Tax deductablility- selling some shares to pay for reno

Hi


I have a question I hope you may assist with

I set up a margin loan to purchase some shares ~ 7 years ago and sold some last year to pay for personal house renovations. I did not pay down the loan at all however I only sold some shares and the dollar value of the shares I have remaining have always been much more than the margin loan amount. My accountant thinks i should have paid down some of the margin loan to an amount of at least the cost base of the shares I sold however I would have expected the purpose of the original loan has not changed it is still for the shares 100% and therefore the margin loan should be fully deductible


Any thoughts?


Thanks


Wally

 

Your accountant is correct. The purpose of the loan was to buy shares. If the shares are no longer there the interest relating to the purchase could not be deductible.

You also have a further problem because the loan is now mixed.

Tax Tip 71: Deduction of interest after assets sold

Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan

 

Thanks for the reply Terry- appreciated. I understand if I sold all the shares then the loan is not deductible if I use the $$ for personal use. I basically had a 200k margin loan to buy 200k of shares. These shares then increased in value to ~400k. I sold 100k worth. So currently I have 300k of shares and 200k loan ie I sold dollar value of less that the capital growth of the shares. Hope this makes sense?

 

Nope, doesn't make sense from either a logical or tax point of view.

You may have purchased 200,000 x $1 shares. each share you borrowed $1 for. If you sell that particular share that loan of $1 no longer relates to that share.

 

OK- many thanks Terry. Appreciate your time,

Wal

 

Exception : You buy $100K of shares. Sell them years later and realise $50K. The remaining $50K loan may still be deductible. This assumes the proceeds are used to paydown the existing loan to $50K. If it isn't paid down you end up with a tainted loan and all of it may pose a concern.