By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.
Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.
One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
At one level of money you are not impacted by a market downturn or crisis.
Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.
If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).
> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.
Taxing capital gains at all is not “obvious”.
Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since (a) you will be dead anyway, (b) tax laws change all the time, and (c) it would have to be discounted appropriately so it may not even be a win.
Personally I think we shouldn’t have capital gains taxes at all so this avoidance method doesn’t bother me.
Yes but that is because taxes are incoherent and abhorrent
Why do we tax realized capital gains at all and why based on the ruler of fiat which is controlled by those who tax (they keep making the ruler shorter)
If the goal is to creat drag on multiplicative dynamics then do so coherently
Tax should make sense at least in core targets. Yet there are no core targets.
At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
At the time the estate tax is being considered isn't that usually down to a single surviving individual? I imagine it's uncommon for a couple to die at once to qualify for the 27m exemption.
There is another difference that is related to risk.
Larger loans allow access to lower risk opportunities.
If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some.
Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
I've owned property to rent in the past. I feel it's worth pointing out to folks keen on this route that, while profitable, it's a Lot of work.
Owning stocks is zero effort. You might glance at your results from time to time. Your fund manager does the heavy lifting (and gets a small % fee for it.)
Owning a property is a pretty constant stream of work. Organizing maintainence. Dealing with complaints. Occasionally evicting non-payers. Finding new tenants. Filtering applicants to filter out the non-payers.
It's so much work you'll likely offload this onto someone rise to do. The cost is not insignificant. (Neither is maintainence.)
The returns may be good, but its not "passive income".
I agree with most of your comments. However, most tax authorities in highly advanced countries view income earned from rental property as passive income, regardless of how much work you need to do. This might be some minor deductions if you act as a real estate agent, but that is a lot of work in most jurisdictions, as real estate agency is normally a highly regulated area of work.
Indeed. Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent) and dividends
For many reasons, including tax and liability, any serious property owner will have a company structure to own the building, collect rent, pay bills etc. Doing it in your personal capacity is pretty insane.
So yeah, you have all the paperwork to run the business as well.
Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole!
But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes?
Edit: To people bringing back the "buy, borrow, die" story:
(a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2]
(b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.)
(c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets.
At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.
So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
It’s called the stepped up basis and yes, only applies to your estate.
A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.
There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..
This is because for a long time, the USA does not tax assets other than real estate.
Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.
I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
The reverse approach has issues as well, primarily for assets that aren't easily divisible.
The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.
If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
This doesn't just apply to property. The family silver collection, the family business, the list goes on.
Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)
> the current price resulting in a large capital gains tax.
There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.
> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income?
No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.
Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die.
(1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today.
(1.2) Estate tax rate and capital gains rates are different.
(1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do.
(1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit
(2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore.
(3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls.
(3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.
For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan.
Nice link. Thank you to share. This notice bothers me a bit:
> IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier.
I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure."
My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity.
<<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
1) buy a painting for X
2) have it evaluated, sometimes the price is higher than X
3) put it in storage or a tax loophole between countries
4) use said painting as collateral for low interest loans
Now you have money to invest, as long as you make more than the low interest loan, you're making profit.
but then you do not get the tax benefits discussed above.
The market for "investment art" I huge and everyone involved
has an upside by art appreciating in value.
> The artist may get more money (since the artist only gets paid in the
initial transaction the artist may only get a fraction of the value
as it increases. The artist may find that later work will become more
valuable as other investors want more of his art.
>The gallery gets more money, and it may attract more art investors
> and the auction house gets more money if it ends up there.
How much art is worth is difficult to estimate on its own.
I mean a white canvas painted uniformly white is worh a lot
of money if a famous artist does it.
It is worth entirely nothing if I do it.
I expect then that the market decides the value.
All investors want art to get more valuable and are in on it.
As an art lover, this is such a tragic scheme.
Unknown amount of art that will never been seen by the public.
Locked up inside a storage facility in a big box
Often the investor has no interest in the art at all, just an
investment made by some form of a broker.
Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> Is Schwab known for being unusually low with its rate for this product?
The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor.
What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.)
But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see.
Should I be taxed when I use the line of credit my bank extends to me?
What OP is missing is the role of collateral. It becomes more important the more perilous the borrower is or might be.
Apple borrows for 20 years unsecured at 31 bps above the U.S. [1][2]. That wouldn't contract much if they offered collateral, because the difference in relative risk is modest to the point of immateriality. Similarly, someone with a century of living expenses in marketable securities really only needs to be restricted from blowing their stockpile--other risks are absorbed by that wealth.
TL; DR The rich don't need collateral as much as the middle class and poor. Penalise the use of collateralised loans like that, and you just make collaterised lending go away or become much more expensive.
> Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Collateral "becomes more important the more perilous the borrower is or might be." It's immaterial to "someone with a century of living expenses."
Elon Musk could probably have borrowed even $100mm unsecured on terms damn close if not identical to that which he could get on a secured loan, ceteris paribus. But Elon is uniquely leveraged. That makes him a more perilous borrower. And $44bn isn't lifestyle borrowing, either.
Nevertheless, he could still probably get a hundred million lent unsecured on terms quite close to his secured rates--there are groups who would do that for relationship building alone.
Why should it be illegal? It’s not a realised gain. It has to be paid off … with money which has to come from somewhere (and be taxed as income or realised gains or whatever).
What reason do you have for wanting it to be illegal, other than not liking it?
How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."
You are paying property tax on that money you are using for that HELOC.
If I bought a house at $300k, I owe $250k and house is now worth $750k the County will be slapping me with $10k/year property taxes whereas before I was paying like $3k. My gains are realized each year via property tax assessments :)
> My gains are realized each year via property tax assessments :)
You are confusing two very different things. You'll realize the gains (and have to pay taxes on) your house value increase only when you sell it. The fact that you were paying property taxes on it all along while owning it has nothing to do with that.
The fact is though if you live in America are paying property taxes on your home, you are NOT hiding from the IRS the fact that you do - you are not saying "sorry, I don't really own this home and I won't be paying anything to you until such later time when my ownership will be revealed at the grand sale at which point I'll pay some taxes"
With "unrealized" stock gains you are doing just that - hiding ownership so you don't have to pay taxes while enjoying the perks of the ownership when it suits you
> if you live in America are paying property taxes on your home
I own in Wyoming. My property's assessed value is like 1/10th the market rate. My neighbour--just checked!--who owns a property like ten times my size, across two plots, and far more lavish than my own has an assessed value similar to mine. The real estate records even have a line item for "actual value" separate from assessed value.
Not familiar with the specifics, but I know California and New York similarly have assessed values that are entirely unmoored from what the property is actually worth.
Because of the definition of what realized income is. Borrowing is not income.
You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000.
You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative.
‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one).
To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income.
Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope.
Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money.
Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!).
> as soon as you try to use it as realized in ANY way you should be taxed immediately
You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfolio at large, or unsecured?
It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)
> ANY usage of unrealized gains makes them realized
What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?
I'm still only talking about publicly-traded common stock, mind you.
> simple to implement but of course won't ever happen
Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.
The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.
I think this is the core issue for me in these discussion - it is not complex at all. If you sell your securities - you pay a tax - that part is simple. Until they it is "unrealized" - right?
> If you write a covered call, did you "use" the asset?
Yes
> If your broker lends your shares out, are they being used?
Yes
> What about presenting your brokerage statement as proof of assets to a mortgage banker?
Of course not
> What about--I've done this--showing your brokerage statements to American Express to get a better rate?
Of course not
> You'd raise taxes on the middle class who can't afford advice
This is always funny to me, middle class :) For sure it would not affect the middle class and there.is not need to "afford advice" when there is nothing complex about this that needs an advice of anyone.
> Because at the end of the day, what you're trying to differentiate is intent
Not at all, it is not "intent" at all - it is just very, very simple... You can own stock and keep it there - no problems. You want to use it for ANYTHING, you pay taxes on it.
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
You say "there is nothing complex about this" after conceding this loophole the size of a planet.
For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant if you're lending tens of millions to a billionaire--plenty of firms will provide this. Next up: loan to heirs. Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
> want to use it for ANYTHING, you pay taxes on it
Swapping "use" for "usage" doesn't address the fundamental issue.
First, you are making lots of great points in your posts. Thanks for your comments.
You wrote:
> Not technically secured.
This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but not a duck!)
For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
I see where you are going with this but you are changing parameters here.
> For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value.
You did not say anything like this, you said "What about presenting your brokerage statement as proof of assets to a mortgage banker?" - this is like me showing my bank account balance during speed dating to flex a bit :) Your example would be 1000000% taxed as you are obviously using it as realized gain.
> Next up: loan to heirs.
If you are using real money, loan all you want. If you are using "money" you are telling Uncle Sam you do not have then you pay tax before you borrow that.
> Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
This is up to the lender... If they want to use my skin color or my gender or my zipcode (all of which they do) they can also use other stuff as well
I get that I am oversimplifying this but surely a system can be put into place that prevents current madness :)
> Your example would be 1000000% taxed as you are obviously using it as realized gain
How? There is nothing different from the Amex example.
In both cases I'm showing assets held elsewhere as proof that I'm rich. In neither case am I pledging anything. In both cases the letter of the contract requires me to notify the lender of material changes in my financial condition, and in both cases I get a favourable rate--sometimes equal to the pledged asset rate.
> is up to the lender
Yes, and they'd rationally replace secured loans to anyone with unsecured loans to the very rich which automatically accelerate on the borrower's death and carry on as usual. In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow, personally, to fund spending, all the way until they die when the bases step up, they cover the loans and then the heirs get to do the same thing.
> you are saying to Uncle Sam that you are not rich
No I'm not. I'm reporting all of those assets as held. They've gained in value, and if and when I sell them I'll pay tax on those gains. In the meantime, they're just sitting there. Appreciating unrealized. And making me look rich to potential lenders.
> exactly what needs to be stopped except of course it won't be cause you know
No, I don't.
I see an analogy with the corporate death penalty. It's an appealing but ultimately stupid concept. Yet it serves a rhetorical purpose: it distracts us from debating massive, debilitating fines. Divide and conqueer. Similarly, we eliminated the step-up basis partly in 1976 and completely in 1980, and then repealed the estate tax in 2010. Those--restoring either the estate tax or, at the very least, the carryover basis in some form--are the real policy wins.
> ANY usage of unrealized gains makes them realized
I don't feel like you're thinking this through.
Can you define (precisely enough to write into the tax code) what is "usage"?
For example, let's say I go to get a second loan for a vacation home. The Uniform Residential Loan Application asks me to list all significant assets. Such as my first house.
Am I "using" the value of my primary home? The second loan is not a lien against the first home, I'm not borrowing anything against it. They are unrelated. But the lender will probably consider my equity there as additional net worth which can be a factor in approving that second loan.
So if you take out a small business loan and use any type of collateral you now have to pay taxes on it?
Significantly increasing the cost of borrowing for most non large companies is certainly a great idea.. it obviously won’t lead to less competition and more concentration.
> It is not messy at all
If you ignore the consequences and implications (or can’t grasp them at all) then sure..
No offense, but I don't believe you understand the nuance of the thing you're talking about.
It is very easy to say 'any attempt by a murderer to flee the state, and he should be thrown back into the jail' for someone with limited education about western law and order.
This is exactly what the billionaires have been able to convince the masses :) It would be "very hard, impossible" to implement a system in which you cannot for the purposes of paying taxes claim you do not have some sht while turning around and heading over to the bank to get a boatload of money borrowing against that same sht - need a genius to figure that out...
No, the fact that your proposal isn’t thought through at all and is entirely impractical doesn’t mean that solving this problem is "very hard, impossible". That seems entirely unrelated..
The key difference here is whether your investment remains at risk. As long as the value of your investment is at risk, then the investment is considered unrealized.
Once you cash in your chips (sell) then the investment becomes realized.
Someone getting a loan against their stock portfolio is still at risk of loss of value of their holdings, therefore the investment gains remain unrealized.
>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.
Your home gains are being taxed already via ever-rising assessments on property taxes. So you are not hiding that and pretending that it is unrealized. You additionally do not pay real estate gains taxes on first 250k as well as...
>Your home gains are being taxed already via ever-rising assessments on property taxes.
it's a separate tax that's on the value, not the gains. Moreover, if we're allowed to bring in other taxes as offsetting factors, do capital gains on companies get a pass because corporations pay corporate taxes as well?
> Millions of Americans sit on appreciated home asset. Should they be taxed?
You live in China and you do not pay property taxes on your home? If you live in America baby, you are not allowed to own anything - especially not homes. For that "right" you have to pay these things called property taxes and you have to pay them all the time...
Once we get some same thing going for securities maybe we can do some comparisons like that - until then ... :) you are too funny mate, I needed this laugh
One could argue stocks be handled differently than homes. Or, to better capture the spirit of the proposal, one would progressively tax unrealized gains used for collateral.
Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
But its true, you can find a real lender for your stocks. You dont have to be rich.
Its not controversial, you have to pay it back. There are other quirks the rich have:
Already post-tax assets to pay something off
They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable.
Borrow more against the increased value or just sell something and pay the taxes that year.
Purchases of primary issuances are taxed differently than secondary market purchases.
But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
> broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.
Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point.
Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
> The wealthy can tell the government what they think it is at each point.
This will need to be audited by the government, at least occasionally. With all the issues that come from estimating the value of a domain names and other unusual assets someone holds.
I think restricting the tax deductibility of charitable donations is a better way to start. These transactions are already usually included in tax filings.
> You have gained income from your capital at this point.
No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back.
Imagine that I am born with $100,000 in stock:
Assets
Stocks
XYZ 100 shares @ $1,000/share = $100,000
Bank account $0
Liabilities $0
Income $0
Expenses $0
Equity -$100,000
My net worth is $100,000.
If I borrow $50,000 against my stock, here are my accounts:
I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.
You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums.
Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%.
My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India.
The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.
If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US
I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).
I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.
I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this).
It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually.
The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
The fact that we can tax houses, the main form of wealth for most people, proves that wealth taxes (levied on other forms of wealth) would be just fine.
This is a pretty complicated matter. In principle, a government could do this. There would then be an invisible tax in the form of high inflation.
High inflation causes practical and psychological problems and undermines the appearance of stability of a currency. For one thing, it would be terrible to save any money. So fungible assets like stocks or foreign currency would see a disproportionate demand. You'd be buying and selling stocks just to buy some groceries or a car. Any event like COVID that creates more demand on savings would send the stock market crashing.
Another aspect is that the government would lose the ability to manipulate tax policy. Charity would have no special status, strategic industry would have to be directly subsidized, etc. Government would lose an important lever.
There also would be little reason to accept payment in this government's currency. Why accept the government's rapidly inflating currency when you have no taxes to pay in that currency and would prefer to transact in a stable currency? Why accept a government contract denominated in their own inflationary currency?
What alternatives are there to owning a home or renting one from someone who owns it?
All you can do is economize on how much home you use, and where it is (where fewer people want to be), which we have seen happen over the past 2-3 decades. So I think we are feeling the pressure of this wealth tax, along with inflation, global competition, and other factors in the real estate market.
With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
> and you are paying HEFTY property taxes on your current home worth each and every year
Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
> do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now)
Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain.
The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.
Yea, you do if you make over 250k in profit but you can roll that over with 1031. Still cannot see how home equity can be compared to borrowing against securities - there are a TON of taxes that we pay for owning a home and none for owning a security...
> Still cannot see how home equity can be compared to borrowing against securities
Home equity: borrow money with the home used as collateral - if you default on the loan the bank takes your house to make themselves whole again.
Borrow against securities: borrow money with the securities used as collateral - if you default on the loan the bank takes your securities to make themselves whole again.
The fact that the house also comes with an attached "ownership tax" that the securities do not include does not change the fact that it is the exact same type of "borrowing".
I would agree with this statement 100% if I was also hiding from the government the fact that I own a home when they came to collect property taxes. Since I am not this argument does not hold water.
>With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it
There's ways around that through 1031 exchange but yea, only first 250k come home free. my argument still stands though that comparing HELOC to borrowing against stock is a poor analogy
Only if the properties are both used for "trade, business or investment" (https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_...). Since your primary residence is not classified as "investment" by the IRS, you can't use a 1031 exchange to defer gains on your primary residence.
And a 1031 is a deferral (see cite above), not a "tax free" swap. If you eventually sell without going through yet another 1031 exchange, all the deferred gains become taxable at that point.
> you can't use a 1031 exchange to defer gains on your primary residence
who says it would be my primary residence when I am about to sell... you never sell your primary residence unless it is an emergency, you move first and make it an investment property and then sell and roll over ...
> If you eventually sell without going through yet another 1031 exchange
You don't of course ever do that. And all this should be in a trust of course...
By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.
Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.
One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
At one level of money you are not impacted by a market downturn or crisis.
Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.
transfer the basis to whom? better not inherit anything
If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).
> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.
Taxing capital gains at all is not “obvious”.
Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Why should you be taxed on it at all?tax is policy. You tax things you want people to consume less of.
Inflation makes nominal values to up.
More inflation more capital gains. Gov is now incengltivized to inflate to pull tax out of realized assets that have not even gained real value
What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
You still need income to pay the interest.
Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since (a) you will be dead anyway, (b) tax laws change all the time, and (c) it would have to be discounted appropriately so it may not even be a win.
Personally I think we shouldn’t have capital gains taxes at all so this avoidance method doesn’t bother me.
Yes but that is because taxes are incoherent and abhorrent
Why do we tax realized capital gains at all and why based on the ruler of fiat which is controlled by those who tax (they keep making the ruler shorter)
If the goal is to creat drag on multiplicative dynamics then do so coherently
Tax should make sense at least in core targets. Yet there are no core targets.
> avoid paying taxes altogether
At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
Not postpone -- avoid. The base price of the asset is adjusted at the time of your death, so if bank sells the asset immediately, they pay no taxes.
https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
No.
This sounds like a great idea but really fails the sniff test:
- you’d need to borrow for decades, where, even at low interest rates were burn through significant capital (more than taxes would)
- you’d need low interest rates to exists for decades which we know doesn’t happen
- finally, all these Uber rich (Bezos, Musk) have all sold significant portions of their equity and paid taxes on it
This seems like nothing more than a hypothetical idea.
Careful, you might be put into the HN cooler, lol
At the time the estate tax is being considered isn't that usually down to a single surviving individual? I imagine it's uncommon for a couple to die at once to qualify for the 27m exemption.
There is another difference that is related to risk.
Larger loans allow access to lower risk opportunities.
If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some.
Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
I've owned property to rent in the past. I feel it's worth pointing out to folks keen on this route that, while profitable, it's a Lot of work.
Owning stocks is zero effort. You might glance at your results from time to time. Your fund manager does the heavy lifting (and gets a small % fee for it.)
Owning a property is a pretty constant stream of work. Organizing maintainence. Dealing with complaints. Occasionally evicting non-payers. Finding new tenants. Filtering applicants to filter out the non-payers.
It's so much work you'll likely offload this onto someone rise to do. The cost is not insignificant. (Neither is maintainence.)
The returns may be good, but its not "passive income".
I agree with most of your comments. However, most tax authorities in highly advanced countries view income earned from rental property as passive income, regardless of how much work you need to do. This might be some minor deductions if you act as a real estate agent, but that is a lot of work in most jurisdictions, as real estate agency is normally a highly regulated area of work.
Indeed. Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent) and dividends
Capital gains is taxed even lower than that.
For many reasons, including tax and liability, any serious property owner will have a company structure to own the building, collect rent, pay bills etc. Doing it in your personal capacity is pretty insane.
So yeah, you have all the paperwork to run the business as well.
Or you just pay a property management company, which comes off pre tax.
Wanna go halfsies on some residential real estate in a high rent neighborhood?
Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
Rich people having more options, and being more insulated from risk, is not news.
This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole!
But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes?
Edit: To people bringing back the "buy, borrow, die" story:
(a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2]
(b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.)
(c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets.
[1] https://news.ycombinator.com/item?id=41411737
[2] https://news.ycombinator.com/item?id=41410808
You just delay selling the stocks until death.
At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.
So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price.
Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
It’s called the stepped up basis and yes, only applies to your estate.
A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.
There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..
This is because for a long time, the USA does not tax assets other than real estate.
Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.
I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
The reverse approach has issues as well, primarily for assets that aren't easily divisible.
The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.
If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
This doesn't just apply to property. The family silver collection, the family business, the list goes on.
Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
> in many cases this can't be paid without selling the asset.
Ok. And?
Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.
They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever.
Forcing the sale of family property or assets does not serve any good in the long term.
It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
^^^ This is the real loophole, the rest is a distraction.
> Is this a special provision that kicks in only on death
To my knowledge, yes [1].
[1] https://en.wikipedia.org/wiki/Stepped-up_basis
> How long has that been in place?
Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)
[1] https://en.wikipedia.org/wiki/Stepped-up_basis
[2] https://greenleaftrust.com/missives/stepped-up-basis-a-short...
[3] https://itep.org/federal-estate-tax-historic-lows-2023/
The USA still has an estate tax.
> USA still has an estate tax
You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1].
[1] https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
Yes. It's been part of the tax code since 1921.
https://www.fidelity.com/learning-center/personal-finance/wh...
https://greenleaftrust.com/missives/stepped-up-basis-a-short...
> the current price resulting in a large capital gains tax.
There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.
> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income?
No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.
Pay taxes once vs pay interest forever? At what point it'll break even and go negative?
Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die.
(1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today.
(1.2) Estate tax rate and capital gains rates are different.
(1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do.
(1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit
(2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore.
(3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls.
(3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.
Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die
It's leverage. That is all. And tax efficient.
what you’re missing is that its not controversial or a loophole
sometimes they pay it off, they just dont have to do that every year
yes, you can do it too, but you would need income to pay it
they already have other assets post tax to pay with, if it ever comes down to that
For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
It's not at all simple what they do.
https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...
Important quote:
> this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M.
Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan.
ref: https://www.interactivebrokers.com/en/trading/margin-rates.p...
Nice link. Thank you to share. This notice bothers me a bit:
I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure."My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity.
<<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
You can also buy art.
Now you have money to invest, as long as you make more than the low interest loan, you're making profit.But then you have X money tied up in some presumably illiquid art with questionable value. Seems better to just invest the X money from the start.
[delayed]
but then you do not get the tax benefits discussed above.
The market for "investment art" I huge and everyone involved has an upside by art appreciating in value.
> The artist may get more money (since the artist only gets paid in the initial transaction the artist may only get a fraction of the value as it increases. The artist may find that later work will become more valuable as other investors want more of his art.
>The gallery gets more money, and it may attract more art investors
> and the auction house gets more money if it ends up there.
How much art is worth is difficult to estimate on its own. I mean a white canvas painted uniformly white is worh a lot of money if a famous artist does it.
It is worth entirely nothing if I do it.
I expect then that the market decides the value. All investors want art to get more valuable and are in on it.
As an art lover, this is such a tragic scheme. Unknown amount of art that will never been seen by the public. Locked up inside a storage facility in a big box Often the investor has no interest in the art at all, just an investment made by some form of a broker.
> your brokerage will lend you money at a very low rate, secured by the equity
I have not found one that will offer a very low rate, have you?
For example here are Schwab's rates for a loan against equity:
https://www.schwab.com/pledged-asset-line/rates
For 500K-1M rate is SOFR + 3.4%, so about 8.2%
For multimillionaires it gets better at SOFT + 2.4%, or about 7.2%
Not bad in this market but not one I'd call "very low"
Possibly there's an unpublished rate for billionaires, there usually is.
Switch to a different broker? e.g. it’s just +0.5%
https://www.interactivebrokers.com/en/trading/margin-rates.p...
The linked page is margin, not equity backed loans.
Is there a difference?
My bank in Hong Kong (where I live) lends in USD against bonds or stock at around SOFR. If they lend in JPY it's around 0.8%
I used this when Chase closed my bank account because of a typo. Just borrowed cash from Fidelity to float for a month until everything got sorted.
Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
Usually they will not give you the full value. Depending on how "safe" they deem the security, they might only allow you to borrow 50%-70% against it.
And most (probably all) of these forbid you from using the loan proceeds to buy more securities.
There is usually a margin requirement (25 to 75% depending on type of equity). And yes, you can.
No. You are not allowed to use these loans for investments, you would need a different type of loan for margin trading.
Ok, we've replacing accessing billions by borrowing against stock in the title above. Thanks!
Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
It’s like people complaining about savings accounts with 0.5% interest rates. Just switch to a different broker…
IBKR is +0.5% at >$200k (It starts at +1.5%)
Schwab Pledge Asset Line (PAL) is SOFR + (2.40% to 4.4%). SOFR today is 4.81%.
Is Schwab known for being unusually low with its rate for this product? Vanguard is 11-13%, consistent with what mixmastamyk said. <https://investor.vanguard.com/client-benefits/margin?msockid...>
In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> Is Schwab known for being unusually low with its rate for this product?
The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor.
[1] https://www.fidelity.com/lending/securities-backed-line-of-c...
8ish percent is good but not fantastic, after years of mortgages lower than that.
What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.)
But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see.
Should I be taxed when I use the line of credit my bank extends to me?
What OP is missing is the role of collateral. It becomes more important the more perilous the borrower is or might be.
Apple borrows for 20 years unsecured at 31 bps above the U.S. [1][2]. That wouldn't contract much if they offered collateral, because the difference in relative risk is modest to the point of immateriality. Similarly, someone with a century of living expenses in marketable securities really only needs to be restricted from blowing their stockpile--other risks are absorbed by that wealth.
TL; DR The rich don't need collateral as much as the middle class and poor. Penalise the use of collateralised loans like that, and you just make collaterised lending go away or become much more expensive.
[1] https://www.bondsupermart.com/bsm/bond-factsheet/US037833AT7...
[2] https://home.treasury.gov/resource-center/data-chart-center/...
> TL; DR The rich don't need collateral as much as the middle class and poor.
You really buy this? Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
> Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Collateral "becomes more important the more perilous the borrower is or might be." It's immaterial to "someone with a century of living expenses."
Elon Musk could probably have borrowed even $100mm unsecured on terms damn close if not identical to that which he could get on a secured loan, ceteris paribus. But Elon is uniquely leveraged. That makes him a more perilous borrower. And $44bn isn't lifestyle borrowing, either.
Nevertheless, he could still probably get a hundred million lent unsecured on terms quite close to his secured rates--there are groups who would do that for relationship building alone.
No difference if secured. You could add to my list of examples a home equity loan. Should that be taxed as a partial sale of the house? No.
Ask your credit union about the variety of loans they offer to regular people.
Why should it be illegal? It’s not a realised gain. It has to be paid off … with money which has to come from somewhere (and be taxed as income or realised gains or whatever).
What reason do you have for wanting it to be illegal, other than not liking it?
How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."
Home equity loans also taxed as realized gains?
You are paying property tax on that money you are using for that HELOC.
If I bought a house at $300k, I owe $250k and house is now worth $750k the County will be slapping me with $10k/year property taxes whereas before I was paying like $3k. My gains are realized each year via property tax assessments :)
> My gains are realized each year via property tax assessments :)
You are confusing two very different things. You'll realize the gains (and have to pay taxes on) your house value increase only when you sell it. The fact that you were paying property taxes on it all along while owning it has nothing to do with that.
> My gains are realized each year via property tax assessments
This strongly depends on jurisdiction. In many (today I learned, not all) assessed value is explicitly different from market value.
The fact is though if you live in America are paying property taxes on your home, you are NOT hiding from the IRS the fact that you do - you are not saying "sorry, I don't really own this home and I won't be paying anything to you until such later time when my ownership will be revealed at the grand sale at which point I'll pay some taxes"
With "unrealized" stock gains you are doing just that - hiding ownership so you don't have to pay taxes while enjoying the perks of the ownership when it suits you
> if you live in America are paying property taxes on your home
I own in Wyoming. My property's assessed value is like 1/10th the market rate. My neighbour--just checked!--who owns a property like ten times my size, across two plots, and far more lavish than my own has an assessed value similar to mine. The real estate records even have a line item for "actual value" separate from assessed value.
Not familiar with the specifics, but I know California and New York similarly have assessed values that are entirely unmoored from what the property is actually worth.
Property tax raises are capped in CA by Prop 13.
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Also, totally irrelevant to the capital gains tax you may owe the federal govt when you sell you house.
> How is it not realized?
Because of the definition of what realized income is. Borrowing is not income.
You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000.
You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative.
‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one).
To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income.
Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope.
Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money.
Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!).
> as soon as you try to use it as realized in ANY way you should be taxed immediately
You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfolio at large, or unsecured?
It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)
> ANY usage of unrealized gains makes them realized
What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?
I'm still only talking about publicly-traded common stock, mind you.
> simple to implement but of course won't ever happen
Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.
The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.
I think this is the core issue for me in these discussion - it is not complex at all. If you sell your securities - you pay a tax - that part is simple. Until they it is "unrealized" - right?
> If you write a covered call, did you "use" the asset? Yes
> If your broker lends your shares out, are they being used? Yes
> What about presenting your brokerage statement as proof of assets to a mortgage banker? Of course not
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
> You'd raise taxes on the middle class who can't afford advice This is always funny to me, middle class :) For sure it would not affect the middle class and there.is not need to "afford advice" when there is nothing complex about this that needs an advice of anyone.
> Because at the end of the day, what you're trying to differentiate is intent Not at all, it is not "intent" at all - it is just very, very simple... You can own stock and keep it there - no problems. You want to use it for ANYTHING, you pay taxes on it.
> If you write a covered call, did you "use" the asset? Yes
This wouldn't make any sense, you didn't use it (unless the call gets exercised).
So you have 200 shares and write 1 call, you'd pay tax on the appreciation of just 100 shares? Then sell another call next week, pay taxes again?
> What about presenting your brokerage statement as proof of assets to a mortgage banker? Of course not
I though it was simple. Now the loopholes start to appear.
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
You say "there is nothing complex about this" after conceding this loophole the size of a planet.
For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant if you're lending tens of millions to a billionaire--plenty of firms will provide this. Next up: loan to heirs. Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
> want to use it for ANYTHING, you pay taxes on it
Swapping "use" for "usage" doesn't address the fundamental issue.
First, you are making lots of great points in your posts. Thanks for your comments.
You wrote:
This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but not a duck!)For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
I see where you are going with this but you are changing parameters here. > For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value.
You did not say anything like this, you said "What about presenting your brokerage statement as proof of assets to a mortgage banker?" - this is like me showing my bank account balance during speed dating to flex a bit :) Your example would be 1000000% taxed as you are obviously using it as realized gain.
> Next up: loan to heirs.
If you are using real money, loan all you want. If you are using "money" you are telling Uncle Sam you do not have then you pay tax before you borrow that.
> Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
This is up to the lender... If they want to use my skin color or my gender or my zipcode (all of which they do) they can also use other stuff as well
I get that I am oversimplifying this but surely a system can be put into place that prevents current madness :)
> Your example would be 1000000% taxed as you are obviously using it as realized gain
How? There is nothing different from the Amex example.
In both cases I'm showing assets held elsewhere as proof that I'm rich. In neither case am I pledging anything. In both cases the letter of the contract requires me to notify the lender of material changes in my financial condition, and in both cases I get a favourable rate--sometimes equal to the pledged asset rate.
> is up to the lender
Yes, and they'd rationally replace secured loans to anyone with unsecured loans to the very rich which automatically accelerate on the borrower's death and carry on as usual. In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow, personally, to fund spending, all the way until they die when the bases step up, they cover the loans and then the heirs get to do the same thing.
You are very convincing and have swayed my opinion on this issue for sure. I do not agree with a lot of it but good disagreements :)
> How? There is nothing different from the Amex example... In both cases I'm showing assets held elsewhere as proof that I'm rich.
but you are saying to Uncle Sam that you are not rich... so you are just a big fat liar here and your punishment should be cap gains taxation!!!!
> In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow...
This is exactly what needs to be stopped except of course it won't be cause you know...
> you are saying to Uncle Sam that you are not rich
No I'm not. I'm reporting all of those assets as held. They've gained in value, and if and when I sell them I'll pay tax on those gains. In the meantime, they're just sitting there. Appreciating unrealized. And making me look rich to potential lenders.
> exactly what needs to be stopped except of course it won't be cause you know
No, I don't.
I see an analogy with the corporate death penalty. It's an appealing but ultimately stupid concept. Yet it serves a rhetorical purpose: it distracts us from debating massive, debilitating fines. Divide and conqueer. Similarly, we eliminated the step-up basis partly in 1976 and completely in 1980, and then repealed the estate tax in 2010. Those--restoring either the estate tax or, at the very least, the carryover basis in some form--are the real policy wins.
(Likewise appreciated the discussion.)
>Divide and conqueer.
Heh.
> ANY usage of unrealized gains makes them realized
I don't feel like you're thinking this through.
Can you define (precisely enough to write into the tax code) what is "usage"?
For example, let's say I go to get a second loan for a vacation home. The Uniform Residential Loan Application asks me to list all significant assets. Such as my first house.
Am I "using" the value of my primary home? The second loan is not a lien against the first home, I'm not borrowing anything against it. They are unrelated. But the lender will probably consider my equity there as additional net worth which can be a factor in approving that second loan.
So if you take out a small business loan and use any type of collateral you now have to pay taxes on it?
Significantly increasing the cost of borrowing for most non large companies is certainly a great idea.. it obviously won’t lead to less competition and more concentration.
> It is not messy at all
If you ignore the consequences and implications (or can’t grasp them at all) then sure..
No offense, but I don't believe you understand the nuance of the thing you're talking about.
It is very easy to say 'any attempt by a murderer to flee the state, and he should be thrown back into the jail' for someone with limited education about western law and order.
This is exactly how you sound.
This is exactly what the billionaires have been able to convince the masses :) It would be "very hard, impossible" to implement a system in which you cannot for the purposes of paying taxes claim you do not have some sht while turning around and heading over to the bank to get a boatload of money borrowing against that same sht - need a genius to figure that out...
No, the fact that your proposal isn’t thought through at all and is entirely impractical doesn’t mean that solving this problem is "very hard, impossible". That seems entirely unrelated..
The key difference here is whether your investment remains at risk. As long as the value of your investment is at risk, then the investment is considered unrealized.
Once you cash in your chips (sell) then the investment becomes realized.
Someone getting a loan against their stock portfolio is still at risk of loss of value of their holdings, therefore the investment gains remain unrealized.
What about reverse mortgages or any type of loan with any collateral? It’s more or less exactly the same..
>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.
Your home gains are being taxed already via ever-rising assessments on property taxes. So you are not hiding that and pretending that it is unrealized. You additionally do not pay real estate gains taxes on first 250k as well as...
>Your home gains are being taxed already via ever-rising assessments on property taxes.
it's a separate tax that's on the value, not the gains. Moreover, if we're allowed to bring in other taxes as offsetting factors, do capital gains on companies get a pass because corporations pay corporate taxes as well?
From the point of view of the IRS you aren’t paying any taxes on your home’s appreciation until you sell.
What's your take than on HELOC?
Capital gains on a primary residence is not taxes in most the cases anyways, so HELOC changes nothing tax wise.
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> Millions of Americans sit on appreciated home asset. Should they be taxed?
You live in China and you do not pay property taxes on your home? If you live in America baby, you are not allowed to own anything - especially not homes. For that "right" you have to pay these things called property taxes and you have to pay them all the time...
Once we get some same thing going for securities maybe we can do some comparisons like that - until then ... :) you are too funny mate, I needed this laugh
One could argue stocks be handled differently than homes. Or, to better capture the spirit of the proposal, one would progressively tax unrealized gains used for collateral.
Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
But its true, you can find a real lender for your stocks. You dont have to be rich.
Its not controversial, you have to pay it back. There are other quirks the rich have:
Already post-tax assets to pay something off
They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable.
Borrow more against the increased value or just sell something and pay the taxes that year.
Purchases of primary issuances are taxed differently than secondary market purchases.
But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
> broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
right, it just hampers the broker’s collection efforts and economic viability if things leave their walled garden
good to know there is no statutory road block
A better very through explanation is at https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...
Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.
Bezos has paid $1.5B and Musk over $12B in taxes according to Google.
Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point.
Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
> The wealthy can tell the government what they think it is at each point.
This will need to be audited by the government, at least occasionally. With all the issues that come from estimating the value of a domain names and other unusual assets someone holds.
I think restricting the tax deductibility of charitable donations is a better way to start. These transactions are already usually included in tax filings.
> You have gained income from your capital at this point.
No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back.
Imagine that I am born with $100,000 in stock:
My net worth is $100,000.If I borrow $50,000 against my stock, here are my accounts:
As you can see, my net worth is still $100,000. I have $50,000 more in cash, but $50,000 less in loan.On the other hand, if worked a job instead and didn’t take out a loan, this might be the situation:
My net worth is now $150,000. I actually had income. Same $50,000 in my bank account, but now it’s income and my net worth has increased.What if I worked the job and took out the loan? Then it would look like this:
I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums.
Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
(2021)
This worked a lot better when interest rates were near zero.
I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%.
My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India.
The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
Interactive Brokers gives you around 5% right now.
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How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.
If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US
So, uh… it’s not different, no
I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
You could get a sub-3% loan with anywhere from a 5-15% down payment without any holdings in the ballpark that is being discussed.
Top 1% wealth in the US is around 13 million. So I would say you are very far off.
Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).
I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
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There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.
sounds frightening (for the bank)
They're loans so where do they get the income to pay off the interest?
If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%:
https://www.interactivebrokers.com/en/trading/margin-rates.p...
I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this).
It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually.
The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
> They're loans so where do they get the income to pay off the interest?
They borrow more, against other stock. Works as long as you have enough stock.
> the rate is probably significantly lower
IBKR is charging Fed Funds rate + 0.5% at >$200k.
Why would they ever offer anyone significantly less than that rewardless if they are billionaires or not? They be losing money on those loans..
Spoiler: the same way you can access your home equity without selling your house.
The fact that we can tax houses, the main form of wealth for most people, proves that wealth taxes (levied on other forms of wealth) would be just fine.
Why have taxes at all if the government can just print money?
This is a pretty complicated matter. In principle, a government could do this. There would then be an invisible tax in the form of high inflation.
High inflation causes practical and psychological problems and undermines the appearance of stability of a currency. For one thing, it would be terrible to save any money. So fungible assets like stocks or foreign currency would see a disproportionate demand. You'd be buying and selling stocks just to buy some groceries or a car. Any event like COVID that creates more demand on savings would send the stock market crashing.
Another aspect is that the government would lose the ability to manipulate tax policy. Charity would have no special status, strategic industry would have to be directly subsidized, etc. Government would lose an important lever.
There also would be little reason to accept payment in this government's currency. Why accept the government's rapidly inflating currency when you have no taxes to pay in that currency and would prefer to transact in a stable currency? Why accept a government contract denominated in their own inflationary currency?
What alternatives are there to owning a home or renting one from someone who owns it?
All you can do is economize on how much home you use, and where it is (where fewer people want to be), which we have seen happen over the past 2-3 decades. So I think we are feeling the pressure of this wealth tax, along with inflation, global competition, and other factors in the real estate market.
With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
> and you are paying HEFTY property taxes on your current home worth each and every year
Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
> do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now)
Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain.
The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.
Yea, you do if you make over 250k in profit but you can roll that over with 1031. Still cannot see how home equity can be compared to borrowing against securities - there are a TON of taxes that we pay for owning a home and none for owning a security...
> Still cannot see how home equity can be compared to borrowing against securities
Home equity: borrow money with the home used as collateral - if you default on the loan the bank takes your house to make themselves whole again.
Borrow against securities: borrow money with the securities used as collateral - if you default on the loan the bank takes your securities to make themselves whole again.
The fact that the house also comes with an attached "ownership tax" that the securities do not include does not change the fact that it is the exact same type of "borrowing".
I would agree with this statement 100% if I was also hiding from the government the fact that I own a home when they came to collect property taxes. Since I am not this argument does not hold water.
In the same way you are also paying corporate taxes in the stocks you own…
>With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it
...only up to 250k if you're in the US.
https://www.irs.gov/taxtopics/tc701
There's ways around that through 1031 exchange but yea, only first 250k come home free. my argument still stands though that comparing HELOC to borrowing against stock is a poor analogy
> There's ways around that through 1031 exchange
Only if the properties are both used for "trade, business or investment" (https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_...). Since your primary residence is not classified as "investment" by the IRS, you can't use a 1031 exchange to defer gains on your primary residence.
And a 1031 is a deferral (see cite above), not a "tax free" swap. If you eventually sell without going through yet another 1031 exchange, all the deferred gains become taxable at that point.
> you can't use a 1031 exchange to defer gains on your primary residence
who says it would be my primary residence when I am about to sell... you never sell your primary residence unless it is an emergency, you move first and make it an investment property and then sell and roll over ...
> If you eventually sell without going through yet another 1031 exchange
You don't of course ever do that. And all this should be in a trust of course...
Is that 250k over your lifetime or 250k per sale? Can you sell your house back and forth to your spouse every year to multiply the exemption?
You can only take it every 2 years. But also this would likely fall under the “step transaction doctrine” and so would be illegal tax evasion.
https://en.wikipedia.org/wiki/Wash_sale
> Can you sell your house back and forth to your spouse every year to multiply the exemption?
If you try you'll likely find yourself being charged with tax evasion once the IRS recognizes what you are doing.
> If you try you'll likely find yourself being charged with tax evasion once the IRS recognizes what you are doing.
Under what law exactly would this "tax evasion" charge be filled (I.MAKE.S.UP(b)(ii)? :)
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