Author Topic: Tax deductions for margin interest?  (Read 610 times)

MustacheAndaHalf

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Tax deductions for margin interest?
« on: June 13, 2021, 10:49:58 AM »
The articles about billionaires using margin loans for tax efficiency also mentioned that the interest on margin loans may be tax deductible.  Did that change in 2018, or is it still the case?

I paid margin interest last year at two brokerages.  Looking at my 1099s, I can't find a line item for margin interest.  Do brokerages have to report this on an IRS form?  Or do I need to check my monthly statements?

I believe the margin loans were much smaller than my standard deduction this year.  But apparently one form of tax efficiency is to avoid selling assets, and take out a margin loan for expenses.  So I'm curious about the details of margin loan interest.

seattlecyclone

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Re: Tax deductions for margin interest?
« Reply #1 on: June 13, 2021, 11:31:21 AM »
Yes, there is an itemized deduction for investment interest. See Schedule A (Line 9), Form 4952, the instructions for these, and other publications mentioned therein.

My understanding from a brief read-through of these materials is that the loan needs to be used to purchase investments in order for the interest to be deductible. Interest on loans used for personal expenses, even if investment property is used as collateral, is not deductible. There's probably a bit of wiggle room here though, given that money is fungible. Suppose that this week you receive $10k of dividends in your brokerage account and you also take a $10k margin loan. The next week you purchase $10k of new shares. Did you use the loan dollars to purchase the shares, or the dividend dollars? Who can say? Seems like it would be more advantageous to claim you used the loan dollars, and you would then be able to deduct the interest every year until you either pay off the loan or cash out the shares you bought with the "loan dollars."

MustacheAndaHalf

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Re: Tax deductions for margin interest?
« Reply #2 on: June 15, 2021, 06:54:52 AM »
I see - so when someone is making new purchases and using money from a margin loan, they can tie those two events together.  They can take tax deductions on the margin loan interest since assets were purchased with the margin loan.

seattlecyclone

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Re: Tax deductions for margin interest?
« Reply #3 on: June 16, 2021, 12:13:40 PM »
That is my assumption from reading the rules, yes. This would be analogous to the deduction rules for mortgage interest. The loan needs to be used to purchase a house to be deductible. If you do a cash-out refinance you can't deduct the interest paid on the additional principal because there's no house purchase directly tied to that amount, but if you buy the identical house next door and take out a loan for the higher amount you can deduct the whole thing. Kinda weird I think, but that's the rule.

 

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