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Capital gains are eventually taxed if you ever sell, but some individuals will just hold and take out loans against their enormously large amount of collateral

Capital gains are eventually taxed if you ever sell, but some individuals will just hold and take out loans against their enormously large amount of collateral to avoid incurring capital gains tax.

ghaff 5y ago
To the degree that someone isn't so concerned about passing down the maximum amount of wealth, there are also a number of things that can be done to turn appreciated assets into an annuity through an existing non-profit of some sort. (e.g. using a CRUT).
lovecg 5y ago
This argument is repeated a lot but I never understood the mechanics. Wouldn’t they have to pay back the principal + interest, from a supposedly taxed source of income? This sounds like a scheme to delay taxes and optimize cash flow, but not a way to avoid taxes altogether?
- bklyn11201 5y ago
  It's all about deferring to death and then hoping for the best possible tax treatment at death allowing basis step-up and avoiding estate taxes via various trusts.
- onlyrealcuzzo 5y ago
  I created this spreadsheet to show that the difference is pretty trivial IFF you ever cash out (<2% over 10 years). However, a lot of people: 1) never plan to cash out. 2) know that tax rates are fickle and plan for a day when there will be extremely low tax rates - just like for companies to "repatriate" their profits - and hope that they can in the future realize with little-to-no profits (although, I doubt capital gains tax rates will go much lower, and might actually go MUCH higher). Anyway - the difference before you realize is >13% over 10 years (and the higher the rate of return is, the bigger the difference - it's >17% with a 10% per year return, which is historically average for the extremely wealthy according to Piketty). Here's the sheet: https://docs.google.com/spreadsheets/d/1dZ6h0s2lZBp0fM6Z2w1KOiRrlUaFc3tyIYdPPMfsMpk/edit?usp=sharing https://docs.google.com/spreadsheets/d/1dZ6h0s2lZBp0fM6Z2w1K... This strategy isn't really popular unless you have a networth of greater >$20M. It's particularly attractive, because you get $40k in untaxed capital gains per year - which is roughly what you need to pay the interest on your "borrowed" / "pretend unrealized" capital gains. And, the added benefit is, the interest IS TAX DEDUCTIBLE!

Capital gains are eventually taxed if you ever sell, but some individuals will just hold and take out loans against their enormously large amount of collateral to avoid incurring capital gains tax.

ghaff 5y ago

To the degree that someone isn't so concerned about passing down the maximum amount of wealth, there are also a number of things that can be done to turn appreciated assets into an annuity through an existing non-profit of some sort. (e.g. using a CRUT).

lovecg 5y ago

This argument is repeated a lot but I never understood the mechanics. Wouldn’t they have to pay back the principal + interest, from a supposedly taxed source of income? This sounds like a scheme to delay taxes and optimize cash flow, but not a way to avoid taxes altogether?

bklyn11201 5y ago
It's all about deferring to death and then hoping for the best possible tax treatment at death allowing basis step-up and avoiding estate taxes via various trusts.
onlyrealcuzzo 5y ago
I created this spreadsheet to show that the difference is pretty trivial IFF you ever cash out (<2% over 10 years). However, a lot of people: 1) never plan to cash out. 2) know that tax rates are fickle and plan for a day when there will be extremely low tax rates - just like for companies to "repatriate" their profits - and hope that they can in the future realize with little-to-no profits (although, I doubt capital gains tax rates will go much lower, and might actually go MUCH higher). Anyway - the difference before you realize is >13% over 10 years (and the higher the rate of return is, the bigger the difference - it's >17% with a 10% per year return, which is historically average for the extremely wealthy according to Piketty). Here's the sheet: https://docs.google.com/spreadsheets/d/1dZ6h0s2lZBp0fM6Z2w1KOiRrlUaFc3tyIYdPPMfsMpk/edit?usp=sharing https://docs.google.com/spreadsheets/d/1dZ6h0s2lZBp0fM6Z2w1K... This strategy isn't really popular unless you have a networth of greater >$20M. It's particularly attractive, because you get $40k in untaxed capital gains per year - which is roughly what you need to pay the interest on your "borrowed" / "pretend unrealized" capital gains. And, the added benefit is, the interest IS TAX DEDUCTIBLE!