Sara Max for Money / Time, Inc. writes: : You can deduct all kinds of expenses related to investing, and that includes margin interest. But, as you would probably expect, there are some caveats.
For one thing, before you can deduct margin interest you’ll need to
first calculate your net investment income by subtracting any other
related write offs. “If you made $1,000 in dividends and have spent $800
on deductible investment expenses, that means you can deduct no more
than $200 in margin interest,” says Leon LaBrecque, a CPA and CFP, and
managing partner of LJPR in Troy, Mich.
These expenses must be reasonable and necessary, and typically
include such costs as investment advisory fees, safety-deposit box
rentals, and subscriptions for research or investment-related
publications. If you have investment losses or costs associated with
real estate investments (but not rental property), those get factored in
here too.
You’ll of course need to itemize your deductions, rather than taking
the standard deduction. If your interest paid should happen to exceed
your net investment come in any given year, you can carry it over to the
next.
Keep in mind too that “you can only deduct what you’ve actually
earned in taxable investment income,” LaBrecque says. Eligible
investment income includes interest, stock dividends, capital gains and
royalties. It doesn’t include tax-exempt securities, such as municipal
bonds, or option straddles. Note: if you include long-term capital gains
or qualified dividends in this equation, you give up the more favorable
(15%) rate, “but in some circumstances it might make sense to do that,”
LaBrecque adds.
Finally, you can only deduct margin interest if you used the proceeds
to generate (or attempt to generate) taxable income. If you used a
margin to buy tax-exempt bonds or sail around the world, none of that
interest is deductible.
Of course, relative to investing with borrowed money, figuring out
how to deduct the interest should be a cakewalk. Buying securities with
margin is risky business. “There’s not just the chance that you’ll lose
money, but that you’ll owe money,” says LaBrecque. “If a stock goes down
enough you can really get wiped out.”
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