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Sure. But if you liquidate the loan payment every month, but the portfolio grows greater than the loan interest you are “making money” (not really until you ac

by lbotos 3y ago

Sure. But if you liquidate the loan payment every month, but the portfolio grows greater than the loan interest you are “making money” (not really until you actually covert to $) If you liquidated the full loan amount up front, you get all of the tax now, and you lose leverage Edit: Let’s make an example. You have a 10MM portfolio. You wanna buy a thing for a million dollars. You sell like 1.3MM to cover tax. Or you get a 10 year loan for 1MM with your 10MM portfolio. Interest on the loan is 7%. If your portfolio averages greater return over the life of the loan, you “make money”.

lbotos 3y ago
https://www.wealthfront.com/portfolio-line-of-credit https://www.wealthfront.com/portfolio-line-of-credit Here is an example product. As you get higher the rates can come down a liiiitle bit, but they are very much tied to the federal funds rate as much is I’ve seen them.
prepend 3y ago
Right, that’s how I imagined it. But that’s not avoiding taxes so much as delaying taxes. Taxes are still paid but just slowly as you liquidate only enough to pay payment and pay taxes. Gaining in value isn’t an issue with avoiding taxes and, I suppose, eventually will result in more taxes being paid.
- Matheus28 3y ago
  No. Once you die and transfer the assets to your children, the cost basis gets reset.
  - nickpp 3y ago
    But isn’t the inheritance tax (for everything over $12 mil until 2026) even larger than the capital gains tax? And it applies to the whole value, not only the increase in value.
    - steveBK123 3y ago
      There are some games that can be played with various types of trusts - irrevocable trusts, irrevocable life insurance trusts, grantor retained annuity trusts and other things I believe. https://www.financialsamurai.com/how-do-millionaires-and-billionaires-avoid-estate-taxes/ https://www.financialsamurai.com/how-do-millionaires-and-bil...
- steveBK123 3y ago
  Right, but to my understanding there are related games that are played with trusts for example such that the loan passes onto the next generation too. To make matters worse, theres a concept called "step up in basis" such that if structured correctly, the inheritors can pretend the cost basis of their portfolio is the current market value. So the parents shield the gains from taxes in life, pass on the portfolio, and the kids reset the tax obligation to zero. "The concept of step-up in basis is actually quite simple. A trust or estate and its beneficiaries, or payable on death beneficiaries, get a step-up in basis to fair market value of the asset so received. That value is stepped up to the fair market value of the asset as of the date of death of the Decedent. This is true even if the beneficiary of the asset so transferred is a spouse of the Decedent." https://www.axley.com/publication_article/step-up-in-basis/ https://www.axley.com/publication_article/step-up-in-basis/ Not an expert, but having heard of it before & doing some research.. I'm sure there are more details, but if mere mortals like me understand it, I am sure the tax lawyers have even more esoteric methods now.
  - CPLX 3y ago
    You’ve zeroed in on the most egregious problem. Step up basis is insane as a policy choice. It basically means that we just don’t tax the primary means of income used by wealthy people AT ALL. If a company pays you you have to pay taxes on it. Unless the company pays you by inflating the value of stock in that company, in which case you just… don’t.
    - RhysU 3y ago
      The step up applies only to assets in one's estate at death, not assets in trust. IIUC, the very wealthy have limited exposure to step up in basis because they use trusts. Everyone else doesn't want to owe taxes when selling a house at market value they, e.g., inherited from a recently deceased loved one. The policy is not insane. It's sufficiently popular that no politician touches it.
      - CPLX 3y ago
        No it’s insane. Like any tax it could be made progressive, make the tax lower or nonexistent for smaller amounts of money. But stepping up the basis is insane and indefensible. It’s a heads I win tails you lose approach. Basically you’re saying oh we know there are capital gains here but they are not realized so it’s not time to tax them yet and then the person dies they say just kidding those capital gains never happened. It’s nonsense. Tax them at whatever rate makes sense if you want but don’t make a complete mockery of the concept of basis.
- deleted 3y ago
  [deleted]
- SnowHill9902 3y ago
  Buy, borrow, die.
- lbotos 3y ago
  Depending on what assets you have you may be looking at short term vs long term cap gains. This strategy could cut your tax burden if you hold short term assets into long term category. You could also strategically take losses as well which could also reduce tax burden.
- Retric 3y ago
  No, because you’re gaining interest on your unpaid taxes. Suppose you have exactly 1 million and must pay 1 million in taxes on year 0. That means you’re left with 0$. Now suppose you can defer exactly 1 year, so you owe 1 million + taxes on your interest in year 1. Taxes on that interest are < 100% so you now have > 0$. That’s equivalent to lowering your tax bill even if nominally you eventually pay more. But what happens if you can avoid paying taxes for say 10 years or 100? Delay long enough and for all practical purposes the actual tax disappears.
  - prepend 3y ago
    But this is just a function of leverage and isn’t unique to tax deferment. This seems more of a complaint about rich people than rich not paying taxes. With 7% interest you end up paying the same tax as initial liquidation in 10 years so it’s not perpetual. And you eventually pay tax on the gains so even though you made money, the government eventually gets their money and ends up with a larger total.
    - Retric 3y ago
      Being able to defer taxes is a function of the tax code and not wealth. The 401(k) system is another example, though vastly less favorable. All useful forms of tax deferment are tax cuts, otherwise people wouldn’t use them.

by lbotos 3y ago

lbotos 3y ago

https://www.wealthfront.com/portfolio-line-of-credit https://www.wealthfront.com/portfolio-line-of-credit Here is an example product. As you get higher the rates can come down a liiiitle bit, but they are very much tied to the federal funds rate as much is I’ve seen them.

prepend 3y ago

Right, that’s how I imagined it. But that’s not avoiding taxes so much as delaying taxes. Taxes are still paid but just slowly as you liquidate only enough to pay payment and pay taxes. Gaining in value isn’t an issue with avoiding taxes and, I suppose, eventually will result in more taxes being paid.

Matheus28 3y ago
No. Once you die and transfer the assets to your children, the cost basis gets reset.
- nickpp 3y ago
  But isn’t the inheritance tax (for everything over $12 mil until 2026) even larger than the capital gains tax? And it applies to the whole value, not only the increase in value.
  - steveBK123 3y ago
    There are some games that can be played with various types of trusts - irrevocable trusts, irrevocable life insurance trusts, grantor retained annuity trusts and other things I believe. https://www.financialsamurai.com/how-do-millionaires-and-billionaires-avoid-estate-taxes/ https://www.financialsamurai.com/how-do-millionaires-and-bil...
steveBK123 3y ago
Right, but to my understanding there are related games that are played with trusts for example such that the loan passes onto the next generation too. To make matters worse, theres a concept called "step up in basis" such that if structured correctly, the inheritors can pretend the cost basis of their portfolio is the current market value. So the parents shield the gains from taxes in life, pass on the portfolio, and the kids reset the tax obligation to zero. "The concept of step-up in basis is actually quite simple. A trust or estate and its beneficiaries, or payable on death beneficiaries, get a step-up in basis to fair market value of the asset so received. That value is stepped up to the fair market value of the asset as of the date of death of the Decedent. This is true even if the beneficiary of the asset so transferred is a spouse of the Decedent." https://www.axley.com/publication_article/step-up-in-basis/ https://www.axley.com/publication_article/step-up-in-basis/ Not an expert, but having heard of it before & doing some research.. I'm sure there are more details, but if mere mortals like me understand it, I am sure the tax lawyers have even more esoteric methods now.
- CPLX 3y ago
  You’ve zeroed in on the most egregious problem. Step up basis is insane as a policy choice. It basically means that we just don’t tax the primary means of income used by wealthy people AT ALL. If a company pays you you have to pay taxes on it. Unless the company pays you by inflating the value of stock in that company, in which case you just… don’t.
  - RhysU 3y ago
    The step up applies only to assets in one's estate at death, not assets in trust. IIUC, the very wealthy have limited exposure to step up in basis because they use trusts. Everyone else doesn't want to owe taxes when selling a house at market value they, e.g., inherited from a recently deceased loved one. The policy is not insane. It's sufficiently popular that no politician touches it.
    - CPLX 3y ago
      No it’s insane. Like any tax it could be made progressive, make the tax lower or nonexistent for smaller amounts of money. But stepping up the basis is insane and indefensible. It’s a heads I win tails you lose approach. Basically you’re saying oh we know there are capital gains here but they are not realized so it’s not time to tax them yet and then the person dies they say just kidding those capital gains never happened. It’s nonsense. Tax them at whatever rate makes sense if you want but don’t make a complete mockery of the concept of basis.
deleted 3y ago
[deleted]
SnowHill9902 3y ago
Buy, borrow, die.
lbotos 3y ago
Depending on what assets you have you may be looking at short term vs long term cap gains. This strategy could cut your tax burden if you hold short term assets into long term category. You could also strategically take losses as well which could also reduce tax burden.
Retric 3y ago
No, because you’re gaining interest on your unpaid taxes. Suppose you have exactly 1 million and must pay 1 million in taxes on year 0. That means you’re left with 0$. Now suppose you can defer exactly 1 year, so you owe 1 million + taxes on your interest in year 1. Taxes on that interest are < 100% so you now have > 0$. That’s equivalent to lowering your tax bill even if nominally you eventually pay more. But what happens if you can avoid paying taxes for say 10 years or 100? Delay long enough and for all practical purposes the actual tax disappears.
- prepend 3y ago
  But this is just a function of leverage and isn’t unique to tax deferment. This seems more of a complaint about rich people than rich not paying taxes. With 7% interest you end up paying the same tax as initial liquidation in 10 years so it’s not perpetual. And you eventually pay tax on the gains so even though you made money, the government eventually gets their money and ends up with a larger total.
  - Retric 3y ago
    Being able to defer taxes is a function of the tax code and not wealth. The 401(k) system is another example, though vastly less favorable. All useful forms of tax deferment are tax cuts, otherwise people wouldn’t use them.