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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)

#71

Post by bdangubic »

JumpCrisscross wrote: post #55
bdangubic wrote: post #53

Earlier quoted context omitted.

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.

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

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

#72

Post by JumpCrisscross »

bdangubic wrote: post #66
JumpCrisscross wrote: post #52

Earlier quoted context omitted.

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 need…

> 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.

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

#73

Post by vineyardmike »

dataflow wrote: post #34
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…

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…

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.

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

#74

Post by mixmastamyk »

bdangubic wrote: post #71
JumpCrisscross wrote: post #55

Earlier quoted context omitted.

> 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 yo…

Property tax raises are capped in CA by Prop 13.

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

#75

Post by JumpCrisscross »

blast wrote: post #64
lesuorac wrote: post #41

Earlier quoted context omitted.

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 curr…

> 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?

> 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/

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

#76

Post by cryptonector »

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.

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

#77

Post by cryptonector »

dataflow wrote: post #34
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…

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…

> 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.

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

#78

Post by JumpCrisscross »

bdangubic wrote: post #60
JumpCrisscross wrote: post #54

Earlier quoted context omitted.

> 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 e…

> 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.)

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

#79

Post by yieldcrv »

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 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

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

#80

Post by mikeyouse »

blast wrote: post #64
lesuorac wrote: post #41

Earlier quoted context omitted.

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 curr…

> 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..

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