From D.P.: “Are you SURE that margin interest is really deductible if the loan is used for personal purposes, such as buying a car? My reading of IRS Pub. 550 ‘Investment Income and Expenses,’ pages 29-30 (available on line), makes this seem a dubious proposition. Although it may defy conventional wisdom, I have found that I CAN deduct credit card interest if the proceeds are used for investment purposes.

“I know, I know, WHY would I use credit cards for investment? Simple, to take advantage of all those low interest rate teasers that stuff my mailbox. At 3.9% or 4.9% it is the cheapest money around and it helps me buy my lots in the Southern Colorado mountains. The downside is keeping on top of the fiendishly tricky card companies and their devious rules, as well as the blizzard of payments that have to be made exactly on time. It wouldn’t be worth the trouble if it weren’t so much fun to fleece the card companies. I call it the ‘card game.’ (It is, of course, essential to have a sturdy backup plan for when the card rollovers dry up.)

“Please don’t use my name if you should use any of this. I don’t care to have the IRS audit me even though everything is on the up and up.”

Response From Andy:

Well. Leaving aside the wisdom of your “card game” and the murky psychological significance of the pleasure you take in fleecing anyone, even a poor, struggling credit card company, you do raise a good point. The IRS regulations on deductible investment interest are very complex and I believe do remain based on the purpose for which you are borrowing.

But as a practical matter, deducting margin interest is very unlikely to arouse the IRS (assuming you meet the other tests, mainly reporting at least as much investment income to deduct the interest against). If you want to be incredibly (and, in my entirely unofficial, unguaranteed, don’t-hold-me-liable opinion, unnecessarily) good about this, I suppose you could use your margin power to buy shares in a money-market or bond fund that allows you to write checks against it. Then some time later, should you need to buy a yacht, write a check. Or of course you can sell some shares, use the proceeds to buy the yacht, then buy them back minutes later on margin. But as I say, I just don’t think this is something you need worry about, either practically or morally. (And as I say again, this is just my entirely unofficial, unguaranteed, don’t-hold-me-liable opinion.)

By contrast, I think the credit card thing, even though you might ultimately prevail, could actually cause you a hassle if you are audited. Unless, that is, you can actually buy stocks by charging them to your Visa card. That might be an easier case to make. (And think of all the frequent flier miles, if it’s the right kind of Visa card!)

Note: In a recent column I said one problem with writing options is that the premiums you are paid to write them — to sell a put or a call — are all taxed as ordinary income. This is true unless the options you write are exercised, in which case the premium is added to or subtracted from the cost of the shares in figuring your capital gain.

Tomorrow: A Brief History of the Universe



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