Investing money borrowed from line of credit?

Question

If I borrow say 100K against my home line of credit at 6%. Then I plan to invest this in a low risk mutual fund. My two questions are:
1) I am hoping that I would be able to write off the complete 6000 dollars (cost of borrowing) while filing my taxes. Is this correct.
2) How much should be the minimum return on investment to make this a sound decision.
Thanks
Tin

Answer 1

Yes if you itemize you can take the deduction
You need to earn 6% on investments to break even, actually maybe less since you can avoid paying the taxes until you sell the investment and if you die before then your heirs get a stepped up basis.

Answer 2

Using the equity in your home can be a very smart way of leveraging your finances, however, there are many factors to consider...

To answer your first question, yes, you could write off the interest. However, keep in mind that doesn't mean the interest expense is paid for, it is just a deduction from your total income when you are calculating your taxes.

2. The minimum ROI depends on many factors, including your current tax bracket. While you're writing off the interest expense, you are also paying income taxes on the interest received from your investment. You'll want to discuss these options with a professional tax advisor as you don't want to take the risk on an investment if the additional income is only going to cause a minimal increase in your after-tax income. Another option is to speak with a licensed mortgage broker. They deal specifically with options involved with the investment of your home.

Answer 3

It would make more sense to borrow only enough to invest what you will recoup from your tax return for that year. If you know a $6500.00 RRSP contribution will create a $6500.00 tax return you could pay off the line of credit amount that you've borrowed. A form of the Smith maneuver. Set up your mortgage as a 1 year variable and you'll be able to grow your investments and pay down your debt in a shorter time period of 10-15 years.

Answer 4

1) Your (cost of borrowing) can only be used as a write off in the year your gain is realized thru the sale of your mutual funds. If this gain is considered a capital gain, your costs can only be applied to capital gains for that year. 2) A return of 8 -10% on investment should be considered a minimum for this plan.

Answer 5

Borrowing in order to invest is not a good idea in my opinion. Even mutual funds carry risk. Generally, they don't disappear like companies do but it has been known to happen. They do however run the chance of losing money.

One caveat: While the interest would be deductible for regular income taxes, it would not be deductible for AMT purposes. As of now, many people are going to get hit with the AMT this year.