Are there IRS rules for moving funds from brokerage to margin accounts?
August 15, 2011
Date: Thu, 2 Jun 2011
I have read a number of your posts regarding the tax deductibility of margin interest on my brokerage account. Are there IRS time "rules" or guidelines regarding the transfer of funds from a brokerage account (say to buy a house) and then later a subsequent increase of margin to buy qualified taxable investments in the brokerage account?
Date: Fri, 1 Jul 2011
The rules are called "the interest tracing rules" and are outlined at Treasury Regulations Section 1.163-8T. They do not state specifically that they apply to margin accounts, but clearly they relate to any debt arrangements, including lines of credit and refinancings.
The rules require that the debt should be allocated to the types of expenditures that they relate to, such as passive activities like rental real estate, investments, and personal expenditures. Interest attributable to personal expenditures is generally nondeductible, except for the $100,000 home equity line exception (that doesn't apply for the alternative minimum tax).
The good news is you can apply principal reduction payments first to the personal expenditure share, which maximizes the interest deduction.
You might find it helpful to read Publication 936, "Home Mortgage Interest Deduction."
If you find tracking this difficult, you might need the help of an accountant. Be aware that allocating interest deductions can really drive up your tax return preparation fees.
You will make your life easier by only paying personal items from a separate source of credit from your margin account.
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