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Author: tangofan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Using CC balance transfer for investment Date: 6/30/2009 4:29 PM
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Hi all,

This is a question somewhat similar to one I asked a while ago re. the deductiblity or credit card interest, if I use the balance for investment purposes ( http://boards.fool.com/Message.asp?mid=25187261&sort=who... )

The situation is as follows:
My CC company offers a low APR for two years on a balance transfer. It will charge a balance transfer fee.

I am considering taking advantage of this offer to pay down a margin loan in a brokerage account. However this is only worth it, if I can deduct the CC interest as investment interest expense. The CC account will carry a zero balance on the next statement, so there won't be any mingling of interest for purchases with the balance transfer.

The wisdom of this approach aside, I have the following questions:
- I understand that if I use the transfer for investment purposes such as paying down a margin loan, I can deduct it as investment interest expense (based on the previous question referred to above).
This time though I will have to pay a balance transfer fee. I assume this is not deductible as an investment interest expense, but only as a misc. investment expense. Is this correct?

- Since I will be paying interest on both the balance transferred and the balance transfer fee, can I deduct the entire interest as investment interest expense or is the portion of interest that I'm paying on the balance transfer fee also a misc. investment expense instead of an investment interest expense?

Thanks for any insight on the matter,

Bernhard
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106415 of 121219
Subject: Re: Using CC balance transfer for investment Date: 6/30/2009 6:23 PM
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I would argue that the balance transfer fee is a personal expense and not at all deductible. The future interest paid on the balance transfer fee would likewise be nondeductible.

Ira

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106416 of 121219
Subject: Re: Using CC balance transfer for investment Date: 6/30/2009 7:27 PM
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I would argue that the balance transfer fee is a personal expense and not at all deductible.
Why?
Certainly seems like an expense for an investment to me. But I'm not an expert on this.

The future interest paid on the balance transfer fee would likewise be nondeductible.
Usually there isn't interest on fees - the fees get paid on the next billing cycle.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106417 of 121219
Subject: Re: Using CC balance transfer for investment Date: 6/30/2009 9:48 PM
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I would argue that the balance transfer fee is a personal expense and not at all deductible.
Why?
Certainly seems like an expense for an investment to me. But I'm not an expert on this.



From IRS Pub. 550:

To be
deductible, these expenses must be ordinary
and necessary expenses paid or incurred:
To produce or collect income, or
To manage property held for producing in-
come.
The expenses must be directly related to the
income or income-producing property, and the
income must be taxable to you.

The balance transfer fee doesn't meet either of these conditions.

Ira

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Author: tangofan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106418 of 121219
Subject: Re: Using CC balance transfer for investment Date: 7/1/2009 12:51 PM
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Thanks to all who responded. So if the balance transfer fee isn't deductible, then I assume that I need to prorate the portion of interest that is deductible (since the balance transfer fee simply gets added to the balanc and incurs interest).

E.g. if I borrow $10000 and pay a $200 balance transfer fee I could deduct 10000/10200 * 100% = 98% of the interest as investment interest expense. Is this correct?

Bernhard

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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106421 of 121219
Subject: Re: Using CC balance transfer for investment Date: 7/2/2009 9:30 PM
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I don't see how borrowing to repay a margin loan causes you to have any deductible investment interest expense. You are using the loan proceeds to repay a debt, not purchase an investment.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106422 of 121219
Subject: Re: Using CC balance transfer for investment Date: 7/2/2009 11:53 PM
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I don't see how borrowing to repay a margin loan causes you to have any deductible investment interest expense. You are using the loan proceeds to repay a debt, not purchase an investment.

Interest on a refinanced loan is allocated and deductible to the same extent as that on the original loan. See IRS Pub. 535.

Ira

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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106428 of 121219
Subject: Re: Using CC balance transfer for investment Date: 7/3/2009 5:05 PM
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In the case of business interest (pub 535), I agree with you. A replacement business loan generates business interest. In the case of home mortgage interest, I also agree; a refi that secures the same home is treated as a substitute for the acquisition (or HEL) debt that is extinguished in the payoff. In the case of investment interest, though, I don't see any authority for the proposition that a borrowing that is used to extinguish a liability that generates investment expense substitutes for that liability and is treated as though it was incurred to make the investment. Extinguishing a debt is not making an investment, so borrowing to extinguish a debt should not give rise to investment expense. I could be wrong, and the odds are greatly in favor of your being right. But I've looked at Pub 550, and I still don't see it.

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