Borrowing to invest

Zoomer | January 1st, 2006

Question: In the next couple of weeks I will be receiving $5000 cash as a gift. What I would like to do is take the $5000, pay down my mortgage, and then borrow $5000 to invest. Essentially I want to deduct the interest costs on the $5000 loan.

What do I need to do in order to be able to deduct the interest on my taxes? Can I just use my personal line of credit to make the investment or do I need to get a special type of loan? Your comments would be most appreciated. – J.M.

Answer:

Your line of credit is fine, although if you have personal, non-deductible loans against it as well, the bookkeeping could get a bit messy. You will have to keep careful records as to exactly how much was used for investing, the interest charges on that portion of the total borrowing, and the repayment of any principal. That can be done fairly easily with a spreadsheet program that you can create yourself using Excel. If you have a loan that is purely for investing purposes, it makes all the tracking much simpler. – G.P.