3 ms·

Any case where you are extracting unrealized gains should be taxed. A first mortgage probably not, but we tax reverse mortgages, why not tax other vehicles?

by Aloha 3y ago

robertlagrant 3y ago
> A first mortgage probably not Is this because you'd like to have a mortgage and not pay tax on a debt, or is there a financial principle behind this?
- ryandrake 3y ago
  Let me attempt (not sure I agree, but just so I can understand the principle): You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here. Your net worth has not increased. So there should be no income tax applied. Later, you want to refinance. Your home is now worth $600K, and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K, and you have realized the gain and are directly benefiting from this through your loan. In principle, you should pay either capital gains or income tax (or something!) on this income. Otherwise, you've found a way to gain income tax-free. You should pay tax on that gain, and the asset's cost basis should be adjusted to $600K at that point, in case you later sell.
  - rufus_foreman 3y ago
    >> You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here Correct. You have a $400K asset and a $300K liability giving you $100K in equity. >> Later, you want to refinance. Your home is now worth $600K, and Nope, no "and". Before you even consider refinancing, you now have an unrealized gain. You have a $600K asset and a $300K liability giving you $300K in equity for an unrealized capital gain of $200K. Whether you take out a new loan or not, your net worth has increased $200K. >> and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K No, your net worth increased when the value of the house went up, not when you took out the loan. The loan is not income. >> and you have realized the gain No, the gain is still unrealized. You have a $600K asset (the house), a $200K asset (cash out from the refi) and a $500K liability (the new loan) giving you equity of $300K. You have not realized the capital gain. You have not made any income. What you are trying to do is to use a refi as a trigger for taxing unrealized capital gains.
    - robertlagrant 3y ago
      > Whether you take out a new loan or not, your net worth has increased $200K. Nitpick: it was already this, but in the house equity.
    - ryandrake 3y ago
      OK yes, I agree that everything you said is evidently how things work today in the real world, and your correcion about the definition of unrealized. I was trying to articulate into words the principle OP was getting at: That we should use lending activity "as a trigger for taxing unrealized capital gains". I think there are reasonable arguments for either side honestly.

Any case where you are extracting unrealized gains should be taxed. A first mortgage probably not, but we tax reverse mortgages, why not tax other vehicles?

by Aloha 3y ago

Any case where you are extracting unrealized gains should be taxed. A first mortgage probably not, but we tax reverse mortgages, why not tax other vehicles?

robertlagrant 3y ago

> A first mortgage probably not Is this because you'd like to have a mortgage and not pay tax on a debt, or is there a financial principle behind this?

ryandrake 3y ago
Let me attempt (not sure I agree, but just so I can understand the principle): You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here. Your net worth has not increased. So there should be no income tax applied. Later, you want to refinance. Your home is now worth $600K, and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K, and you have realized the gain and are directly benefiting from this through your loan. In principle, you should pay either capital gains or income tax (or something!) on this income. Otherwise, you've found a way to gain income tax-free. You should pay tax on that gain, and the asset's cost basis should be adjusted to $600K at that point, in case you later sell.
- rufus_foreman 3y ago
  >> You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here Correct. You have a $400K asset and a $300K liability giving you $100K in equity. >> Later, you want to refinance. Your home is now worth $600K, and Nope, no "and". Before you even consider refinancing, you now have an unrealized gain. You have a $600K asset and a $300K liability giving you $300K in equity for an unrealized capital gain of $200K. Whether you take out a new loan or not, your net worth has increased $200K. >> and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K No, your net worth increased when the value of the house went up, not when you took out the loan. The loan is not income. >> and you have realized the gain No, the gain is still unrealized. You have a $600K asset (the house), a $200K asset (cash out from the refi) and a $500K liability (the new loan) giving you equity of $300K. You have not realized the capital gain. You have not made any income. What you are trying to do is to use a refi as a trigger for taxing unrealized capital gains.
  - robertlagrant 3y ago
    > Whether you take out a new loan or not, your net worth has increased $200K. Nitpick: it was already this, but in the house equity.
  - ryandrake 3y ago
    OK yes, I agree that everything you said is evidently how things work today in the real world, and your correcion about the definition of unrealized. I was trying to articulate into words the principle OP was getting at: That we should use lending activity "as a trigger for taxing unrealized capital gains". I think there are reasonable arguments for either side honestly.