Mark Zukerbert taking $1 salary

[AZ-Tax]

Interesting article on how a some one with such massive networth can obtain debt with a wink of an eye and live off the proceeds from the debt. Here is an excerpt from the article that I believe is incorrect regarding using HELCO proceeds to purchase muni bonds.

"Zuckerberg could also use the money he has earned, some from his HELOC and some from other loans to purchase income-producing, tax-exempt municipal bonds. The interest on the HELOC would be tax deductible—producing a double-tax advantage. The interest on the other loans would not be—but the income from coupon payments from the muni debt would be. He could even use the income from the munis to pay some of his interest expense, which would substantially reduce the lifetime accumulation of debt"

http://www.cnbc.com/id/46236916?__source=otbrn%7Cfbext%7C&par=otbrn

[Koss]

Mortgage Interest

I haven't looked this one up.

But I think from a purely technical standpoint, interest on a home equity loan is deductible mortgage interest, even if the proceeds of the loan are used to purchase tax-exempt bonds, provided that all the criteria are met for deductibility of home mortgage interest.

Those criteria might be difficult for someone like Zuckerberg to meet.

I'm talking about the rules that say that you cannot deduct mortgage interest when the loan was not used to buy, build or improve your main or second home, if the amount of the loan exceeds a certain threshold.

Is the threshold $1 million?

Those are some pretty complicated rules that I don't have to deal with very often.

If I'm a working stiff with a house worth $175,000, and a first mortgage of $120,000, and I take out a second mortgage or a line of credit for $25,000, and use that money to buy municipal bonds, I think the mortgage interest is still deductible on Schedule A.

What makes this example silly is that a guy with that kind of house probably has income that is low enough that tax-exempt bonds don't make sense.

For Zuckberg, tax-exempt bonds make sense.

The CNBC article may not be factually inaccurate. But I agree that in the scenario described, some portion of the mortgage interest might not be deductible.

BMK

[Lion]

AMT could throw a monkey wrench in to the mix.

But, I think what AZ might've been referring to is -- aren't there restrictions on purchasing securities with borrowed funds?

[Koss]

Loans

What kind of restrictions are you referring to?

There are all kinds of rules and regulations associated with margin, but that doesn't have a lot of impact on the tax treatment. And a mortgage loan is not subject to the margin rules.

On an unsecured loan, or on a loan that is secured by stock or other securities, you generally cannot deduct interest if the loan proceeds were used to generate tax-exempt income, such as municipal bonds.

But I think if the loan is secured by your main or second home, that it is still deductible as mortgage interest, subject to the limitations.

BMK

[Lion]

I have no idea. Ask the OP. I don't have any clients in situations that would make me research. I just have something in the back of my mind from long ago classes that suggest there may be restrictions on purchasing securities with borrowed funds. That would not change anything on the tax return that I know of. It's the Purchase that sticks in my mind, nothing to do with Investment Income. Maybe it's nothing at all. The OP triggered some half memory!

[veritas]

Cnbc

Thanks for the link to the article. Now I know not to waste my time with them ever again.

[JoshinNC]

This is a REALLY bad article

First, if his $1 salary is his only earned income then he is ineligible for EIC.

As for the HELOC interest, here's the rule. First mortgage interest used for buying, building or remodeling are deductible, up to $1 million in aggregate debt. Second mortgage interest, including a HELOC, are deductible up to the aggregate of the original purchase price, plus another $100k, per property.

So, if he owns $100 million in debt free property he could take out 10 HELOC's on 10 Different properties at $100k apiece and invet the proceeds in muni's, and keep the earnings while deducting the interest. He could take out more in loans than the $1 million, but only deduct the interest on the first $1 million.

Very poorly written/researched by what is generally a good source of financial news.

[Snaggletooth]

Prohibitions

Without speaking to the deductibility on Schedule A, I do believe there ARE restrictions on business interest where the party has invested in tax-free bonds, and I think this has been around for a long time.

Scenario in particular -- ABC mega corp invests $40 million in industrial bonds, then borrows $40 million to build a plant, deducting the interest paid. Essentially has no cash outlay to build the plant and is deducting interest on money effectively not borrowed, and not paying income on the tax-free proceeds of the bonds. A funny-money plan that IRS has disallowed for years.

[OtisMozzetti]

Without speaking to the deductibility on Schedule A, I do believe there ARE restrictions on business interest where the party has invested in tax-free bonds, and I think this has been around for a long time.

Scenario in particular -- ABC mega corp invests $40 million in industrial bonds, then borrows $40 million to build a plant, deducting the interest paid. Essentially has no cash outlay to build the plant and is deducting interest on money effectively not borrowed, and not paying income on the tax-free proceeds of the bonds. A funny-money plan that IRS has disallowed for years.

I totally agree that IRS says that interest paid to carry tax-exempt bonds is not deductible interest. The rules for tracing the interest can get a little convoluted, but you have to assume that the IRS is going to convolute it their way, not your way.

[Gary2]

As for the HELOC interest, here's the rule. First mortgage interest used for buying, building or remodeling are deductible, up to $1 million in aggregate debt. Second mortgage interest, including a HELOC, are deductible up to the aggregate of the original purchase price, plus another $100k, per property.

So, if he owns $100 million in debt free property he could take out 10 HELOC's on 10 Different properties at $100k apiece and invet the proceeds in muni's, and keep the earnings while deducting the interest. He could take out more in loans than the $1 million, but only deduct the interest on the first $1 million.

The HELOC limit is $100K total, not per property. And the number of properties is limited to two, so if you had three homes, each with a HELOC of $20K, you could only deduct the interest on two of the three ($40K worth of loan).

Nor can new loans against debt-free property count against the $1M home acquisition debt limit. If all he has in home properties is $100M in debt-free properties, then the most he can do, as far as the home mortgage interest is concerned, is deduct the interest on up to $100K of HELOC secured by at most two of those properties.

Besides, if he's just using loan proceeds, munis, and that $1 salary for his cost of living (sort of a young person's reverse mortgage situation), then his taxes will be negligible and the deduction on the loan payments worthless.

[JoshinNC]

Gary

The HELOC limit is $100K total, not per property. And the number of properties is limited to two, so if you had three homes, each with a HELOC of $20K, you could only deduct the interest on two of the three ($40K worth of loan).

Nor can new loans against debt-free property count against the $1M home acquisition debt limit. If all he has in home properties is $100M in debt-free properties, then the most he can do, as far as the home mortgage interest is concerned, is deduct the interest on up to $100K of HELOC secured by at most two of those properties.

Besides, if he's just using loan proceeds, munis, and that $1 salary for his cost of living (sort of a young person's reverse mortgage situation), then his taxes will be negligible and the deduction on the loan payments worthless.

You are right about the 2 property limit, thanks for catching that for me.

Either way, the writer of the article is hopelessly wrong and would have been well served to contact someone with some tax knowledge before posting the article.

[JohnH]

The writer of the article probably did get the best tax advice he could find. I'm betting he researched most of the article while getting his hair styled. Mutil-tasking, you might say...