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It's a little bit different. Most of the ultra-wealthy live on debt. Here's the basic scheme: - Let's say I own $10B in startup.com stock, but haven't sold it

It's a little bit different. Most of the ultra-wealthy live on debt. Here's the basic scheme: - Let's say I own $10B in startup.com stock, but haven't sold it. My income tax burden is $0. - If I sell the stock, and taxes are 40% in my country, I get $6B, and the government gets $4B. - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. The trick is to never realize gains or income. Debt lets you do that. One more trick is that a lot of purchases are "investments." If I buy a mansion, yacht, and Picasso on debt I can use them. When I'm bored of them, I sell them, and pay off that debt. I've probably made money on the mansion and Picasso, and lost money on the yacht. I've paid a little bit of interest and a little bit of tax, but much less than I would have otherwise.

sokoloff 4y ago
What you describe sounds pretty much the same as “if I start with a paid off house and take out a mortgage on it…”
- hannasanarion 4y ago
  One big difference is that you are constantly paying property taxes on the house, levied as a proportion of its total value, making the mere ownership of it a financial burden. Stock ownership comes with no such burden. Another is that, should the need arise, stock can be sold at the drop of a hat. It is liquid and fungible so a stock-collateralized loan is seen by banks to be a very safe investment. Houses are not.
eadmund 4y ago
You left out the portion where you get the money to pay the principal and interest. Either you actually sell some of that stock, or you work a job to get that money. Either way you that income will be taxed.
- thefreeman 4y ago
  I'm no expert but in other parts of the thread people are saying that interest is tax deductible. So you sell just enough stock to cover the interest and the capital gains are not taxed because they are offset by the interest deduction.
  - bombcar 4y ago
    You still have to pay down principal at some point. In this case explicitly I suspect it has more to do with the uncertainty of the deal going through AND not wanting to incur the tax penalty ALONG with the share penalty (liquidating $30 billion in TSLA would affect its price for sure). If you sold the shares to raise the cash, paid the tax, and then the deal didn't go through and bought the shares back, you'd be out the tax (with a stepped-up cost basis to be sure).
- HWR_14 4y ago
  Or continually roll the debt over, borrowing more money and more money. Then, when you die, your estate can sell the assets to cover the debt, but that avoids taxes.
MockObject 4y ago
> - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
- sokoloff 4y ago
  You don't repay the loan using stock. You repay it with cash from other sources (possibly thrown off by the new investment) or you keep the loan open and continue to pay interest on it.
- aeyes 4y ago
  You repay the loan with the next loan because you have $10b in stock but only took out a $10m loan. In the meantime the stock appreciates some more or you have more vested stock. I guess the risk here would be that the stock goes to 0, you get margin called AND you are now on the hook to pay taxes.
- kjksf 4y ago
  You don't have to repay the loan (for a very loooong time). Let's say you have 10 million in stock. A typical margin account allows you to borrow up to, say, 40% of that. That's 4 million dollars. Let's say you borrow $1 million and spend it. Currently interest rate on a margin loan is under %2. So every year the amount you need to repay grows by $20k (2% of $1 million, for simplicity I don't count compounding). So in 10 years that would be $1.2 million to repay. But you're authorized for $4 million. If in those 10 years the value of stock doubles to $20 million, then you're authorized to borrow $8 million - the amount you can borrow grows faster than the amount you need to repay. To be clear: eventually you have to repay it but in the corner case it could be done when you die. There are of course caveats. If interest rate increases dramatically, then the amount to repay will grow much faster etc. but you can see how e.g. if you have $10 million then you could borrow and spend $100k to live a good life and never have to sell your stock to fund your life (especially if stocks keep going up faster than interest rate, inflation and your spending habits)

sokoloff 4y ago

What you describe sounds pretty much the same as “if I start with a paid off house and take out a mortgage on it…”

hannasanarion 4y ago
One big difference is that you are constantly paying property taxes on the house, levied as a proportion of its total value, making the mere ownership of it a financial burden. Stock ownership comes with no such burden. Another is that, should the need arise, stock can be sold at the drop of a hat. It is liquid and fungible so a stock-collateralized loan is seen by banks to be a very safe investment. Houses are not.

eadmund 4y ago

You left out the portion where you get the money to pay the principal and interest. Either you actually sell some of that stock, or you work a job to get that money. Either way you that income will be taxed.

thefreeman 4y ago
I'm no expert but in other parts of the thread people are saying that interest is tax deductible. So you sell just enough stock to cover the interest and the capital gains are not taxed because they are offset by the interest deduction.
- bombcar 4y ago
  You still have to pay down principal at some point. In this case explicitly I suspect it has more to do with the uncertainty of the deal going through AND not wanting to incur the tax penalty ALONG with the share penalty (liquidating $30 billion in TSLA would affect its price for sure). If you sold the shares to raise the cash, paid the tax, and then the deal didn't go through and bought the shares back, you'd be out the tax (with a stepped-up cost basis to be sure).
HWR_14 4y ago
Or continually roll the debt over, borrowing more money and more money. Then, when you die, your estate can sell the assets to cover the debt, but that avoids taxes.

MockObject 4y ago

> - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?

sokoloff 4y ago
You don't repay the loan using stock. You repay it with cash from other sources (possibly thrown off by the new investment) or you keep the loan open and continue to pay interest on it.
aeyes 4y ago
You repay the loan with the next loan because you have $10b in stock but only took out a $10m loan. In the meantime the stock appreciates some more or you have more vested stock. I guess the risk here would be that the stock goes to 0, you get margin called AND you are now on the hook to pay taxes.
kjksf 4y ago
You don't have to repay the loan (for a very loooong time). Let's say you have 10 million in stock. A typical margin account allows you to borrow up to, say, 40% of that. That's 4 million dollars. Let's say you borrow $1 million and spend it. Currently interest rate on a margin loan is under %2. So every year the amount you need to repay grows by $20k (2% of $1 million, for simplicity I don't count compounding). So in 10 years that would be $1.2 million to repay. But you're authorized for $4 million. If in those 10 years the value of stock doubles to $20 million, then you're authorized to borrow $8 million - the amount you can borrow grows faster than the amount you need to repay. To be clear: eventually you have to repay it but in the corner case it could be done when you die. There are of course caveats. If interest rate increases dramatically, then the amount to repay will grow much faster etc. but you can see how e.g. if you have $10 million then you could borrow and spend $100k to live a good life and never have to sell your stock to fund your life (especially if stocks keep going up faster than interest rate, inflation and your spending habits)