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Recently, one on my loyal tax clients called me about improvements she wanted to make on a rental property she has had for a number of years. She had a number of accounts and investments to choose from and wanted advice on the best one to use.
We met and went over a number of options and eventually decided on borrowing against her stock portfolio at a local brokerage firm. They offered the best rate and payment terms compared to her other options.
During the evaluation, we looked at any possible tax advantages and ultimately there were none available.
We briefly thought we could use the brokerage account, but it turns out that the IRS only allows a tax deduction on margin interest if it is used to buy investment securities. Not for personal use, which is what the rental property would be considered in this case.
Here is a further explanation of what the IRS says when it comes to deducting margin interest in securities brokerage accounts:
“Interest on margin accounts.
If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you.
You cannot deduct any interest on money borrowed for personal reasons.”
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