Selling the stocks and ETFs when you have borrowed to invest
If you have purchased good quality stocks or ETFs, we
recommend that you hold them forever (buy and hold). When you sell any investment, you
will have to pay tax on any capital gains,
lowering your return on investment.
If you sell all or part of an investment that you have
purchased with borrowed money (leveraged
investments), you should repay the borrowed money, as the
interest on that portion of the debt will no longer be tax deductible.
Example:
Borrow $10,000 and invest in ETFs.
Pay only the interest each month.
Transfer any dividends to another account.
When the investments have reached a market value of
$12,000, a sale is done for $2,000 of the ETFs.
The cost basis of the investment sold is
2,000/12,000 x 10,000, or $1,667.
The capital gain is 2,000 - 1,667, or $334.
This amount must be reported on your tax return.
The $1,667 should be used to pay down the debt,
because the interest on this amount is no longer deductible.
If a margin account is being used, the $334
should be transferred out of the account, and the $1,667 left in
the account to reduce the amount owing.
If a line of credit is being used, the $2,000
should be transferred out of the investment account, and $1,667 of
it used to reduce the amount owing on the line of credit.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
See our Business
Directory for tax, accounting and finance-related firms in your
area.
Please see our legal
disclaimer.
