Some questions that are bugging me a bit:
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How much margin can we practically have, without the tax office having a problem with it? The “rule” says margin interest paid should be lower than taxable income received (dividends etc.). Anyone tested the limits or knows real world examples?
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Anyone else actually also thinking this rule is very weird thinking about it? Currently we are in a high interest regime and you pay 6.8% on USD at IB. Two years ago we paid like 2%. Why is that you could basically have 3x as much margin two years ago considering this rule (as dividend yields are roughly the same in both environments)? Why is it fine for the tax office to take on more margin at low interest? Also why am i allowed to borrow more in CHF (as low interest) than USD? I have never read any justification anywhere for this rule. Maybe it has to do with being able to deduct the loan and ensuring that you will not deduct more than the income you generate? (That just sprung to my mind, it’s probably that thinking harder about it)
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Now concerning practical limits: Let’s say USD ~6% interest (some near term rate cuts already implied) and dividend yield/interest of ~2% on average over your investments. This should mean I can borrow 50% of my portfolio value on margin without violating the rule right? As you are then leveraged 150% and those 150% have a yield of 2% → lets say 1000$ + 500$ borrowed → 1500$x 2% = 30$ income; 500$ borrowed x 6% interest = the same 30$
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In CHF I could basically borrow double the amount at <3% interest
→ Someone having some practcial experience here or spotting a flaw in my thinking?
I’m trying to assess how much margin I can practically and safely take on, without causing issues.
→ Another consideration I have: DA-1 reimbursement for US withholding tax is also somehow affected by me deducting my margin loan from taxes. But apparently it’s a super difficult formula. Does anyone have some formulas I can use to assess that?
Basically I want to know how much DA-1 reimbursements I lose with very high margin loans, as that could severely reduced the effectiveness of the margin loan investments.
Also I want to assess how much sense it can make sense to switch to IE domiciled etfs, if I get too much of my DA-1 refused due to high margin. Although my factor funds are not available in IE, I’d bite the bullet, go full factor on US side and then do something like EXUS + emerging markets (and some swiss stock sprobabaly) as Ireland funds. A big tax drag is not worth it to stick to teh factor funds.
E: Is this formula applicable still?
I just punched some numbers on a spreadsheet and basically at 45% margin in USD at 6% interest, you get 0% (zero) back from DA-1, the same in CHF at say 2.5% and you still get 85% back of your DA-1 when the formula holds true.
That’s pretty crazy tbh.
Of course if you deduct 6% from taxes, you get effectively 1.5% back at 25% marginal tax rate and when deducting CHF 2.5% you only get back 0.625%.
And getting more yield then 2% also massively changes the picture again. This whole thing seems to be very sensitive.
Now what is the most optimal/ tax efficient way is the question…