1,250.
Good to know how this works, thank you. Personally, since I don't keep cash in the bank because of the high tax bracket, it looks like I'm not able to take advantage of this.

I wonder if it's possible to treat qualified dividends as unqualified though. Need to look into this.
Yes, see line 4g of form 4952, linked above.
Topic Author
MrJones
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Re: What are some tax effective ways to borrow?

Post by MrJones »

toddthebod wrote: Tue Apr 02, 2024 2:25 pm
MrJones wrote: Tue Apr 02, 2024 12:45 pm I wonder if it's possible to treat qualified dividends as unqualified though. Need to look into this.
Yes, see line 4g of form 4952, linked above.
Excellent, that's what I was looking for. Thanks much again!
EricGold
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Re: What are some tax effective ways to borrow?

Post by EricGold »

CletusCaddy wrote: Tue Apr 02, 2024 9:50 am
MrJones wrote: Mon Apr 01, 2024 11:39 pm
toddthebod wrote: Mon Apr 01, 2024 8:35 pm You can deduct margin interest against your investment income, but only if you treat it as ordinary income instead of qualified dividends.

The form & instructions: https://www.irs.gov/pub/irs-pdf/f4952.pdf
Interesting, didn't know this. However, my investment income is almost completely qualified dividends, so this might not work for me, if I understood this correctly?
How about bank account interest?

I keep $50k in HYSA earning 5% as my emergency fund, yielding $2,500 for the year. This would be taxed at 50% for me, so I only get to keep $1,250.

I have a margin line available at Schwab that costs 6.75%. If I borrow $50k it would cost me $3,375 for the year.

But $2,500 of that would be tax deductible against the HYSA interest, allowing me to keep an extra $1,250 of the HYSA interest.

Meaning the margin loan would cost me $3,375 - $1,250 = $2,125 which is only 4.25% effective borrowing rate.
Interesting. Could this also work for any 1099-INT, e.g US treasury notes ?
EricGold
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Re: What are some tax effective ways to borrow?

Post by EricGold »

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