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Posted by Herb Smith on August 1, 2007, 4:26 pm
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> kam...@panix.com (Arthur Kamlet) wrote:
>>>> If I need to borrow money to invest in stock market, what's
>>>> more attractive from the tax/cost perspective between using
>>>> home equity and margin borrowing offered by the broker?
>>>> I think the home equity interest might be (partially) tax
>>>> deductable. The margin interest may be counted as investment
>>>> cost. But I don't know how the investment cost is treated.
>>>> Is it fully deducted from your investment gain or what?
>>> Forget the tax/cost perspective and look at the risk
>>> perspective. If you are a lousy stock picker would you
>>> rather lose your investment or your house? For what it's
>>> worth, margin interest is deductible as an itemized
>>> deduction to the extent you have investment income. Except
>>> in some less common circumstances, it doesn't affect your
>>> investment gain.
>> Both investment interest and home equity interest are
>> deductible on Schdule A, but with different limits,
>>
>> Investment interest is limited to investment income.
>>
>> Home equity interest is limited to $100,000 principal
>> on the main home or one second home.
>>
>> Home equity interest is not deductible for AMTI, so may
>> throw you into AMT.
>>
>> Traceability may apply to investment interest.
> So assuming both are not reach their respective limits, can
> I conclude that the investment interest is more attractive
> in a typical situation (e.g. investment interest rate is 10%
> and home equity is 7.25%)? For example, for simplicity,
> assuming one makes 5K profit and borrowning 10K.
>
> 1) using investment margin, the interest is 1K and the net
> taxable amount is 4K
>
> 2) using home equity, the interest is 0.725K, but one can
> only deduct, say, up to 35% of that amount, depending on his
> individual tax rate.
>
> Is my understanding correct?
No. Both home equity and investment interest are deducted on
Schedule A, so have an equal effect on your taxable income
if the interest rates are equal. Obviously, the loan with
the LOWER interest rate will result in a greater after-tax
profit, regardless of your marginal tax rate.
If loss of the entire home equity loan amount (plus
interest) would not cause you to lose your home, then that
would be the preferred way to go.
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