Borrowing to buy shares

May 05, 2011

A common, yet risky, investment strategy used by share investors has been to borrow money, usually via a margin loan, to buy shares.

Borrowing is a good strategy in a rising market, but it can multiply any losses in a falling market. The last thing you want is a loan to repay but no shares to show for it. Don't consider borrowing if you are new to investing.

Just like the tax rules for investment properties, if you borrow money to buy a share portfolio, you can claim a tax deduction for the loan interest, provided it is reasonable to expect that assessable income (dividends or capital gains) will be derived from the share investment. If the loan has a private component, you will only be able to claim interest incurred on the part of the loan used to acquire the shares.

The benefit of such a strategy is that the interest expense should offset any dividend income received, resulting in franking credits that can be offset against other taxable income.

Hopefully the shares increase in value under this strategy and any capital gains are only realised in a later year when the taxpayer is on a lower tax rate, for example, in retirement.

If you expect to earn a lower income next tax year (for example, due to redundancy or maternity leave) an excellent strategy to consider is prepaying interest 12 months in advance before year end on your margin loan to maximise your tax deduction based on the higher marginal tax rate.

Borrowing expenses (such as establishment fees, legal expenses and stamp duty on loans) may be claimed for tax purposes. If borrowing expenses are more than $100, then they must be apportioned over five years or over the term of the loan, whichever is less. Borrowing expenses under $100 are fully deductible in the year incurred.

For a borrowing strategy to work you need to get a return greater than the cost of the interest rate that you are paying (which is generally at a premium for margin loans), otherwise you are falling further behind despite receiving the tax benefi ts. Remember the ABC motto: Absolute Bloody Cash!

Some investors use a capital protected borrowings strategy, where shares are bought using a borrowing arrangement where the borrower is wholly or partly protected against a fall in the market value of the investments.

Any interest paid for capital protection under a capital protected borrowing arrangement for shares is not deductible but instead is treated as if it were a payment for a put option.

While there was a change in the laws in September 2007 that made it possible to borrow within self managed super funds, special rules apply. Seek professional advice on how to structure such a borrowing to avoid any contravention of the complex superannuation rules.

Tags: 101 WaysBorrowingDeductionsPersonal taxShares

Author: Mr Taxman


"Aloha - item D8 in the individual tax return allows for this deduction "

By: Mr Taxman on May 29, 2011 12:08PM

"Many Thanks Mr Taxman. The information is helpful."

By: Aloha on Jun 02, 2011 1:20PM

"Can I still claim interest costs on money borrowed to buy shares that are now worthless?"

By: Scott on Oct 23, 2011 5:03AM

"Just like the tax rules for investment properties, if you borrow money to buy a share portfolio, you can claim a tax deduction for the loan interest, provided it is reasonable to expect that assessable income (dividends or capital gains) will be derived from the share investment. So if your investment will not derive an income any more then you cannot claim interest going forward."

By: Mr Taxman on Nov 28, 2011 11:17AM

"I purchased some shares sometime in 2010 using the money that I borrowed from a bank. I received some dividend for the shares. Before reading your blog I had an impression that I could claim the interest paid on the borrowed money after selling. Is it ok to claim the interest for the financial year 2010-11 on my tax return for 2011-12?"

By: Athar on Aug 21, 2012 10:27PM

"You should claim the 2010/11 interest in that year's return - you can request the ATO to issue you with an amendment of your taxable income."

By: Mr Taxman on Aug 24, 2012 12:24AM

"I borrowed $50K to purchase some managed investments a couple of years ago, and this year sold out at a partial loss. I have put all of the proceeds in a high earning cash management account while I decide to (soon) reenter the market. This money is earning interest so I imagine I can claim the interest expense on the loan? Is this correct?"

By: Ryan on Sep 13, 2012 8:07AM

"If you can demonstrate that the cash management acocunt is purely investment & you haven't used any of the funds for personal/living purposes then you should be able to claim the interest expense against your interest income."

By: Mr Taxman on Sep 19, 2012 8:43AM

"Should the personal loan secured by shares to get tax deduction? or loan purpose on the loan application and on the contract sufficient? "

By: Mana on Sep 25, 2012 9:22PM

"Doesn't matter what security (if any) for the loan nor what you put down as purpose in the loan application. What matters is where you actually put the borrowed funds once you get the loan monies - if personal purposes (eg credit card debt) then not deductible. If for a share portfolio, then it would be deductible."

By: Mr Taxman on Sep 29, 2012 12:26AM

"Hi I had a share trading and investment loss in my wife's account over the past 5 years. Can I claim it as bad debt in my tax return as she has not income. Can I declare it as a loan that will never be recovered? Thanks"

By: Sach on Feb 02, 2013 12:50PM

"Nice thinking but unfortunately not Sach. In order to claim a bad debt you need to have previously declared it as income (which you wouldn't have done). "

By: Mr Taxman on Feb 02, 2013 11:34PM

"When you aay previously declared as income means what ? "

By: Shane on Jul 04, 2015 11:35PM

"Hello Can i redraw monies from my home loan to buy shares and then claim the interest or do i need to create a new loan to be able to claim the loan interest on shares purchased? Thanks"

By: Clarst on Mar 16, 2013 7:24AM

"By all means you can re-draw to buy shares & claim the portion of interest however the calculations can get quite messy particularly if you do additional re-draws in the future that are not investment related. Ideally, it would be desirable to have a separate loan (or split loan) to easily identify the deductible interest expense relating to your shares. "

By: Mr Taxman on Mar 24, 2013 10:14PM

"Can you explain the split load please? I have 150k in the redraw which I want to invest. How do I split the loan so the 150 in redraw is in its own loan? Also will that loan be charged at the same interest rate as my home loan? Thank youi"

By: brad on Jun 05, 2015 8:48AM

"I have redrawed money from my home loan to buy shares over the last couple of years. I would now like to split my loan to make claiming interest simpler at tax time. My total cost for my shares held at the moment is $94000. Does this meanI have to make 1 loan for this amount? Any issues with making it more?"

By: Simon on Nov 24, 2017 2:26AM

"Re-drawing from a line of credit to buy shares is deductible. My situation though involves an off-set account. I am about to retire and my lump sum will be greater than my mortgage. If the balance in my off-set exceeds the house loan and then I withdraw, would the interest on the loan then be deductible?"

By: Geoff on Mar 29, 2013 4:17AM

"An offset account is separate from your loan account. If you have interest charged on your loan (no matter what size) and you originally used the funds borrowed for an investment (eg rental property or shares), then you can claim the interest. If the borrowing was for personal purposes then always non-deductible."

By: Mr Taxman on Mar 31, 2013 10:14PM

"My loan account allows for redraws at no cost. From what you said I may have to take the extra step of actually transferring the retirement funds into the loan account and then redrawing. My loan would be a redraw facility under paras 8 to 11 of TR 2000/2 and would be deductible as per para 23."

By: Geoff on Apr 01, 2013 5:43AM

"Do the shares purchased need to be publicly traded? I am looking into borrowing money to buy into the family business. We are a privately held C corp."

By: Ben on Apr 10, 2013 12:25AM

"I may not sure if you are aware Ben that this is an Australian-based website & my knowledge of international tax laws is flimsy at best. However, if you were in Australia & borrowed money for investing in a private company then the interest would be tax deductible here."

By: Mr Taxman on Apr 10, 2013 9:25PM

"Can i claim all the interest as a tax deduction on a loan that is used to buy shares if the loan is in 2 names"

By: Daniel on May 09, 2013 9:03AM

"If you can demonstrate that you used the funds for shares in your name then you can claim the interest."

By: Mr Taxman on May 09, 2013 11:50PM

"We have a loan for an investment property in my husband's name that is now paid off using our combined income. If he draws down the loan again and transfers the funds into my name for investment in shares, could he still claim the loan interest on his tax return, with the profits/dividend income in my name? "

By: Sally on Jul 01, 2013 12:05AM

"if he doesn't have the shares to derive income for himself then he won't be able to claim the interest on the drawdown."

By: Mr taxman on Jul 04, 2013 11:06PM

"Can I borrow money from a family member to buy shares and then claim the interest as a deduction?"

By: Ivan on Aug 06, 2013 9:29PM

"Yes that would be possible - the family member would need to show the interest received as income."

By: Mr Taxman on Aug 14, 2013 7:42AM

"Hi. I have about $40000 worth of shares in a company. If I borrow $10000 and use it to buy more shares in the company I can claim the interest (pays dividends). Will the taxman care if a couple of weeks later I sell $10000 worth of the shares (that i already held in that co.) given that the ones actually being sold we're purchased years ago?"

By: Steve on Aug 23, 2013 9:21PM

"that will be fine."

By: Mr Taxman on Sep 19, 2013 4:45AM

"Hi. Is it OK to claim interest paid on a margin loan if the share dividends are reinvested as part of a dividend reinvestment plan rather than getting the dividend as an actual payment? Thanks"

By: Brendan on Sep 25, 2013 2:55PM

"Hello, I have a line of credit financed against the farm for around 15 years. I only use it to trade shares. I claim all interest and costs, against my other income. The sale of shares including capital gain/loss, dividends are all payed back to the line of credit to reduce the interest. Question: eg: asset pool(shares) 700k, LCR 400K, Can I sell up to 300K of shares for person use? What are tax implications? Many thanks Peter"

By: Peter on Jan 06, 2019 2:57AM

"yes you can Peter. The key is demonstrating the original $400k was used to finance share purchases that you currently have."

By: Mr Taxman on Jan 07, 2019 1:56AM

"Hi. I prepaid interest on a margin loan for the value of $20,000 in June 2013. Can I claim the interest expense as a deduction for the 2012/13 financial year if did not purchased shares using the loan until July 2013? Thanks"

By: Jared on Sep 28, 2013 3:33AM

"Hi Mr Taxman. I have a line of credit used to purchase shares. The Line of Credit is in joint names with my wife. The share trade account is in joint names with my wife. My wife earns about 5% of our joint income. Can I claim 95% of the interest cost as well as obviously 95% of the gains and dividends. If so, is there a tax publication that states this? Cheers "

By: Anthony on Oct 21, 2013 12:12AM

"I borrowed money from my wife and invested in equity shares of a Private company. I pay her interest at 12% p.a. Can i claim the interest expense as a deduction on my return while she shows the exact same amount on her return ? Also, my investment did not pay a dividend this year but is likely/expected to pay dividend in future (i.e. profitable company) where the board defered dividend for the year "

By: MVc on Oct 25, 2013 3:25AM

"Hi...Is it possible to claim the interest charged on money borrowed to purchase shares when there were no dividends paid in that tax year? Thanks "

By: Anne on Dec 07, 2013 1:31AM

"You wrote: "Borrowing expenses (such as establishment fees, legal expenses and stamp duty on loans) may be claimed for tax purposes. If borrowing expenses are more than $100, then they must be apportioned over five years or over the term of the loan, whichever is less. Borrowing expenses under $100 are fully deductible in the year incurred." Just to clarify my understanding, can you please comment on the following. If an investment loan has an establishment fee of $300 then this fee has to be apportioned over 5 tax years or the loan term. If there is a monthly loan account keeping fee (say, $10 p/m) this is deductible in the financial year concerned. Is my understanding correct?"

By: Grace on Jan 03, 2014 11:42AM

"Hi If you purchase a portfolio partly paid by borrowed funds and partly by cash what is the story re: sales proceeds? Are you obliged to apportion it the same as the original investment? "

By: Nicko on Apr 05, 2014 6:38AM

"Hi. My son wants to buy small commercial property that he has been renting for 7 years. He has almost 1/3 as deposit, And repayments on my loan would be less/close to lease costs. He doesn't want to cross collateralise with his home which banks want todo. I want his name on certificate of title. Would I have to pay tax on the repayments he makes to my loan? & any other implications (other than if he defaults at any time). Thanks and regards, Lynda"

By: Lynda Vickery on Apr 28, 2014 1:06PM

"If I equity in my home to purchase shares can I claim interest paid on this loan if both the share dividends and the earnings on the shares are reinvested as part of a dividend reinvestment plan. I intend to invest through an SMA with all dividends and earnings reinvested. Also as I understand it I need to include the dividends in my tax return even if they are not paid directly into my account. Is this correct? "

By: Bernadette on Jun 02, 2014 5:58AM

"Hi Adrian, Have your book (2 updates actually), just looking on the site without luck to find a shares spreadsheet for tax time without luck"

By: Barry on Jun 19, 2015 10:48AM

"I recently purchased an investment in a Unit Trust for $100,000 through a separate loan. The unit trust issued a return of capital of 100 cents in the dollar, but I still receive investment income of approximately 4.5%. I still hold the same unit holding. Do I need to apply the $100,000 I have received as a return of capital against the loan, or can I put it against my personal home loan. I'm thinking as I'm getting income, it would be good to continue to offset the interest deduction of the loan against it... hope that makes sense."

By: Anthony on Oct 07, 2015 1:51PM

"Hello, If I borrow from a line of credit to buy shares is the interest only tax deductible on dividend payments and further more only claimable on any un-franked amounts? What if I sell these shares in the tax year? Will the expenses in borrowing reduce my income and indirectly offset any capital gain made?"

By: Andrew on Nov 09, 2015 3:47AM

"THe interest will be deductible for the period that you hold the shares & will reduce your taxable income (and by default the net amount of tax that you would have to pay on any dividends & capital gains)"

By: Mr Taxman on Mar 20, 2017 2:47AM

"Hi, I was wondering if I have borrowed money to buy speculative shares with no dividends and I have made a loss on the sale of those shares, do I combine the loss in value with the interest paid to arrive at my net loss or do I put the interest in the deductions and leave my net loss as that from the shares alone?"

By: Pash on Aug 07, 2016 3:59AM

"The interest expense would form part of your deductions in item D8 in the tax return."

By: Mr Taxman on Mar 20, 2017 2:44AM

"I am non-resident of Australia, I borrowed $250,000 throguh ANZ in Australia to buy shares in a company based in australia i received $25,000 as franked dividend and incurred an interest expense of $9241, will i be able to claim a deduction as interest expense , please suggest .."

By: Mcmahon on Mar 16, 2017 2:41AM

"Yes the interest would be deductible however as a non-resident you will not be required to declare fully franked dividends in your tax return."

By: Mr Taxman on Mar 20, 2017 2:46AM

"Hi, interest deductions aside, I'm wondering if I borrow $50,000 to buy shares and those shares double in price and I then sell half of those shares whilst continuing to hold the other half and then pay back the $50,000 loan, would I still have to declare that $50,000 I obtained from selling half of the shares as profit even though I haven't actually made any realised profit until I sell the other half of the shares? Thanks in advance"

By: delish on Apr 08, 2017 10:12AM

"You would need to pay tax on the $25k that was realised. THe other $25k gain remains unrealised & as such not taxable still disposed of."

By: Mr Taxman on Apr 09, 2017 12:56AM

"Hi Mr Taxman, please advice me here, I took a loan of R1000 0000 and used R700 000 to buy Material for my business and the R300 000 used to buy Shares in a listed company. I have received dividend of R56 000 and I have interest of R100 000 to pay for the loan. Can I deduct the interest in my tax for 2017 period of assessment? "

By: Elvis on Apr 15, 2017 5:21PM

"NOt sure which country you are based Elvis - but in Australia you could claim the full interest amount as a tax deduction - although in two different parts of tax return (Business income & interest/dividend deductions). If the interest for the business resulted in a loss for the business then the loss may be quarantined unless you satisfy one of the non-commercial tests. But that is Australian tax law so may be different where you are!"

By: Mr Taxman on Apr 17, 2017 2:55AM

"Hi my husband and I took out a line of credit recently from a current investment property to buy a new investment property but didn't use it all. can we use the rest to invest in shares? will it bother the bank that we are using it for a purpose other than buying an investment property? should we apply for a separate line of credit purely for shares instead? Thanks"

By: TF on Jul 25, 2017 5:42AM

"If i used a line of credit to purchase the shares, what documentation do I need to prove the loan was used for investments? Does it matter that I also have a home loan for a owner-occupied home? "

By: Brad on Oct 18, 2017 9:02AM

"Hi, My question relates to claiming a tax deduction on a new mortgage for shares already held. It feeds into a decision I'm making about selling the shares to pay down the mortgage or, in the least, reduce tax. I've just bought a house and now have a mortgage - let's say, $500,000 house, $400,000 mortgage. I already had, say, $100,000 in shares. My questions are: - If I keep the shares, can I claim an amount of the mortgage as finance for the shares? (eg, share value of $100,000 or 25% of loan costs/interest) - If so, on what basis can I do this? (eg, full current value is claimable, purchase price is claimable). Thanks Ryan "

By: Ryan on Dec 09, 2017 4:16AM

"Ryan, No you can't. For it to work how you wanted, you would have needed to setup the loan prior to buying the shares. The best way around it, and make the shares tax deductible: 1. Make sure redraw is available on your home loan. 2. Sell the shares and put the profits into the home loan. 3. Ask the bank to 'split' the loan. 4 Use the money in the new loan to buy new shares. Now it's totally separate, so easy to apportion the interest, and also now tax deductible. Seek specific advice from your accountant. I am not an accountant. Do not perform any of that without seeking specific advice. Mike"

By: mike on Jan 05, 2018 5:31AM

"Hi, I have two properties, one is my home without mortgage and another is rental property has $300k mortgage. If I sell my home for $500k, and I used the money to buy shares, I move into my rental property as my new home, , can i use the mortgage interest as my tax deduction to dividends? "

By: Tim Wong on Feb 05, 2018 9:30AM

"In 2008 I bought some shares. In 2014 the shares were valued at $40.000. At that same point I took a loan of $500.000 to buy my house (Not an investment house) If have sold my shares I would have needed $460.000 instead of $500.000. Can I then claim as tax deduction the interest on the "extra" $40.000 I have to "borrow"...... I never claimed anything.... so can I claim that for the last 4 years (2014 to 2018)? 3 options: 1) Apply the interest rate (it have changed since then, because is variable and I constantly re-negotiate) of each year to the $ that for 4 years and use the interest as tax deduction 2) Same as before but calculate and average value of the stock for each year and calculate the interest. Example value at the beginning and at the end of the financial year divided by 2 and then apply the average interest rate for that particular year. 3) Today the stocks are valued at $80.000. that means that I could reduce my mortgage by $80.000 which will reduce my interest by approximately $3000 in a year....I was thinking about using those $3000 as interest for tax deduction Is that possible"

By: DIEGO MENENDEZ on May 15, 2018 9:02PM

"Hi, I have used my credit card to purchase shares through a trading account. I have also used the credit for other purchases. Can i deduct the interest from the credit credit card based on the amount i purchased on the credit card? "

By: NJ on Jul 17, 2018 4:35AM

"Hi, I have a question re interest and shares and if it is to be capitalised or if it can be deducted from your annual income (normal job). For a short term trade where the intent was capital gains I capitalise the interest i.e it becomes part of the capital loss. For longer term holds (which pay divis) I deduct the interest against my annual income (which also includes dividends). Some questions... If say for eg you hold Woodside for 10 months and it pays a divi in Feb and you continue to hold the stock for a another 3 months then sell it can you deduct the full 10 months of interest paid ? If say you hold Newcrest for 6 months but miss the divi can you deduct the interest ? If say you hold a speculative stock with the intention that one day it will pay divis (but never does and you sell for a loss). Can you deduct the interest charged or do you have to capitalise it ? "

By: Guy Booth on Jul 18, 2018 9:23AM

"Can you claim interest expense at D8 if you have had no dividend income in the year, but have borrowed for shares "

By: C Nyle on Dec 17, 2018 2:51AM

"Hi, my husband is on the highest tax bracket and is our sole income. we are looking at investing in shares, we have an financial inverter who also manages our super will be doing this. my questions are - do we borrow 100K under our family trust and invest? or do we borrow under my name? or do we borrow under my husband name? or do we us our own cash? We want to set it up to achieve the best tax out neg geared and or less tax paid when selling shares profit."

By: Mrs Sarah Moon on Sep 07, 2020 10:45PM

"Your financial adviser should be able to answer these questions for you Sarah especially as he/she will know more about your personal circumstances. In general I will say that negative gearing isn't tax effective for those earning less than the tax free threshold as you essentially do not get any tax benefit on the interest on the loan ... however although the spouse on the top tax bracket will benefit from negative gearing, he/she will also have to pay tax on the top tax bracket when the portfolio becomes positively geared or when capital gains are realised which is not an ideal situation. A family trust can be good if there is other income being generated in it but if negative gearing losses are made then they are quarantined in there til gains are subsequently made. Plus they costly to establish & maintain. Good luck with the investing!"

By: Mr Taxman on Sep 19, 2020 12:23AM

"I'm about to receive a cash settlement of say $300,000 for my share of the family home from a divorce. I want to rent for a couple of years and maintain the purchase power of the $300K as best I can. I'm happy for it to sit in in index tracker for a few years as I earn, say, $100K gross annual salary. Could you comment on the strategy of borrowing $250K to invest in the tracker, then paying the principal and interest from my cash $300K and claiming the interest against tax? Is it likely to beat just buying $300K of index tracking shares with the cash?"

By: John Do on Jan 19, 2021 1:04PM

"I am not licenced to give specific financial advice ... however for any borrowing strategy to work you will need to generate an after-tax return greater than the interest rate that you are paying on the loan at an absolute minimum. "

By: Mr Taxman on Feb 17, 2021 5:39AM

"I am not licenced to give specific financial advice ... however for any borrowing strategy to work you will need to generate an after-tax return greater than the interest rate that you are paying on the loan at an absolute minimum. "

By: Mr Taxman on Feb 17, 2021 5:39AM

"Hi. I bought shares back in 2018.. And a few more since. I borrowed the money out of my home loan to do this. I still own the shares, but do not receive any dividends from them, although the value has increased. Can I claim interest if there are no dividends? (I do realise I have missed the boat on tax returns greater than 2 years ago though)"

By: Harry on Mar 31, 2021 3:38AM

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