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Selling Leveraged Investments

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Financial Planning -> Stocks, Bonds etc. -> Borrowing to Invest -> Selling the Stocks

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:

bullet Borrow $10,000 and invest in ETFs.
bullet Pay only the interest each month.
bullet Transfer any dividends to another account.
bullet When the investments have reached a market value of $12,000, a sale is done for $2,000 of the ETFs.
bullet The cost basis of the investment sold is 2,000/12,000 x 10,000, or $1,667.
bullet The capital gain is 2,000 - 1,667, or $334.  This amount must be reported on your tax return.
bullet The $1,667 should be used to pay down the debt, because the interest on this amount is no longer deductible.
bullet 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.
bullet 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.

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.

Previous:

bullet Methods of borrowing
bullet Setting up the brokerage account
bullet Buying the stocks and ETFs
bullet What to do with the dividends

 

Tax Tip:  Repay the borrowed money if you sell your leveraged investments.  Better yet, hold them forever.

 

Revised: September 19, 2017

 

 

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