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The richest people borrow against their stock (2021)

forbes.com

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

#51

Post by bdangubic »

JumpCrisscross wrote: post #40
bdangubic wrote: post #32

Earlier quoted context omitted.

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 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…

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 :)

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

#52

Post by JumpCrisscross »

__turbobrew__ wrote: post #29
creato wrote: post #11

Earlier quoted context omitted.

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/...

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

#53

Post by bdangubic »

WillPostForFood wrote: post #44
bdangubic wrote: post #36

Earlier quoted context omitted.

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 :)

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

#54

Post by JumpCrisscross »

bdangubic wrote: post #51
JumpCrisscross wrote: post #40

Earlier quoted context omitted.

> 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…

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…

> 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.

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

#55

Post by JumpCrisscross »

bdangubic wrote: post #53
WillPostForFood wrote: post #44

Earlier quoted context omitted.

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

This strongly depends on jurisdiction. In many (today I learned, not all) assessed value is explicitly different from market value.

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

#56

Post by pwg »

bdangubic wrote: post #43
pwg wrote: post #15

Earlier quoted context omitted.

> 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…

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".

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

#57

Post by pwg »

cperciva wrote: post #37
gruez wrote: post #16

Earlier quoted context omitted.

>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

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?

> 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.

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

#58

Post by basementcat »

petermcneeley wrote: post #49
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 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?

There is usually a margin requirement (25 to 75% depending on type of equity). And yes, you can.

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

#59

Post by pwg »

bdangubic wrote: post #21
gruez wrote: post #16

Earlier quoted context omitted.

>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.

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

#60

Post by bdangubic »

JumpCrisscross wrote: post #54
bdangubic wrote: post #51

Earlier quoted context omitted.

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…

> 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--som…

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...

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