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The richest people borrow against their stock (2021)

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Re: The richest people borrow against their stock (2021)

#121

Post by Zenzero »

hn_throwaway_99 wrote: post #35
doe_eyes wrote: post #2

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 ho…

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…

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.

Re: The richest people borrow against their stock (2021)

#122

Post by bertjk »

bdangubic wrote: post #7
doe_eyes wrote: post #2

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 ho…

> 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 borr…

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.

Re: The richest people borrow against their stock (2021)

#123

Post by scoofy »

creer wrote: post #91
hn_throwaway_99 wrote: post #35

Earlier quoted context omitted.

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…

> 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.

No.

Re: The richest people borrow against their stock (2021)

#124

Post by jjav »

bdangubic wrote: post #14
JumpCrisscross wrote: post #9

Earlier quoted context omitted.

> 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 portfo…

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

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.

Re: The richest people borrow against their stock (2021)

#125

Post by bruce511 »

throwaway2037 wrote: post #118
bruce511 wrote: post #114

Earlier quoted context omitted.

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 ev…

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.

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.

Re: The richest people borrow against their stock (2021)

#126

Post by jjav »

bdangubic wrote: post #32
JumpCrisscross wrote: post #17

Earlier quoted context omitted.

> 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-t…

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…

> 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.

Re: The richest people borrow against their stock (2021)

#127

Post by throwaway2037 »

beezle wrote: post #48
doe_eyes wrote: post #2

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 ho…

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:

    > 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. 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.

> 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.

Re: The richest people borrow against their stock (2021)

#128

Post by nicolas_t »

jjav wrote: post #117
doe_eyes wrote: post #2

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 ho…

> 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 l…

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%

Re: The richest people borrow against their stock (2021)

#130

Post by zeroonetwothree »

hn_throwaway_99 wrote: post #35
doe_eyes wrote: post #2

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 ho…

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…

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.

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