Does anyone know if the tax free status of income from a muni bond changes if the bond is used as collateral for a loan such as a real estate loan. Specifically can you deduct loan interest and still take the bond income tax free?
I am no authority, but as far as I know, a muni’s tax free status is certified by a law firm. Not every muni is certified tax free, ie. sporting venues. Personally, I have never seen a tax free change it’s status.
ednomore’s question doesn’t explain the role that the munis have in the transaction. I was involved in a real estate loan where the underwriter accepted a margin loan on a portfolio of munis as down payment, but I have never seen the bonds used as collateral on the real estate loan itself. He may have his facts confused.
OK…I was confused about what part of the question you were answering with “no”. I don’t believe that muni bond’s tax status changes solely because they are offered as collateral…I’m with you there. Correspondingly, I believe that a person could offer an already-owned muni bond as collateral for a real estate loan, and still get the tax advantages both ways. If the proceeds were used to purchase municipal bonds, that changes my answer entirely.I'll also add the disclaimer that I'm no expert in this kind of transaction either and I've never seen it done. Just because I believe it's possible, doesn't mean your accountant will agree. If you offer to pay me more than I can make slinging annuities, I might research that for you and give you a firm answer...
Thanks for all of your input. To clarify the question, If a person owns a security portfolio which includes tax free bonds, and pledges the account as collateral for a loan, does it in any way change the tax free status of the income from the tax free bonds? I can’t see how it could, but I was asked the question and do not have a definitive answer. My CPA can answer, but I thought it was an interesting question.