Selling the Stocks and ETFs When You Have
Borrowed to Invest
If you have purchased good quality stocks or exchange-traded
funds (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 of our suggestion to keep record-keeping simple:
Borrow $10,000 and invest in an ETF.
Pay only the interest each month.
Transfer any dividends less interest to another account.
When the investment has reached a market value of
$12,000, a sale is done for $2,000 of the ETF.
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 above is just a suggestion for how to do this - certainly not a rule!
Note that if you have sold a stock at a loss, the
interest expense may still be deductible - see our article on Disappearing
Source Rules.