Smith Manouvre
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Smith Manouvre
Max Thu Jul 01, 2010 9:28 pm
SCENARIO
The scenario is that you have say $100,000 mortgage and $10,000 in stock investments.
METHOD
What you do is you sell the stock, use the proceeds to pay down the mortgage, and then borrow the same $10,000 through a home equity line of credit and deposit directly into your investment account. Theoretically, this puts you in exactly the same position you were before, except now the interest on the $10,000 is tax deductible.
POTENTIAL ISSUES
-It is not going to be free to move all this money around. The bank where your mortgage is held will charge fees for prepayment. Setting up the line of credit will have fees as well. There will also be commissions on the sale and repurchase of stock.
-There will be a capital gain when you sell the stock, which means you will have to pay taxes on the gain immediately, instead of deferring the taxes.
-The interest rate on the line of credit may be higher than that of the original mortgage.
The scenario is that you have say $100,000 mortgage and $10,000 in stock investments.
METHOD
What you do is you sell the stock, use the proceeds to pay down the mortgage, and then borrow the same $10,000 through a home equity line of credit and deposit directly into your investment account. Theoretically, this puts you in exactly the same position you were before, except now the interest on the $10,000 is tax deductible.
POTENTIAL ISSUES
-It is not going to be free to move all this money around. The bank where your mortgage is held will charge fees for prepayment. Setting up the line of credit will have fees as well. There will also be commissions on the sale and repurchase of stock.
-There will be a capital gain when you sell the stock, which means you will have to pay taxes on the gain immediately, instead of deferring the taxes.
-The interest rate on the line of credit may be higher than that of the original mortgage.
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