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How does the loan hack work here? I feel like there's a step missing in the explanations I always read. You take a loan to buy your yacht with your stocks at co

How does the loan hack work here? I feel like there's a step missing in the explanations I always read. You take a loan to buy your yacht with your stocks at collateral, then somehow (?) get untaxed cash to pay the loan back?

notch898a 4y ago
As a pleb my guess would be to just get new loans, bigger and bigger, that pay off the previous loan debt plus what you need next. Once you die the estate settles the loans via the creditors just grabbing the collateral. I think it would never get taxed then no?
- dataflow 4y ago
  So, what I'm trying to get someone here to confirm (with no success so far) is that none of this would be a issue to speak of without inheritance cost basis step-up? Am I correct to understand that that's the real issue, and wash sale rules etc. are just distractions?
quickthrower2 4y ago
You never pay them back. Just pay interest which you also borrow. This might stop being as attractive if interest rates are high and inflation is low though.
- dataflow 4y ago
  Hm I don't quite believe this explains the story. How much does debt does someone like Ballmer carry to their death, and how much do they pay in interest?
heleninboodler 4y ago
I think that's really all there is to it. They do have to pay the interest, and the cash they use to service the loan isn't untaxed, but they were paying that tax anyway. It does assume that the have the cashflow to service the loan completely independent of this deal, but the point is it means they get the best of all worlds: they get immediate access to the cash value of the stock, they don't pay taxes on that value, and they continue gaining as the stock increases even more in value. But you're right, they aren't really avoiding the tax on the stock gains, they're just deferring it way down the road, which is particularly beneficial when your heirs get to step up the basis of what they inherit.
- dataflow 4y ago
  Yeah so the ultimate source of the problem seems to be the basis step up, not any of the rest. So why isn't that identified as the source of the problem? I suppose one thing nobody has mentioned is that deferral can also help you wait for a year when the rate of the top tax bracket is lowered? Maybe that's a significant component too?
  - heleninboodler 4y ago
    I think it's possible that eliminating the basis step up could change a lot of incentives to do this sort of maneuver, yes. For folks this wealthy, I doubt the difference in tax brackets make much of a difference. What's classified as income is probably such a small portion of what they get taxed on that it just doesn't matter.
    - dataflow 4y ago
      Sorry, to clarify, I meant the rate of the top tax bracket. Not the threshold. I edited the comment to clarify.
      - heleninboodler 4y ago
        Still, if you make $10MM/year in cap gains and what qualifies as "income" is in the hundreds of thousands, do you care what the top rate is?
        dataflow 4y ago
        Depends what kind of capital gains you have. I have no idea what they have, but short-term capital gains are treated as ordinary income. And obviously the logic would be the same for if/when they change the long-term capital gains tax rates.

notch898a 4y ago

As a pleb my guess would be to just get new loans, bigger and bigger, that pay off the previous loan debt plus what you need next. Once you die the estate settles the loans via the creditors just grabbing the collateral. I think it would never get taxed then no?

dataflow 4y ago
So, what I'm trying to get someone here to confirm (with no success so far) is that none of this would be a issue to speak of without inheritance cost basis step-up? Am I correct to understand that that's the real issue, and wash sale rules etc. are just distractions?

quickthrower2 4y ago

You never pay them back. Just pay interest which you also borrow. This might stop being as attractive if interest rates are high and inflation is low though.

dataflow 4y ago
Hm I don't quite believe this explains the story. How much does debt does someone like Ballmer carry to their death, and how much do they pay in interest?

heleninboodler 4y ago

I think that's really all there is to it. They do have to pay the interest, and the cash they use to service the loan isn't untaxed, but they were paying that tax anyway. It does assume that the have the cashflow to service the loan completely independent of this deal, but the point is it means they get the best of all worlds: they get immediate access to the cash value of the stock, they don't pay taxes on that value, and they continue gaining as the stock increases even more in value. But you're right, they aren't really avoiding the tax on the stock gains, they're just deferring it way down the road, which is particularly beneficial when your heirs get to step up the basis of what they inherit.

dataflow 4y ago
Yeah so the ultimate source of the problem seems to be the basis step up, not any of the rest. So why isn't that identified as the source of the problem? I suppose one thing nobody has mentioned is that deferral can also help you wait for a year when the rate of the top tax bracket is lowered? Maybe that's a significant component too?
- heleninboodler 4y ago
  I think it's possible that eliminating the basis step up could change a lot of incentives to do this sort of maneuver, yes. For folks this wealthy, I doubt the difference in tax brackets make much of a difference. What's classified as income is probably such a small portion of what they get taxed on that it just doesn't matter.
  - dataflow 4y ago
    Sorry, to clarify, I meant the rate of the top tax bracket. Not the threshold. I edited the comment to clarify.
    - heleninboodler 4y ago
      Still, if you make $10MM/year in cap gains and what qualifies as "income" is in the hundreds of thousands, do you care what the top rate is?
      - dataflow 4y ago
        Depends what kind of capital gains you have. I have no idea what they have, but short-term capital gains are treated as ordinary income. And obviously the logic would be the same for if/when they change the long-term capital gains tax rates.