Leveraging Portfolios with Tax-Smart Credit Strategies 

How strategic use of financing can help enhance an investor’s overall wealth.

While investors continue to feel the ramifications of the 2013 tax changes, savvy investors can employ strategies to help soften the blow. Credit strategies – secured loans, mortgages and intrafamily loans that benefit from today’s low-rate environment – can enable the equitable funding of major expenses, grow wealth or even make the payment of a larger-than-expected tax bill less painful. 

As investors adapt to new tax rates, it’s not uncommon to face an unexpectedly high tax obligation. Or, perhaps the investor is simply managing through a year-over-year cash flow issue. Regardless of the circumstance, many investors find they need ready access to liquidity to satisfy financial obligations on time.

Credit strategies, such as secured loans, can be an attractive option for meeting liquidity needs. A secured loan can help investors avoid liquidating assets and incurring potential capital gains taxes, while at the same time keeping a long-term wealth strategy plan intact.

For example, when an investor leverages existing assets to take out a low-interest loan to diversify a portfolio or purchase investments expected to appreciate higher than the interest rate, he or she benefits from increased wealth.

Many investors consider purchasing a home or second property with idle cash. However, with the mortgage interest deduction still available and interest rates low for the near term, it may be more advantageous to invest that idle cash and use a mortgage for the home purchase.

If paying 100 percent cash for a property, it may be difficult to retrieve the investment should a financial emergency arise. By taking a mortgage and investing cash in liquid financial assets, an investor has greater access to liquidity without being forced into an untimely sale of property.

Another way for investors to leverage credit is the intrafamily loan. Suppose an investor has an adult child with a highly promising business opportunity, but not the liquidity needed to realize that opportunity? Tapping a 401(k) or other longer-term investment vehicles may provide an unnecessary setback for that adult child. One tax-smart alternative is to borrow funds from a family member.

An intrafamily loan from one family member to another can be a powerful wealth transfer tool that helps avoid gift and estate taxes – if drafted and administered correctly. Lenders receive a promissory note with IRS-sanctioned rates (AFR 7822) against their idle cash, and the recipient can invest the funds at a potentially higher return.

As with all these strategies, it’s critical to work with the right wealth management professional to understand both the risks and opportunities.

About the Author: James Robertson is managing director of BNY Mellon Wealth Management’s New Jersey region. The firm works with clients and their advisors to identify tax-smart ways to leverage portfolios – while ensuring that long-term wealth strategies stay intact. 


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