Ron Peterson wrote:
[...]
>> That's the whole point of the law: personal interest to buy a car is
not
>> deductible. Interest on money borrowed *directly* for investment
>> purposes is.
>
> Since interest is fungible, it's a silly rule.
You really should consider that there are two sets of "rules" --
economic, and tax. From an economic view, you're right - interest is
interest, a dollar is a dollar, and so on.
For tax purposes, actually the rule is pretty straightforward:
generally, interest is NOT deductible (wasn't always the case). Then,
there are three major exceptions: student loan interest, most mortgage
interest on personal residence(s), and any interest that can be DIRECTLY
traced to the production of taxable income, such as a business, rental,
or capital investment. If the tracking of proceeds rule was not
followed, there would be no way to enforce the general rule and yet
still allow exceptions.
> But, my broker says to
> use such loans as tem****ary ways to manage investments.
I don't understand this.
>> As previously mentioned, tax consequences are just one of many factors
>> in determining whether borrowing money makes sense.
>
> I was just looking at the situation where one can borrow for less than
> what investments return. In which case, tax deductions are im****tant.
What I think you're trying to ask is, why can't you defer income tax on
the gains from your investments while still enjoying the use of those
gains by taking cash loans against them and deducting the interest?
That's double-dipping (or, single-dipping from an empty container).
It's the same reason why there's a cap on how much equity debt qualifies
for home mortgage interest deduction. For both a home and stock
investments, you have two basic choices:
1. cash out, pay the tax (if applicable -- homes and stocks both have
built-in breaks on taxes), and use the money for whatever you want,
interest-free.
2. borrow, continue to defer the tax on the gains, but don't expect a
deduction for the interest.
-Mark Bole
--
Mark Bole
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