The Smith maneuver is:
- convert some % of your mortgage to a HELOC based off the principal you pay off every month
- invest that HELOC, which has its own (probably less favorable) interest rate, in the stock market
- deduct the interest of you HELOC (not the mortgage interest) from your income during tax season
- use the tax return to pay off your mortgage
- repeat. Over time you will convert more and more of your mortgage to HELOC and you just hold the interested funds until the mortgage is paid off, then you sell it all at once (likely you pay capital gains since this must be in a cash account for business activities)
Now this basically just sounds like a more complicated version of leveraged investing. How is this any different from just getting a good old fashioned LoC? Here are some similarities/complications:
- you now have two interests to pay every month
- you also have "two loans" to pay, if your mortgage is 500k, and you take out a 100k HELOC, then you owe the bank 600k - ideally you can make up the difference from the market
- crucially, you are not actually deducting your mortgage interest, you are deducting your HELOC interest. The Smith maneuver is marketed as a technique to make your mortgage interest tax deductible but it seems to be not that.
A normal LoC just sounds simpler. You can deduct the interest from that as a business activity just the same. I am probably not understanding something important though, hence why I ask here. Thank you in advance!