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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)

#91

Post by creer »

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…

> 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.

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

#92

Post by Apreche »

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…

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.

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

#93

Post by PaulDavisThe1st »

lesuorac wrote: post #41
dataflow wrote: post #34

Earlier quoted context omitted.

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…

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…

> 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.

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

#94

Post by PaulDavisThe1st »

mikeyouse wrote: post #80
blast wrote: post #64

Earlier quoted context omitted.

> 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…

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.

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

#95

Post by PaulDavisThe1st »

JumpCrisscross wrote: post #75
blast wrote: post #64

Earlier quoted context omitted.

> 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 USA still has an estate tax.

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

#96

Post by janalsncm »

rufus_foreman wrote: post #4

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.

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

#97

Post by yieldcrv »

JumpCrisscross wrote: post #82
yieldcrv wrote: post #79

Earlier quoted context omitted.

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…

> 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

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

#98

Post by JumpCrisscross »

PaulDavisThe1st wrote: post #95
JumpCrisscross wrote: post #75

Earlier quoted context omitted.

> 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 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...

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

#99

Post by dullcrisp »

Apreche wrote: post #92
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…

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 mo…

Wanna go halfsies on some residential real estate in a high rent neighborhood?

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

#100

Post by tightbookkeeper »

Apreche wrote: post #92
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…

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 mo…

Rich people having more options, and being more insulated from risk, is not news.
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