[doe_eyes]

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.

[hn_throwaway_99]

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.

[eadmund]

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.

[zeroonetwothree]

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.

[creer]

> 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.

[refurb]

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.

[technothrasher]

> 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.

That's federal estate tax. State tax can be different. Massachusetts, for example, has estate taxes on over $2M ($4M for a couple who manages their estate plan wisely).

[atmavatar]

Borrowing against the current value of your stocks should automatically cause any gains to become realized for tax purposes.

[Zenzero]

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.

[nobodywillobsrv]

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.

[dataflow]

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

[lesuorac]

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.

[cryptonector]

> 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.

[bdangubic]

Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die

[vineyardmike]

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.

[yieldcrv]

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

[nobodywillobsrv]

It's leverage. That is all. And tax efficient.

[Apreche]

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.

[bruce511]

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".

[dullcrisp]

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

[tightbookkeeper]

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

[beezle]

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...

[throwaway2037]

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.

[traceroute66]

> The framing is deceptive.

Indeed the framing is very deceptive.

Yes, it helps to have a relationship with a private bank. But as pointed out, some brokerages will let you do it too if you are too poor to be allowed to enter through the door of a private bank.

BUT

The main thing that is skirted around in the article is that it still needs to go through the financial institution's credit committee.

So, for example, you cannot just rock-up with a million in Tesla shares and expect a loan against them, or at least not at a sensible LTV ratio.

The financial institution will want a boring portfolio with government bonds and low-risk corporate shares.

Any bank that would be willing to lend against a high-risk portfolio is probably not the sort of bank you want to do business with anyway.

[SomeHacker44]

This is not true: "very low rate." My brokerage starts at 12+% which I would not call low. It never even reaches prime at millions of borrowing, and I do not have remotely enough to get much better a rate.

[kman82]

Wrong brokerage. Interactive Brokers lends at 5% on large amounts and around 6% on small amounts.

[dranudin]

You can also lend money from the options market with a box spread for around 4-5%. See e.g. boxtrades.com

[htrp]

you need to look at the Lombard landing products offered by banks, not margin loans on brokerage or personal loans

[s0rce]

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.

[chx]

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.

[creer]

To be fair, there are very accessible options like margin loan or pledged assets which you can also keep going indefinitely - possibly all the way into estate tax which - as a "little guy" - you wouldn't owe. They are higher interest rates (to the point of not being all that interesting - depending on what you want to do.) And they don't have the same features.

But if you are high assets and low income, they might still allow you to buy a house with a loan - if it's what you want.

[theshrike79]

You can also buy art.

  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.

[Shaanie]

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.

[gadders]

>> 3) put it in storage or a tax loophole between countries

I think some of the Swiss Freeports would be up there with some of the world's best museums: https://medium.com/@girivasishta07/switzerlands-freeports-se...

[kwere]

there was a loophole that allowed wealthy people to donate to museums works of arts in exchange of a write off on the value of the artwork. to limit abuses they patched it so that you can writeoff only the purchase price not the market value. I heard a workaround is having living artist create a artwork directly for you and getting it appraised to a crazy amount for writeoffs.

[jjav]

> 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.

[ywvcbk]

Switch to a different broker? e.g. it’s just +0.5%

https://www.interactivebrokers.com/en/trading/margin-rates.p...

[FireBeyond]

I think Adam Neumann and a couple of others notably got zero interest loans from banks from the bank wanting to court their business income too.

[nicolas_t]

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%

[creer]

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.

[christophilus]

Interactive Brokers is 6%. Not low, but not bad.

[tomatocracy]

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.

[petermcneeley]

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?

[kelnos]

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.

[basementcat]

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

[blasphemers]

No. You are not allowed to use these loans for investments, you would need a different type of loan for margin trading.

[yieldcrv]

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

[JumpCrisscross]

> 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.)

[mixmastamyk]

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.

[TMWNN]

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.

[ywvcbk]

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%)

[taxman22]

Schwab Pledge Asset Line (PAL) is SOFR + (2.40% to 4.4%). SOFR today is 4.81%.

[dang]

Ok, we've replacing accessing billions by borrowing against stock in the title above. Thanks!

[bdangubic]

> 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.

[1123581321]

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.

[eadmund]

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?

[JumpCrisscross]

> 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?

[bertjk]

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.

[ywvcbk]

What about reverse mortgages or any type of loan with any collateral? It’s more or less exactly the same..

[lxm]

What's your take than on HELOC?

[gruez]

>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.

[mason_mpls]

Even if there’s risk, this is still clearly realizing market gains