Using the Equity in Your Investments

Gregory J. Cook, EA, CPA+
Accredited Tax Advisor
Past President Alabama Society of Enrolled Agents
Past President Alabama Association of Accountants

Using the Equity in Your Investments to Retire Debt - A Strategy to Consider

Many long-term investors find themselves in the same situation when short-term cash needs arise – their assets are tied up in illiquid, long-term investments. If you find yourself in this situation, what can you do? You may need cash for a short-term purpose, such as paying an unanticipated income tax bill. Or you may want to take advantage of the equity in your investments without triggering capital gains taxes. You can also use the value of your securities to take advantage of an investment opportunity. Borrowing against the value of your investments is accomplished by securing a loan using your investments as collateral. This loan is commonly referred to as a margin loan. Before you decide to borrow against the value in your investments, be sure to discuss the pros and cons with your financial advisor.

How it Works
To borrow against the value of your securities, you usually need to fill out an agreement with the institution that holds your investments. There are federal regulations limiting how much you can borrow and which types of securities are available to be used as collateral, and each institution can impose stricter regulations. Consult your financial institution to learn which securities are eligible to borrow against and how much equity is required. When borrowing against the equity in your investments, it is always wise to be prudent. The market fluctuates. It is important to leave a large enough cushion in your portfolio to help protect yourself from having to deposit additional securities to keep the loan in good standing. Once you have established an agreement with your financial institution, you can generally use your account as a line of credit, borrowing against your assets as needed – up to the limit established based on the value of your securities.

Benefits of Loans against Securities
One of the greatest advantages of a margin loan is that you can use the proceeds for almost any purpose, giving you great flexibility when managing your overall finances. Frequently these loans offer competitive interest rates, and the interest you pay may be tax deductible. Typically, loans against securities in your account can be completed in a short time, ideal for immediate cash needs.

Risks
A margin loan can result in financial losses if the market value of your investment portfolio dips below a certain level while the loan is outstanding. When this happens, the broker will issue a margin call and you’ll have to repay all or part of the loan – immediately. You may have no choice but to sell your investments at a loss to meet your obligation. It’s possible to lose more money than you initially invested.

The Big Picture
When deciding how to finance a need for cash, it is important to investigate all your options. How you borrow can be as important to your overall financial picture as how you invest. Discuss your borrowing needs with a qualified financial professional to see if this type of borrowing is right for you.

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Greg Cook

Greg Cook on the Recovery Act ...

The Recovery Act was passed by Congress and signed into law by President Obama on February 17, 2009. The purpose of the $787 billion Recovery package is to jump-start the economy to create and save jobs. The Act specifies appropriations for a wide range of federal programs, and increases or extends certain benefits under Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also reduces individual and corporate income tax collections (to an extent), and makes a variety of other changes to tax laws.

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This Act will have far reaching consequences and we will be dealing with it for years to come (at least until 2018). Twenty-eight different agencies – such as the Departments of Education; Health and Human Services; and Energy – have been allocated a portion of the $787 billion in Recovery funds. Each agency develops specific plans for how it will spend its Recovery Act funds. The agencies then award grants and contracts to state governments or, in some cases, directly to schools, hospitals, contractors, or other organizations. The agencies are required to file weekly financial reports on how they are spending the money and their specific activities related to Recovery funds.

Read more about The Recovery Act

While Our Government Rolls the Dice with Deficit Spending ...

We endeavor to bring information to you that will help you keep taxes and your personal finances in check.

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Have You Refinanced Your Home?
If you are one of thousands who locked into a lower home mortgage interest rate, then you've hit the savings jackpot! Besides getting one of the lowest rates in decades, you may be able to deduct some of the refinancing costs when you file your tax return. The “points” paid to get a home mortgage may be deductible as mortgage interest when you itemize on Form 1040's Schedule A. Points paid to get an original home mortgage may be fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.

For a refinanced mortgage, you figure the interest deduction by dividing the points paid by the number of payments you will make over the life of the loan. You may deduct points only for those payments made in the tax year. Say you paid $2,000 in points and you will make 360 payments on a 30-year mortgage. You could deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year. If you used part of the refinanced mortgage money to finance improvements to your home and if you meet certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid.

Also, if you are refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off. Other closing costs – such as appraisal fees and other non-interest fees – generally are not deductible. And the amount of your adjusted gross income could affect the amount of deductions you can take. Any way you look at it, between the lower interest rates and the tax savings, that's money you can take to the bank. For more information on deductions related to refinancing, contact your Cook and Co. Advisor.