On May 8, 7:48*pm, Will Trice <wtr...[at]notmonitored.com> wrote:

- quote -

On my last mortgage, I also only paid just enough to avoid PMI for the
same reason.

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kastnna wrote:

- quote -

I agree and I would extend this to a more generalized rate of return
argument. If I can earn a higher rate that the rate of the loan, the
loan is not bad regardless of purpose (well, almost regardless). For
example, I could have paid cash for my last car, but at 0.9% interest I
thought it made more sense to leave money in the market. That's the
same reason I didn't put more down on my house.

-Will

william dot trice at ngc dot com

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Ron Peterson wrote:
[...]
- quote -

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.

- quote -

I don't understand this.

- quote -

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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Ron Peterson <ron[at]shell.core.com> writes:

- quote -

It may be silly, but it's the law, and the interest-tracing rules apply.

For example:
(a) You have $30,000 in a checking account. You buy $30,000 in stock,
send in $15,000 in partial payment, and use the other $15,000 to
buy a car. You end up with $0 in checking, $30,000 in stock,
a $15,000 margin loan, and a car. The interest is deductible.

(b) You have $30,000 in a checking account. You buy $30,000 in stock,
send in full payment of $30,000. Then you tell the broker to
send you $15,000 (you don't sell anything) and use it to buy a
car. You end up with $0 in checking, $30,000 in stock,
a $15,000 margin loan, and a car. The interest is NOT deductible.

(I posited this scenario in misc.taxes.moderated several years ago,
and the consensus was as described above -- even though the outcomes
are identical, the interest-tracing rules and the sequencing of events
makes the first scenario deductible but the second scenario non-deductible).

--
Rich Carreiro rlc-news[at]rlcarr.com

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On Apr 30, 8:20*am, Mark Bole <ma...[at]pacbell.net> wrote:
- quote -

I see that the deduction doesn't disappear entirely based on income.
There is a maximum of a 60% reduction and a maximum reduction of 3%
of income beyond $157,000(?).

- quote -

Since interest is fungible, it's a silly rule. But, my broker says to
use such loans as temporary ways to manage investments.

- quote -

I was just looking at the situation where one can borrow for less than
what investments return. In which case, tax deductions are important.

--
Ron

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On Apr 30, 12:21*pm, jIM <noreplysoc...[at]hotmail.com> wrote:
- quote -

I agree that the tax deductibility doesn't define good or bad. As you
said, it's "icing on the cake". "Good" and "bad" are surely relative
terms, but I don't agree that the ending value of the asset relative
to the loan expense defines good or bad either. I consider it to be
merely a consideration also.

Back to the car example... suppose I live in an area with no access to
alternative transportation (buses, taxis, subways, commuters, etc...).
Furthermore, suppose I could work from home and earn $50k a year, or
take a job working from an office 15 miles away and earn $100k a year.
So by purchasing a modest vehicle, under reasonable terms, I
relinquish some money to the interest gods, but in the end make
significantly more. If I were in that position I would feel my
investment (the car) was a smart one. Do you disagree? I can imagine
this scenario to be quite common among recent college grads.

Now if I managed to find a car that APPRECIATED in value that would
just make the investment that much better ("icing on the cake").

In the end, I think the determinants for "good debt" and "bad debt"
are highly case specific. But in general (and as I said earlier), if
the loan yields more than it costs, it's a "good debt".

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- quote -

good and bad (what is the definition of good?).

My understanding is that mortgage debt is not good because it is tax
deductable, it is good because the asset the debt was used to secure
goes UP in value over the life of the loan. Car debt is not bad debt
because it is not tax deductable, car debt is bad because the value of
the product the loan was used to secure has decreased in value at the
end of the loan term.

The fact the mortgage interest is tax deductable is icing on the cake
relative to the appreciation of the house itself, which is the real
profit from the good debt.

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Ron Peterson wrote:
- quote -

Schedule A limitations based on income, yes. Also, only first and
second home qualify. Also, you have to keep track of acquisition vs.
equity debt, the law is designed to prevent endlessly refinancing your
equity and still fully deducting all interest.


- quote -

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.

As previously mentioned, tax consequences are just one of many factors
in determining whether borrowing money makes sense.

-Mark Bole

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On Apr 28, 10:58*am, Mark Bole <ma...[at]pacbell.net> wrote:

- quote -

I see that there are income restrictions and restrictions as to the
amount of the mortgage.

- quote -

One should then avoid purchasing a vehicle directly from a brokerage
account that has a loan against the stock, but i am not sure how to
free up the cash without selling stock.

--
Ron

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On Apr 28, 9:52*am, Ron Peterson <r...[at]shell.core.com> wrote:
- quote -

Tax deductions only function to lower the effective interest rate.
They make a certain type of debt "better" but not necessarily to the
point of being called "good debt".

- quote -

That's true, but if a vehicle is the only plausible way to get to the
job that provides significant income and the only method of obtaining
a vehicle is through an auto loan, then I would contend it is a "good
debt". In theory, the loan yields more than it costs.

- quote -

That's true also, but would you consider a current mortgage charging
20% interest to be "good debt" just because it's tax deductible?

- quote -

Same question as the mortgage hypothetical above

...
The moral of the story is that certain debts do get a tax deduction
which makes employing them more advantageous. However, the terms of
the debt will play a much larger factor in determining whether it is
"good" or "bad" debt.

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Ron Peterson wrote:
- quote -

Tax consequences are only one of several factors you should consider
when evaluating debt, not even necessarily the most important.

- quote -

Subject to a number of restrictions.

- quote -

Correct. It's only the interest on money you borrowed to *buy* the
stock that might be deductible as investment interest expense.

- quote -

No.

There is a general concept of proceeds tracing. To survive a tax audit,
you should be able to show that loan proceeds for which you want to
deduct interest were not mingled with other funds used for
non-deductible personal expenses. This involves having separate bank
accounts, making close-in-time transactions, and so on, similar to the
rules for tracing separate property in states where marriages are
subject to community property rules.

If you do an internet search for the title "I.R.S. SETS TIGHT RULE ON
INTEREST" you should find a free 1987 New York Times article which
provides more information.

-Mark Bole

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There are several categories on interest in the tax code which brings
up the question of what types of debt are best.

Debt to finance a personal vehicle doesn't seem to allow a tax
deduction for the interest.

Mortgage debt on a principal home, on the other hand, does allow a tax
deduction for the interest.

And, debt incurred for investment purposes also allows a tax deduction
for the interest.

If one doesn't want to sell stock in an investment portfolio because
of the possibility of high(?) returns or capital gains tax, what type
of debt is best for buying an auto or a house?

Does the government consider borrowing against stock to purchase an
auto to be non tax deductible?

Borrowing against stock for purchase of a house has the threat of
higher future interest rates and the possible forced selling of stock
to keep adequate safety margins on the loan.

If investment income is close to zero, is investment interest expense
deductible from other taxable income like mortgage interest?

--
Ron

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