How do you track margin interest for investing vs. spending?

[Anonymous]

Suppose you have:

• Checking: $50k in cash

• Brokerage: $1m in stocks

You use a bit of margin to go longer on stocks:

• Checking: $50k in cash

• Brokerage: $1.1m in stocks, -$100k cash

At the end of the year, you can deduct the margin interest against capital gains on your taxes IIUC.

You decide to move $30k from checking to your brokerage to reduce margin interest, anticipating that you won't need the cash. Now you have:

• Checking: $20k in cash

• Brokerage: $1.1m in stocks, -$70k cash (margin)

You realize you need an extra $10k in cash. So you move some from your brokerage to checking again:

• Checking: $30k in cash

• Brokerage: $1.1m in stocks, -$80k cash (margin)

Because you've used margin to withdraw cash for spending purposes, at least that portion of your margin interest can no longer be deducted IIUC. This is a little confusing to me, since you've just barely moved that cash from checking into your brokerage.

Is that right?

If so, how do you separate the margin you've used for investments vs. withdrawals? Do brokerages help with this? Should you use separate accounts at your brokerage so that you can track margin for investment vs. spending purposes? How would that work?

If you're in this position:

• Checking: $30k in cash

• Brokerage: $1.1m in stocks, -$80k cash (margin)

And you'd like to sell $100k stock to buy a yacht, how do you do that without dirtying your account around margin for investments-vs-spending? Naively, I think this would happen:

You sell the stock and have:

• Checking: $30k in cash

• Brokerage: $1m in stocks, $20k cash

You withdraw the $100k for the yacht and have:

• Checking: $130k in cash

• Brokerage: $1m in stocks, $-80k cash (margin)

Does that mean that the interest on the -80k is no longer deductible?

What if you did this, start with:

• Checking: $30k in cash

• Brokerage: $1.1m in stocks, -$80k cash (margin)

Sell 180k stock to get to:

• Checking: $30k in cash

• Brokerage: $0.92m in stocks, $100k cash

Then withdraw $100k to buy the yacht.

• Checking: $130k in cash

• Brokerage: $0.92m in stocks, $0 cash

Then buy stock to bring your margin balance where you want it:

• Checking: $130k in cash

• Brokerage: $1m in stocks, $-80k cash (margin)

Is the interest from the -80k now deductible? Isn't this just a roundabout way to achieve the previous position?

Is the only way to keep this sane to never withdraw from the margin account?

[JohnB5677]

The second scenario is the correct one to use.  It will keep everything clean and 100% of the margin interest will be used for securities. 

You can then add to and take margin loans in your brokerage account without having any mixed loan amounts.

[JohnB5677]

The second scenario is the correct one to use.  It will keep everything clean and 100% of the margin interest will be used for securities. 

You can then add to and take margin loans in your brokerage account without having any mixed loan amounts.

[Anonymous]

Thanks for the help.

Just to clarify, by second scenario do you mean the last one where you go to $0 margin to "reset"? The concern I have with that one is the cost of commissions required to reset the entire margin balance can be $hundreds or $thousands, because my broker's fee scales with the size of the transaction (IBKR Pro). I'm aware other brokers have different fee structure, but they also have much higher margin interest rates.

What is your opinion on using multiple accounts and transferring positions between them? E.g. to take the last scenario where you want to buy a $100k yacht with multiple accounts:

Start with:

• Checking: $30k in cash

• Brokerage account 1: $1.1m in stocks, -$80k cash (margin)

• Brokerage account 2: $0 stocks, $0 cash

Transfer 100k stock position to get to:

• Checking: $30k in cash

• Brokerage account 1: $0.90m in stocks, $-80k cash

• Brokerage account 2: $100k stocks, $0 cash

Then sell $100k from account 2:

• Checking: $30k in cash

• Brokerage account 1: $0.90m in stocks, $-80k cash

• Brokerage account 2: $0 stocks, $100k cash

Then withdraw $100k to buy the yacht.

• Checking: $130k in cash

• Brokerage account 1: $0.90m in stocks, $-80k cash

• Brokerage account 2: $0 stocks, $0 cash

Would this also be a way to keep the accounting separate?

[DaveF1006]

Yes, this is a question more for the finance pundits and not a directly-related tax question.