5 ms·

Can you explain how this works, how it avoids tax? Taking a $100 loan still means you’ll need an income of $100 (plus interest) future income and tax paid on th

by tomp 5y ago

Can you explain how this works, how it avoids tax? Taking a $100 loan still means you’ll need an income of $100 (plus interest) future income and tax paid on this income... If you’re gonna say “they benefit in the extra capital gains between now and when the loan is repaid” - no, that can’t be it, that’s exactly equivalent to taking a $100 loan and investing in stocks instead (i.e. leverage).

jedberg 5y ago
The assumption is that you are using the money for an income generating activity like buying a rental property.
- mciancia 5y ago
  Hm, but income from rental is also taxed, isn't it? If so, how does it help?
  - jedberg 5y ago
    The income from the rental is taxed, but slowly over decades. You don't have to take that entire tax hit in one year.
    - alex_young 5y ago
      You can also sell it and take the gains tax free in many cases.
      - MR4D 5y ago
        Short of a 1031 exchange, I'm not sure how you would do that.
        alex_young 5y ago
        You can sell a house every 2 years and write off up to $500k in capital gains as long as it’s been your primary residence for 2 of the last 5 years. Doesn’t need to be consecutive.
        MR4D 5y ago
        Sure, but you have to stomach the 6% commission you’re paying to the brokers, which really limits this situation to transitory market conditions instead of a get rich quick strategy.
    - notahacker 5y ago
      Also, people buying rental property from cash they earned from wages or selling their business pay tax on the wages/gains and the rental income, not just the latter...
- tomp 5y ago
  The correct expression to use to refer to such money is “loan”, not “tax evasion”.
cj 5y ago
1) You purchased $100 of SPY on June 15th, 2020 2) You're buying a house, and you need $100 today. 3) You sell $100 of SPY, and pay short-term capital gains (up to 37%) OR... 1) You purchased $100 of SPY on June 15th, 2020 2) You're buying a house, and you need $100 today. 3) You take a loan for $100 4) You wait until June 15th, 2021 and then sell $100 of your SPY holdings, paying long-term capital gains (15-20%) 5) You repay the $100 loan ...it doesn't really avoid tax. It's just an alternative way of accessing capital by taking out a loan instead of liquidating assets.
- dakial1 5y ago
  But if the asset sale + the debt leaves you at a loss wouldn't you be able to avoid paying the capital gaibs over the asset sale?
  - cj 5y ago
    The theoretical assumes SPY increased over the time period. If it decreased, you could of course sell it and pay 0% since your investment lost money, short/long-term gains wouldn’t matter because there wouldn’t be any gains. I might be misunderstanding your question though.
  - MR4D 5y ago
    Debt is not a loss unless you default on it.
- deleted 5y ago
  [deleted]
- derivagral 5y ago
  The above basically arbitrages long-term vs short-term capgains for the price of 1 APY cycle, right? That's ~23% for short in the USA, and up to income-level (37%?) for short-term. Quite a big difference for a 2-5% APY loan that you close after 1 year, and the numbers would seem to scale better the higher you go.
- rocho 5y ago
  That's not accurate. It has several benefits (like interest payments being deductible expenses) and wealthy people can continuously borrow to pay off other debts as their other assets appreciate. You just need the rate of appreciation of your assets to be higher than the interest rate. For very big loans, it's quite possible. Finally, it's also possible to roll the gains into a trust and the cost basis is adjusted to zero on death. [0] So yes, it's tax avoidance. [0]: E.g. this is how it's possible to do that: https://wellergroupllc.com/taxes-resources/tax140-guide-determining-the-basis-of-trust-assets https://wellergroupllc.com/taxes-resources/tax140-guide-dete...
dakial1 5y ago
https://youtu.be/8pBPZMUcsh0 https://youtu.be/8pBPZMUcsh0 They never sell, they borrow over that invested money and pay 3% (interest) instead of 37% (income tax)
8note 5y ago
Chances are it doesn't, but the IRS won't go after rich people if they claim they don't have any taxes to pay.

by tomp 5y ago

jedberg 5y ago

The assumption is that you are using the money for an income generating activity like buying a rental property.

mciancia 5y ago
Hm, but income from rental is also taxed, isn't it? If so, how does it help?
- jedberg 5y ago
  The income from the rental is taxed, but slowly over decades. You don't have to take that entire tax hit in one year.
  - alex_young 5y ago
    You can also sell it and take the gains tax free in many cases.
    - MR4D 5y ago
      Short of a 1031 exchange, I'm not sure how you would do that.
      - alex_young 5y ago
        You can sell a house every 2 years and write off up to $500k in capital gains as long as it’s been your primary residence for 2 of the last 5 years. Doesn’t need to be consecutive.
        MR4D 5y ago
        Sure, but you have to stomach the 6% commission you’re paying to the brokers, which really limits this situation to transitory market conditions instead of a get rich quick strategy.
  - notahacker 5y ago
    Also, people buying rental property from cash they earned from wages or selling their business pay tax on the wages/gains and the rental income, not just the latter...
tomp 5y ago
The correct expression to use to refer to such money is “loan”, not “tax evasion”.

cj 5y ago

1) You purchased $100 of SPY on June 15th, 2020 2) You're buying a house, and you need $100 today. 3) You sell $100 of SPY, and pay short-term capital gains (up to 37%) OR... 1) You purchased $100 of SPY on June 15th, 2020 2) You're buying a house, and you need $100 today. 3) You take a loan for $100 4) You wait until June 15th, 2021 and then sell $100 of your SPY holdings, paying long-term capital gains (15-20%) 5) You repay the $100 loan ...it doesn't really avoid tax. It's just an alternative way of accessing capital by taking out a loan instead of liquidating assets.

dakial1 5y ago
But if the asset sale + the debt leaves you at a loss wouldn't you be able to avoid paying the capital gaibs over the asset sale?
- cj 5y ago
  The theoretical assumes SPY increased over the time period. If it decreased, you could of course sell it and pay 0% since your investment lost money, short/long-term gains wouldn’t matter because there wouldn’t be any gains. I might be misunderstanding your question though.
- MR4D 5y ago
  Debt is not a loss unless you default on it.
deleted 5y ago
[deleted]
derivagral 5y ago
The above basically arbitrages long-term vs short-term capgains for the price of 1 APY cycle, right? That's ~23% for short in the USA, and up to income-level (37%?) for short-term. Quite a big difference for a 2-5% APY loan that you close after 1 year, and the numbers would seem to scale better the higher you go.
rocho 5y ago
That's not accurate. It has several benefits (like interest payments being deductible expenses) and wealthy people can continuously borrow to pay off other debts as their other assets appreciate. You just need the rate of appreciation of your assets to be higher than the interest rate. For very big loans, it's quite possible. Finally, it's also possible to roll the gains into a trust and the cost basis is adjusted to zero on death. [0] So yes, it's tax avoidance. [0]: E.g. this is how it's possible to do that: https://wellergroupllc.com/taxes-resources/tax140-guide-determining-the-basis-of-trust-assets https://wellergroupllc.com/taxes-resources/tax140-guide-dete...

dakial1 5y ago

https://youtu.be/8pBPZMUcsh0 https://youtu.be/8pBPZMUcsh0 They never sell, they borrow over that invested money and pay 3% (interest) instead of 37% (income tax)

8note 5y ago

Chances are it doesn't, but the IRS won't go after rich people if they claim they don't have any taxes to pay.