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Income here is not relevant. What matters are assets you can borrow against. You could make 35,000 or 350,000, but it wouldn't be material. So the important qu

Income here is not relevant. What matters are assets you can borrow against. You could make 35,000 or 350,000, but it wouldn't be material. So the important question is how this could be applied with whatever your net worth in usually taxable assets is.

noduerme 5y ago
I'm still confused about the mechanics of this as well. I suck at finance (Damnit Jim, I'm a coder, not a mortgage broker!) Like, if I were to get a reverse mortgage on my home equity let's say while rates are low. Take that and put it in the stock market, something that pays a high dividend. Makes sense that would be a win as long as the market doesn't crash[0]. But where's the tax advantage? If I ever want to spend that money I have to take it out and pay capital gains. The fact that the basis is adjusted when I die doesn't really help me. I guess if I had enough gains from stock to service the debt and declare a loss... is that the ticket? I really hate how I can write a genetic algo from scratch and then feel like a freakin 11 year old who just missed an easy layup every time I call my accountant. Reading a tax form makes my eyes gloss over faster than trying to look at someone's wordpress plugin. [0] which is why I haven't done this [edited for misplaced italics]
- MattGaiser 5y ago
  > If I ever want to spend that money I have to take it out and pay capital gains. No. This is the trick. You can take money out of the asset tax free by borrowing against it. Say that you wanted to invest your home equity. You have two choices. You can sell the house and rent or borrow against the house. Imagine that you paid $0 for the house and can now sell it for $500,000. You have to pay tax on that, bringing it down to $425,000 in your pocket. You lose 15%. You put that 425K in the stock market and it gains 10% per year. After 10 years you have 1.1 million. Alternatively, you can just borrow 500,000 and put your house up as collateral to the bank you are borrowing from. You pay no tax on that 500K. Put that 500K in the market at the same 10%. You end up with 1.3 million in 10 years. The tax benefit is in avoiding the destruction of your initial capital by 15%. You effectively spent the money in our home, but one method makes you pay capital gains while another does not. You could spend your house equity on a boat in the same way. This example is very contrived and ignores things like the capital gains exemption on housing (and the fact that no house costs 0) and that you generally can't borrow 100% of house value (but you can with stocks as long as they are liquid).
  - noduerme 5y ago
    Great explanation. Thank you. Framing it as retaining the maximum initial gains as a basis for investment makes it much clearer.
ac29 5y ago
I think the point is that people who make 35,000/year are unlikely to have a huge net worth to be able to take advantage of these tax strategies. So, the advice would be to invest as early and often as possible to hopefully be able to take advantage of this strategy later in life... or just be born into intergenerational wealth, where this is going to be most relevant.

noduerme 5y ago

I'm still confused about the mechanics of this as well. I suck at finance (Damnit Jim, I'm a coder, not a mortgage broker!) Like, if I were to get a reverse mortgage on my home equity let's say while rates are low. Take that and put it in the stock market, something that pays a high dividend. Makes sense that would be a win as long as the market doesn't crash[0]. But where's the tax advantage? If I ever want to spend that money I have to take it out and pay capital gains. The fact that the basis is adjusted when I die doesn't really help me. I guess if I had enough gains from stock to service the debt and declare a loss... is that the ticket? I really hate how I can write a genetic algo from scratch and then feel like a freakin 11 year old who just missed an easy layup every time I call my accountant. Reading a tax form makes my eyes gloss over faster than trying to look at someone's wordpress plugin. [0] which is why I haven't done this [edited for misplaced italics]

MattGaiser 5y ago
> If I ever want to spend that money I have to take it out and pay capital gains. No. This is the trick. You can take money out of the asset tax free by borrowing against it. Say that you wanted to invest your home equity. You have two choices. You can sell the house and rent or borrow against the house. Imagine that you paid $0 for the house and can now sell it for $500,000. You have to pay tax on that, bringing it down to $425,000 in your pocket. You lose 15%. You put that 425K in the stock market and it gains 10% per year. After 10 years you have 1.1 million. Alternatively, you can just borrow 500,000 and put your house up as collateral to the bank you are borrowing from. You pay no tax on that 500K. Put that 500K in the market at the same 10%. You end up with 1.3 million in 10 years. The tax benefit is in avoiding the destruction of your initial capital by 15%. You effectively spent the money in our home, but one method makes you pay capital gains while another does not. You could spend your house equity on a boat in the same way. This example is very contrived and ignores things like the capital gains exemption on housing (and the fact that no house costs 0) and that you generally can't borrow 100% of house value (but you can with stocks as long as they are liquid).
- noduerme 5y ago
  Great explanation. Thank you. Framing it as retaining the maximum initial gains as a basis for investment makes it much clearer.

ac29 5y ago

I think the point is that people who make 35,000/year are unlikely to have a huge net worth to be able to take advantage of these tax strategies. So, the advice would be to invest as early and often as possible to hopefully be able to take advantage of this strategy later in life... or just be born into intergenerational wealth, where this is going to be most relevant.