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Refinancing or drawing down investment and margin loans: Is interest tax deductible?

Newbie

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I am currently looking to reduce interest costs associated with investment loans related to shares and am unclear as to how tax deductions work for finance changes related to shares already purchased. All the info I have found is about purchasing shares in the first instance, and not about managing a portfolio once purchased.  On that basis I would appreciate more clarity whether interest will be tax deductible and I think the following two scenarios help explain what I mean...

 

Scenario 1: Drawing down on margin loan.

Assuming I have $50,000 in shares, and a $10,000 margin loan (with a $20,000 credit limit). If I draw down $5,000 on the margin loan and use those funds for any purpose (eg, personal expenses), will the costs associated with the margin loan interest still be fully tax deductible?

 

Scenario 2: Paying down margin loan with another loan facility

Assuming the same as above ($50,000 shares, $10,000 margin loan),if I pay down the margin loan with $10,000 drawn from a home mortgage (to access a lower interest rate), will the costs associated with the additional $10,000 loan on the mortgage be tax deductible?

 

Support much appreciated.

 

 

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Most helpful response

Devotee

Replies 0

When determining if interest from a loan is tax deductible, the key test is what that dollar was spent on. For example if you use loan funds for personal expenses, the interest from that portion of the loan is not tax deductible. If you pay out your investment loan, you no longer have a loan to claim interest on. 

There are a lot of existing rulings and determinations on this and maybe another community member will have the time to find one to help you. It can get very tricky and I usually recommend getting advice from a tax specialist one these matters. It really falls into the category of financial planning. 

 

 

1 REPLY 1

Most helpful response

Devotee

Replies 0

When determining if interest from a loan is tax deductible, the key test is what that dollar was spent on. For example if you use loan funds for personal expenses, the interest from that portion of the loan is not tax deductible. If you pay out your investment loan, you no longer have a loan to claim interest on. 

There are a lot of existing rulings and determinations on this and maybe another community member will have the time to find one to help you. It can get very tricky and I usually recommend getting advice from a tax specialist one these matters. It really falls into the category of financial planning.