Sell shares already owned, to borrow money and re-buy them?

If a reasonable portfolio of shares (eg. approx. $100K) were previously purchased using someone's own money and there is no tax-deductible debt attached to them, is it worth considering selling them, using the proceeds to pay down non-deductible debt (eg. PPoR loan), then borrowing the equivalent (as a separate loan, with tax deductible) to buy the shares again?

I know that there would be CGT implications for selling the shares, but while the values are high (and dividends are not so great), waiting on dividends as part of a debt recycling strategy seems like a very slow road. I'm wondering if I'm better off taking the capital growth (or selling existing shares entirely), dumping it into the mortgage, then borrowing for more shares.

The loan structure is already set up to allow for this - it's just whether or not it's a 'smart' move... I'm interested in thoughts and perspectives from the PC gurus.

 

Do the numbers.

The tax benefit is the mortgage interest rate x marginal tax rate.

the cost is brokerage and capital gains tax.

if the marginal tax rate is high, tax benefit is greater but so will capital gains.

 

Might pay to read up on whether this would qualify as a wash trade? Usually it's not a problem if you don't buy back the exact same shares as you just sold.

 

Why don’t you just used the borrowed money to buy more shares and keep the ones you have?

 

Wash sale.

Get advice on Part IVA

 

My assumption (so, good chance it is wrong) was that a wash sale was for gaining capital losses. Does it also apply when you realise capital gains?

 

I find it difficult to believe that a normal person can be prosecuted on Part IVA.

You just have to find a reasonable excuse if the tax office asks you why you sold: "They stormed the Capitol which i thought would lead to chaos and therefore would be bad for shares worldwide". Why did you buy them back? "The authorities took back control and there did not appear to be any long term damage to stocks". Only a fool would tell them that you sold for tax purposes.

 

Is intention or state of mind relevant in a wash sale?

 

What's the reason for doing this?

 

Have a read of the Hart's case from about 20 years ago. Normal property investors and Part IVA.

Tax advice is needed

 

Depends, how long will it take to pay off the loan over a long time small margins compound into big dollars. You could pay a higher interest rate on a new loan, short term you could be worse off even on high tax bracket. Assuming you get CGT discount on 40% rate, a 2% interest on 100k on PPoR loan may cost you $400 in lost deduction. A 3% investment loan may save you 600k in tax but you will but still needing to pay $400 more after tax. If in high tax bracket you could pay 20k tax to pay more tax. But you could be able to sell enough in one year to keep under a threshold or sell those without much gain, a combination of winners and losers, or tranches that have had the least gain, to pay negligable tax, effectively almost tax free income to pay down your loan, while keeping gains in you pocket and your winners to compound, generally winners keep winning.

 

Avoiding wash sale - E.g sell VAS and buy A200. Same same but different.

 

Normally shares go down, you want to sell and realise the capital loss, then rebuy. As I understand, this is when a wash sale applies.

In this thread's situation, shares are bought and the value goes up. The idea is to sell and realise a capital gain (ie the government benefits, as opposed to the individual). Then to use borrowed funds to purchase those shares.

Is realising capital gains and not a capital loss still a wash sale?

 

It doesn't matter if it is a wash sale or not. This is probably not a wash sale.
But that is irrelevant as the word 'wash sale' doesn't occur in tax law.

What you need to ask yourself is if this is a scheme and if so does it have a dominant purpose of gaining a tax benefit? If so the ATO could deny the tax deductions.

 

That's what I was thinking/worried about .

 

To improve overall tax position - rather buy the shares using borrowed funds (where interest is tax deductible), than keep then when there is no loan/deductibility attached.

Was worried about the wash sale/buy scenario being applied, which sounds likely.

 

Therefore Part IVA could apply.

 

And then, what would the next question be?

 

Oh dear - it's way too late on a Saturday night for me to even contemplate an answer.

I'm thinking "Can you suggest an alternative?...", but I'm sure one of the gurus on here will do a much better job than I ever could.

 

The one risk would be , depending on what the 100k is invested in..

Selling now as most ASX listed in the top 20 blue chips over the past 8 weeks have all experienced above a ten percent upward trend so by selling and buying back in you may well pay a higher entry cost ..
I know nothing about the Tax ,but you could margin up 75 percent and borrow on the 100k ,pay no tax until you sell ,rather then sell run the risk of higher entry and pay all the associated tax along the way..imho..