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The richest people borrow against their stock (2021)

137 points by CHB0403085482 2y ago

doe_eyes 2y ago
By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
- mixmastamyk 2y ago
  Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
  - ywvcbk 2y ago
    It’s like people complaining about savings accounts with 0.5% interest rates. Just switch to a different broker… IBKR is +0.5% at >$200k (It starts at +1.5%)
  - taxman22 2y ago
    Schwab Pledge Asset Line (PAL) is SOFR + (2.40% to 4.4%). SOFR today is 4.81%.
    - TMWNN 2y ago
      Is Schwab known for being unusually low with its rate for this product? Vanguard is 11-13%, consistent with what mixmastamyk said. <https://investor.vanguard.com/client-benefits/margin?msockid=100f2dbd312165502f483ed9306d640b https://investor.vanguard.com/client-benefits/margin?msockid...> In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
      - JumpCrisscross 2y ago
        > Is Schwab known for being unusually low with its rate for this product? The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor. [1] https://www.fidelity.com/lending/securities-backed-line-of-credit https://www.fidelity.com/lending/securities-backed-line-of-c...
    - mixmastamyk 2y ago
      8ish percent is good but not fantastic, after years of mortgages lower than that.
  - TMWNN 2y ago
    What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.) But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid=100f2dbd312165502f483ed9306d640b https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
- bdangubic 2y ago
  > If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it." Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
  - 1123581321 2y ago
    That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
    - creato 2y ago
      If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
      - deleted 2y ago
        [deleted]
      - __turbobrew__ 2y ago
        My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see. Should I be taxed when I use the line of credit my bank extends to me?
        JumpCrisscross 2y ago
- s0rce 2y ago
  I used this when Chase closed my bank account because of a typo. Just borrowed cash from Fidelity to float for a month until everything got sorted.
- dataflow 2y ago
  This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole! But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes? Edit: To people bringing back the "buy, borrow, die" story: (a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2] (b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.) (c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets. [1] https://news.ycombinator.com/item?id=41411737 https://news.ycombinator.com/item?id=41411737 [2] https://news.ycombinator.com/item?id=41410808 https://news.ycombinator.com/item?id=41410808
  - lesuorac 2y ago
    You just delay selling the stocks until death. At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax. So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
    - blast 2y ago
      > At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
      - 2y ago
- hn_throwaway_99 2y ago
  I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
  - creer 2y ago
    > avoid paying taxes altogether At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
    - deepsun 2y ago
      Not postpone -- avoid. The base price of the asset is adjusted at the time of your death, so if bank sells the asset immediately, they pay no taxes. https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
      - creer 2y ago
        There is confusion between capital gains tax and estate tax (and estate planning devices like trust law). And that matters. Is the problem capital gains tax as some people claim or is it elsewhere? In the process described, capital gains tax is not even postponed (and that write up does not provide for Peter's major expenses during life). That write up works (when it does) because of bypassing estate tax. The need for realizing capital gains is eliminated through trust, estate planning and other estate tax law (seems to me). The whole of the procedure is in that side of the equation. Not in capital gains tax law. So the question: Does this all call for a change in capital gains tax law or changes in estate planning (trusts) and estate tax law? When you use margin loan or pledged assets lines of credit, you are postponing. Which you can potentially kick all the way into estate tax (which your estate may pay if it's large enough). That write up is different still and describes working around even that estate tax. And then the question does matter of which law you are asking to change. (Besides the traditional method of making a law, any random law, thereby solving all problems for eternity - or at least gaining some voter satisfaction.)
- beezle 2y ago
  Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan. ref: https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p...
  - throwaway2037 2y ago
    Nice link. Thank you to share. This notice bothers me a bit: > IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier. I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure." My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity. <<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-minimums.php https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
    - tomatocracy 2y ago
      I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
      - beezle 2y ago
        Once the amounts get lumpy there needs to be complete assessment of counterparty risk (you). IB can't assume that you are only borrowing from them and that the collateral in your account won't first be liened by another party, etc.
- petermcneeley 2y ago
  If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
  - basementcat 2y ago
    There is usually a margin requirement (25 to 75% depending on type of equity). And yes, you can.
  - blasphemers 2y ago
    No. You are not allowed to use these loans for investments, you would need a different type of loan for margin trading.
  - kelnos 2y ago
    Usually they will not give you the full value. Depending on how "safe" they deem the security, they might only allow you to borrow 50%-70% against it. And most (probably all) of these forbid you from using the loan proceeds to buy more securities.
- dang 2y ago
  Ok, we've replacing accessing billions by borrowing against stock in the title above. Thanks!
- yieldcrv 2y ago
  Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases. But its true, you can find a real lender for your stocks. You dont have to be rich. Its not controversial, you have to pay it back. There are other quirks the rich have: Already post-tax assets to pay something off They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable. Borrow more against the increased value or just sell something and pay the taxes that year. Purchases of primary issuances are taxed differently than secondary market purchases. But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
  - JumpCrisscross 2y ago
    > broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases. There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
    - yieldcrv 2y ago
      right, it just hampers the broker’s collection efforts and economic viability if things leave their walled garden good to know there is no statutory road block
- creer 2y ago
  Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
  - christophilus 2y ago
    Interactive Brokers is 6%. Not low, but not bad.
    - creer 2y ago
      5.8 - 5.6% above 100k now indeed, and that's for margin (which you can live on OR re-invest)! Not low but improving yes! Roughly in line with a 15 yr fixed rate mortgage but not tax deductible at least if you live on it. Might be tax deductible if you re-invest.
- Apreche 2y ago
  There is another difference that is related to risk. Larger loans allow access to lower risk opportunities. If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some. Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
  - dullcrisp 2y ago
    Wanna go halfsies on some residential real estate in a high rent neighborhood?
    - throwaway2037 2y ago
      Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
    - Apreche 2y ago
      Sure, but we'll have to go thousandsies, or at least hundredsies.
  - tightbookkeeper 2y ago
    Rich people having more options, and being more insulated from risk, is not news.
    - Apreche 2y ago
      It's not news to the world, but it's news to many.
- jjav 2y ago
  > your brokerage will lend you money at a very low rate, secured by the equity I have not found one that will offer a very low rate, have you? For example here are Schwab's rates for a loan against equity: https://www.schwab.com/pledged-asset-line/rates https://www.schwab.com/pledged-asset-line/rates For 500K-1M rate is SOFR + 3.4%, so about 8.2% For multimillionaires it gets better at SOFT + 2.4%, or about 7.2% Not bad in this market but not one I'd call "very low" Possibly there's an unpublished rate for billionaires, there usually is.
  - nicolas_t 2y ago
    My bank in Hong Kong (where I live) lends in USD against bonds or stock at around SOFR. If they lend in JPY it's around 0.8%
  - ywvcbk 2y ago
    Switch to a different broker? e.g. it’s just +0.5% https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p...
    - jjav 2y ago
      The linked page is margin, not equity backed loans.
      - ywvcbk 2y ago
        Is there a difference?
        Kon-Peki 2y ago
        Yes. In a margin loan, the "things of value" never leave the institution handing out the loan. The borrower buys stock, for example. And the institution giving out the loan has the right to sell whatever you bought to prevent losses on the loan, without your permission if certain conditions are triggered. In a loan backed by collateral, all the money can leave into some external account controlled by the borrower. To get some or all of it back requires an expensive and lengthy process that doesn't guarantee success.
- theshrike79 2y ago
  You can also buy art. 1) buy a painting for X 2) have it evaluated, sometimes the price is higher than X 3) put it in storage or a tax loophole between countries 4) use said painting as collateral for low interest loans Now you have money to invest, as long as you make more than the low interest loan, you're making profit.
  - Shaanie 2y ago
    But then you have X money tied up in some presumably illiquid art with questionable value. Seems better to just invest the X money from the start.
    - ThinkBeat 2y ago
      but then you do not get the tax benefits discussed above. The market for "investment art" I huge and everyone involved has an upside by art appreciating in value. > The artist may get more money (since the artist only gets paid in the initial transaction the artist may only get a fraction of the value as it increases. The artist may find that later work will become more valuable as other investors want more of his art. >The gallery gets more money, and it may attract more art investors > and the auction house gets more money if it ends up there. How much art is worth is difficult to estimate on its own. I mean a white canvas painted uniformly white is worh a lot of money if a famous artist does it. It is worth entirely nothing if I do it. I expect then that the market decides the value. All investors want art to get more valuable and are in on it. As an art lover, this is such a tragic scheme. Unknown amount of art that will never been seen by the public. Locked up inside a storage facility in a big box Often the investor has no interest in the art at all, just an investment made by some form of a broker.
    - theshrike79 2y ago
      Art is like Schrödinger's cat, its value is only determined when it changes owner. If someone pays 1M€ for a piece of art, it is "valued at $1M" and you can use it for collateral for a loan at some percentage of its valuation. Will it actually be 1M€ if it needs to be liquidated? Nobody knows. It can be worthless or it can be worth 10M€ - it all depends on what the next person is willing to pay for it. But until that point it's "worth" 1M€. --- This is why there are so many empty (commercial) properties, they were valued at a specific €/m2 price and were used to take loans based on that value. Until they're rented/leased again, that is their worth and value. Could the owner get someone in the property by lowering the price? Definitely. Would that also cause a rolling cascade of loans not having enough collateral to back them up? Yup.
- tomatocracy 2y ago
  For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
- chx 2y ago
  It's not at all simple what they do. https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/... Important quote: > this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M.
  - creer 2y ago
    To be fair, there are very accessible options like margin loan or pledged assets which you can also keep going indefinitely - possibly all the way into estate tax which - as a "little guy" - you wouldn't owe. They are higher interest rates (to the point of not being all that interesting - depending on what you want to do.) And they don't have the same features. But if you are high assets and low income, they might still allow you to buy a house with a loan - if it's what you want.
- traceroute66 2y ago
  > The framing is deceptive. Indeed the framing is very deceptive. Yes, it helps to have a relationship with a private bank. But as pointed out, some brokerages will let you do it too if you are too poor to be allowed to enter through the door of a private bank. BUT The main thing that is skirted around in the article is that it still needs to go through the financial institution's credit committee. So, for example, you cannot just rock-up with a million in Tesla shares and expect a loan against them, or at least not at a sensible LTV ratio. The financial institution will want a boring portfolio with government bonds and low-risk corporate shares. Any bank that would be willing to lend against a high-risk portfolio is probably not the sort of bank you want to do business with anyway.
- SomeHacker44 2y ago
  This is not true: "very low rate." My brokerage starts at 12+% which I would not call low. It never even reaches prime at millions of borrowing, and I do not have remotely enough to get much better a rate.
  - kman82 2y ago
    Wrong brokerage. Interactive Brokers lends at 5% on large amounts and around 6% on small amounts.
  - htrp 2y ago
    you need to look at the Lombard landing products offered by banks, not margin loans on brokerage or personal loans
    - mixmastamyk 2y ago
      Interesting... https://en.wikipedia.org/wiki/Lombard_banking https://en.wikipedia.org/wiki/Lombard_banking
  - dranudin 2y ago
    You can also lend money from the options market with a box spread for around 4-5%. See e.g. boxtrades.com
    - red-iron-pine 2y ago
      options are a whole different box of worms, and playing that game has a lot more risk. "but uh its a box trade it can't go wrong because bla bla bla bla" -- then things proceed to go wrong
- mason_mpls 2y ago
  Even if there’s risk, this is still clearly realizing market gains
rufus_foreman 2y ago
Spoiler: the same way you can access your home equity without selling your house.
- bdangubic 2y ago
  With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
  - JumpCrisscross 2y ago
    > and you are paying HEFTY property taxes on your current home worth each and every year Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
    - bdangubic 2y ago
      I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
    - cperciva 2y ago
      Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
  - pwg 2y ago
    > do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain. The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.
Animats 2y ago
(2021) This worked a lot better when interest rates were near zero.
- creer 2y ago
  For once the date of the article is rather relevant. But even then the simpler mechanisms are useful to be aware of if financial planning is a concern for you. And the most complex mechanisms completely irrelevant to the common mortal.
theogravity 2y ago
They're loans so where do they get the income to pay off the interest? If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%: https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p... I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
- zie 2y ago
  Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this). It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually. The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
- cryptonector 2y ago
  > They're loans so where do they get the income to pay off the interest? They borrow more, against other stock. Works as long as you have enough stock.
- ywvcbk 2y ago
  > the rate is probably significantly lower IBKR is charging Fed Funds rate + 0.5% at >$200k. Why would they ever offer anyone significantly less than that rewardless if they are billionaires or not? They be losing money on those loans..
deleted 2y ago
[deleted]
cryptonector 2y ago
Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.
- refurb 2y ago
  Bezos has paid $1.5B and Musk over $12B in taxes according to Google.
  - WA 2y ago
    Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
    - mherrmann 2y ago
      I think it does matter. Let's assume Musk paid $12B. How much have you paid? Isn't it then actually reasonable to say that he contributed more than you to the country, even if his tax percentage is lower than yours?
      - piyuv 2y ago
        How much subsidy did he get for his companies? Trump said Musk wouldn’t survive without those. I don’t think Musk would say Trump is a liar. https://truthsocial.com/@realDonaldTrump/posts/108636743295734643 https://truthsocial.com/@realDonaldTrump/posts/1086367432957...
      - WA 2y ago
        What do you gain by talking about absolute numbers? They are meaningless. By this logic, Musk could pay only $1 million in tax and still would've "contributed more to the country" than most individuals. If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share, that they will get richer faster than everybody else and, the most important fact, that long-term stability might suffer, because the bigger the divide between rich and poor, the more civil unrest follows.
tpurves 2y ago
There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.
- Scoundreller 2y ago
  sounds frightening (for the bank)
dh2022 2y ago
How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.
- ketzo 2y ago
  If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US So, uh… it’s not different, no
  - dh2022 2y ago
    I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
    - penultimatename 2y ago
      You could get a sub-3% loan with anywhere from a 5-15% down payment without any holdings in the ballpark that is being discussed.
  - zeroonetwothree 2y ago
    Top 1% wealth in the US is around 13 million. So I would say you are very far off.
kumarvvr 2y ago
I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%. My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India. The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
- UltraSane 2y ago
  10% seem very high for a that kind of loan.
  - creer 2y ago
    Just about right for a different country than the US. Mortgage rates in India 8.3-9.5% right now, inflation 5-6%, benchmark rate 6.5% - and this may or may not be tax deductible in India, perhaps depending on the usage. And 25-44% yoy stock market gains. It's about the same as a 15-year fixed rate mortgage - same as in the US.
- jjeaff 2y ago
  Interactive Brokers gives you around 5% right now.
- deleted 2y ago
  [deleted]
- creer 2y ago
  How is this used by the middle class in India? To fund day to day living expenses? to buy or build a house? for further investment? Do people tend to repay the debt now and then, or make it flow into their estate? how does succession / estate law treat that? Is this seen as prudent management? etc... I know these ways of thinking are very different between the US and western Europe (where for example a home mortgage is very cheap, and considered normal and indispensable investing, and stock investing can be crazy conservative - all the way to considered reckless, and estate law and tax is downright brutal). I wonder about India.
UltraSane 2y ago
If a houses can have property taxes then why can't shares?
- BizarroLand 2y ago
  Because that would negatively impact the economy and no political party has the chutzpah to pass a law that would make their benefactors mad at them. "Of the people (with money), by the people (with money) for the people (with money)"
qeternity 2y ago
Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).
- altacc 2y ago
  I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
  - amalgamationga 2y ago
    > the incredibly low amount of tax paid by the ultra wealthy According to IRS data, the top 1% of earners pay roughly 40% of all federal income taxes.
  - qeternity 2y ago
    You still have to pay interest. At 5% interest rates compounded after 4 years it’s cheaper to just pay CGT. The wealthy pay the vast majority of taxes. You might not think it’s enough, but let’s be realistic here. The biggest government expenditures don’t scale with someone’s wealth. So wealthy people aren’t consuming more government services yet they pay a much larger absolute sum.
lifeisstillgood 2y ago
Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point. Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
- eadmund 2y ago
  > You have gained income from your capital at this point. No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back. Imagine that I am born with $100,000 in stock: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $0 Liabilities $0 Income $0 Expenses $0 Equity -$100,000 My net worth is $100,000. If I borrow $50,000 against my stock, here are my accounts: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $50,000 Liabilities Loan -$50,000 Income $0 Expenses $0 Equity -$100,000 As you can see, my net worth is still $100,000. I have $50,000 more in cash, but $50,000 less in loan. On the other hand, if worked a job instead and didn’t take out a loan, this might be the situation: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $50,000 Liabilities $0 Income $50,000 Expenses $0 Equity -$150,000 My net worth is now $150,000. I actually had income. Same $50,000 in my bank account, but now it’s income and my net worth has increased. What if I worked the job and took out the loan? Then it would look like this: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $100,000 Liabilities Loan -$50,000 Income $50,000 Expenses $0 Equity -$150,000 I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.
kelnos 2y ago
You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums. Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
chx 2y ago
A better very through explanation is at https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...
omega3 2y ago
These are called lombard loans e.g. https://www.credit-suisse.com/ch/en/private-clients/investments/lombard-loan.html https://www.credit-suisse.com/ch/en/private-clients/investme...
SideQuark 2y ago
Anyone can borrow against their own assets: house, car, stocks, cash holdings, 401k, even their expected earnings (e.g., college loans). They can even borrow against nothing as far as they're trusted (e.g., credit cards). None of this is special to any class or income level. News at 11.
jerkstate 2y ago
I’ve been trying to model using a SBLOC in a FIRE simulator to cover the gap between retirement below 65 and when 401k/social security kicks in versus selling and paying capital gains, and it looks like you come out ahead of selling stock like 90% of the time, but 10% of the time it’s much riskier and you go broke.
valval 2y ago
Borrowing money in exchange for interest is a fair transaction. Taxes on the interest are paid by the company that lent the money. Suggesting anything else would be interfering with the market which is dangerous territory.

137 points by CHB0403085482 2y ago

By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.

mixmastamyk 2y ago
Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
- ywvcbk 2y ago
  It’s like people complaining about savings accounts with 0.5% interest rates. Just switch to a different broker… IBKR is +0.5% at >$200k (It starts at +1.5%)
- taxman22 2y ago
  Schwab Pledge Asset Line (PAL) is SOFR + (2.40% to 4.4%). SOFR today is 4.81%.
  - TMWNN 2y ago
    Is Schwab known for being unusually low with its rate for this product? Vanguard is 11-13%, consistent with what mixmastamyk said. <https://investor.vanguard.com/client-benefits/margin?msockid=100f2dbd312165502f483ed9306d640b https://investor.vanguard.com/client-benefits/margin?msockid...> In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
    - JumpCrisscross 2y ago
      > Is Schwab known for being unusually low with its rate for this product? The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor. [1] https://www.fidelity.com/lending/securities-backed-line-of-credit https://www.fidelity.com/lending/securities-backed-line-of-c...
  - mixmastamyk 2y ago
    8ish percent is good but not fantastic, after years of mortgages lower than that.
- TMWNN 2y ago
  What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.) But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid=100f2dbd312165502f483ed9306d640b https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
bdangubic 2y ago
> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it." Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
- 1123581321 2y ago
  That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
  - creato 2y ago
    If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
    - deleted 2y ago
      [deleted]
    - __turbobrew__ 2y ago
      My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see. Should I be taxed when I use the line of credit my bank extends to me?
      - JumpCrisscross 2y ago
s0rce 2y ago
I used this when Chase closed my bank account because of a typo. Just borrowed cash from Fidelity to float for a month until everything got sorted.
dataflow 2y ago
This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole! But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes? Edit: To people bringing back the "buy, borrow, die" story: (a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2] (b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.) (c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets. [1] https://news.ycombinator.com/item?id=41411737 https://news.ycombinator.com/item?id=41411737 [2] https://news.ycombinator.com/item?id=41410808 https://news.ycombinator.com/item?id=41410808
- lesuorac 2y ago
  You just delay selling the stocks until death. At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax. So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
  - blast 2y ago
    > At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
    - 2y ago
hn_throwaway_99 2y ago
I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
- creer 2y ago
  > avoid paying taxes altogether At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
  - deepsun 2y ago
    Not postpone -- avoid. The base price of the asset is adjusted at the time of your death, so if bank sells the asset immediately, they pay no taxes. https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
    - creer 2y ago
      There is confusion between capital gains tax and estate tax (and estate planning devices like trust law). And that matters. Is the problem capital gains tax as some people claim or is it elsewhere? In the process described, capital gains tax is not even postponed (and that write up does not provide for Peter's major expenses during life). That write up works (when it does) because of bypassing estate tax. The need for realizing capital gains is eliminated through trust, estate planning and other estate tax law (seems to me). The whole of the procedure is in that side of the equation. Not in capital gains tax law. So the question: Does this all call for a change in capital gains tax law or changes in estate planning (trusts) and estate tax law? When you use margin loan or pledged assets lines of credit, you are postponing. Which you can potentially kick all the way into estate tax (which your estate may pay if it's large enough). That write up is different still and describes working around even that estate tax. And then the question does matter of which law you are asking to change. (Besides the traditional method of making a law, any random law, thereby solving all problems for eternity - or at least gaining some voter satisfaction.)
beezle 2y ago
Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan. ref: https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p...
- throwaway2037 2y ago
  Nice link. Thank you to share. This notice bothers me a bit: > IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier. I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure." My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity. <<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-minimums.php https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
  - tomatocracy 2y ago
    I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
    - beezle 2y ago
      Once the amounts get lumpy there needs to be complete assessment of counterparty risk (you). IB can't assume that you are only borrowing from them and that the collateral in your account won't first be liened by another party, etc.
petermcneeley 2y ago
If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
- basementcat 2y ago
  There is usually a margin requirement (25 to 75% depending on type of equity). And yes, you can.
- blasphemers 2y ago
  No. You are not allowed to use these loans for investments, you would need a different type of loan for margin trading.
- kelnos 2y ago
  Usually they will not give you the full value. Depending on how "safe" they deem the security, they might only allow you to borrow 50%-70% against it. And most (probably all) of these forbid you from using the loan proceeds to buy more securities.
dang 2y ago
Ok, we've replacing accessing billions by borrowing against stock in the title above. Thanks!
yieldcrv 2y ago
Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases. But its true, you can find a real lender for your stocks. You dont have to be rich. Its not controversial, you have to pay it back. There are other quirks the rich have: Already post-tax assets to pay something off They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable. Borrow more against the increased value or just sell something and pay the taxes that year. Purchases of primary issuances are taxed differently than secondary market purchases. But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
- JumpCrisscross 2y ago
  > broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases. There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
  - yieldcrv 2y ago
    right, it just hampers the broker’s collection efforts and economic viability if things leave their walled garden good to know there is no statutory road block
creer 2y ago
Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
- christophilus 2y ago
  Interactive Brokers is 6%. Not low, but not bad.
  - creer 2y ago
    5.8 - 5.6% above 100k now indeed, and that's for margin (which you can live on OR re-invest)! Not low but improving yes! Roughly in line with a 15 yr fixed rate mortgage but not tax deductible at least if you live on it. Might be tax deductible if you re-invest.
Apreche 2y ago
There is another difference that is related to risk. Larger loans allow access to lower risk opportunities. If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some. Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
- dullcrisp 2y ago
  Wanna go halfsies on some residential real estate in a high rent neighborhood?
  - throwaway2037 2y ago
    Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
  - Apreche 2y ago
    Sure, but we'll have to go thousandsies, or at least hundredsies.
- tightbookkeeper 2y ago
  Rich people having more options, and being more insulated from risk, is not news.
  - Apreche 2y ago
    It's not news to the world, but it's news to many.
jjav 2y ago
> your brokerage will lend you money at a very low rate, secured by the equity I have not found one that will offer a very low rate, have you? For example here are Schwab's rates for a loan against equity: https://www.schwab.com/pledged-asset-line/rates https://www.schwab.com/pledged-asset-line/rates For 500K-1M rate is SOFR + 3.4%, so about 8.2% For multimillionaires it gets better at SOFT + 2.4%, or about 7.2% Not bad in this market but not one I'd call "very low" Possibly there's an unpublished rate for billionaires, there usually is.
- nicolas_t 2y ago
  My bank in Hong Kong (where I live) lends in USD against bonds or stock at around SOFR. If they lend in JPY it's around 0.8%
- ywvcbk 2y ago
  Switch to a different broker? e.g. it’s just +0.5% https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p...
  - jjav 2y ago
    The linked page is margin, not equity backed loans.
    - ywvcbk 2y ago
      Is there a difference?
      - Kon-Peki 2y ago
        Yes. In a margin loan, the "things of value" never leave the institution handing out the loan. The borrower buys stock, for example. And the institution giving out the loan has the right to sell whatever you bought to prevent losses on the loan, without your permission if certain conditions are triggered. In a loan backed by collateral, all the money can leave into some external account controlled by the borrower. To get some or all of it back requires an expensive and lengthy process that doesn't guarantee success.
theshrike79 2y ago
You can also buy art. 1) buy a painting for X 2) have it evaluated, sometimes the price is higher than X 3) put it in storage or a tax loophole between countries 4) use said painting as collateral for low interest loans Now you have money to invest, as long as you make more than the low interest loan, you're making profit.
- Shaanie 2y ago
  But then you have X money tied up in some presumably illiquid art with questionable value. Seems better to just invest the X money from the start.
  - ThinkBeat 2y ago
    but then you do not get the tax benefits discussed above. The market for "investment art" I huge and everyone involved has an upside by art appreciating in value. > The artist may get more money (since the artist only gets paid in the initial transaction the artist may only get a fraction of the value as it increases. The artist may find that later work will become more valuable as other investors want more of his art. >The gallery gets more money, and it may attract more art investors > and the auction house gets more money if it ends up there. How much art is worth is difficult to estimate on its own. I mean a white canvas painted uniformly white is worh a lot of money if a famous artist does it. It is worth entirely nothing if I do it. I expect then that the market decides the value. All investors want art to get more valuable and are in on it. As an art lover, this is such a tragic scheme. Unknown amount of art that will never been seen by the public. Locked up inside a storage facility in a big box Often the investor has no interest in the art at all, just an investment made by some form of a broker.
  - theshrike79 2y ago
    Art is like Schrödinger's cat, its value is only determined when it changes owner. If someone pays 1M€ for a piece of art, it is "valued at $1M" and you can use it for collateral for a loan at some percentage of its valuation. Will it actually be 1M€ if it needs to be liquidated? Nobody knows. It can be worthless or it can be worth 10M€ - it all depends on what the next person is willing to pay for it. But until that point it's "worth" 1M€. --- This is why there are so many empty (commercial) properties, they were valued at a specific €/m2 price and were used to take loans based on that value. Until they're rented/leased again, that is their worth and value. Could the owner get someone in the property by lowering the price? Definitely. Would that also cause a rolling cascade of loans not having enough collateral to back them up? Yup.
tomatocracy 2y ago
For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
chx 2y ago
It's not at all simple what they do. https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/... Important quote: > this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M.
- creer 2y ago
  To be fair, there are very accessible options like margin loan or pledged assets which you can also keep going indefinitely - possibly all the way into estate tax which - as a "little guy" - you wouldn't owe. They are higher interest rates (to the point of not being all that interesting - depending on what you want to do.) And they don't have the same features. But if you are high assets and low income, they might still allow you to buy a house with a loan - if it's what you want.
traceroute66 2y ago
> The framing is deceptive. Indeed the framing is very deceptive. Yes, it helps to have a relationship with a private bank. But as pointed out, some brokerages will let you do it too if you are too poor to be allowed to enter through the door of a private bank. BUT The main thing that is skirted around in the article is that it still needs to go through the financial institution's credit committee. So, for example, you cannot just rock-up with a million in Tesla shares and expect a loan against them, or at least not at a sensible LTV ratio. The financial institution will want a boring portfolio with government bonds and low-risk corporate shares. Any bank that would be willing to lend against a high-risk portfolio is probably not the sort of bank you want to do business with anyway.
SomeHacker44 2y ago
This is not true: "very low rate." My brokerage starts at 12+% which I would not call low. It never even reaches prime at millions of borrowing, and I do not have remotely enough to get much better a rate.
- kman82 2y ago
  Wrong brokerage. Interactive Brokers lends at 5% on large amounts and around 6% on small amounts.
- htrp 2y ago
  you need to look at the Lombard landing products offered by banks, not margin loans on brokerage or personal loans
  - mixmastamyk 2y ago
    Interesting... https://en.wikipedia.org/wiki/Lombard_banking https://en.wikipedia.org/wiki/Lombard_banking
- dranudin 2y ago
  You can also lend money from the options market with a box spread for around 4-5%. See e.g. boxtrades.com
  - red-iron-pine 2y ago
    options are a whole different box of worms, and playing that game has a lot more risk. "but uh its a box trade it can't go wrong because bla bla bla bla" -- then things proceed to go wrong
mason_mpls 2y ago
Even if there’s risk, this is still clearly realizing market gains

rufus_foreman 2y ago

Spoiler: the same way you can access your home equity without selling your house.

bdangubic 2y ago
With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
- JumpCrisscross 2y ago
  > and you are paying HEFTY property taxes on your current home worth each and every year Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
  - bdangubic 2y ago
    I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
  - cperciva 2y ago
    Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
- pwg 2y ago
  > do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain. The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.

Animats 2y ago

(2021) This worked a lot better when interest rates were near zero.

creer 2y ago
For once the date of the article is rather relevant. But even then the simpler mechanisms are useful to be aware of if financial planning is a concern for you. And the most complex mechanisms completely irrelevant to the common mortal.

theogravity 2y ago

They're loans so where do they get the income to pay off the interest? If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%: https://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p... I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.

zie 2y ago
Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this). It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually. The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
cryptonector 2y ago
> They're loans so where do they get the income to pay off the interest? They borrow more, against other stock. Works as long as you have enough stock.
ywvcbk 2y ago
> the rate is probably significantly lower IBKR is charging Fed Funds rate + 0.5% at >$200k. Why would they ever offer anyone significantly less than that rewardless if they are billionaires or not? They be losing money on those loans..

deleted 2y ago

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cryptonector 2y ago

Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.

refurb 2y ago
Bezos has paid $1.5B and Musk over $12B in taxes according to Google.
- WA 2y ago
  Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
  - mherrmann 2y ago
    I think it does matter. Let's assume Musk paid $12B. How much have you paid? Isn't it then actually reasonable to say that he contributed more than you to the country, even if his tax percentage is lower than yours?
    - piyuv 2y ago
      How much subsidy did he get for his companies? Trump said Musk wouldn’t survive without those. I don’t think Musk would say Trump is a liar. https://truthsocial.com/@realDonaldTrump/posts/108636743295734643 https://truthsocial.com/@realDonaldTrump/posts/1086367432957...
    - WA 2y ago
      What do you gain by talking about absolute numbers? They are meaningless. By this logic, Musk could pay only $1 million in tax and still would've "contributed more to the country" than most individuals. If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share, that they will get richer faster than everybody else and, the most important fact, that long-term stability might suffer, because the bigger the divide between rich and poor, the more civil unrest follows.

tpurves 2y ago

There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.

Scoundreller 2y ago
sounds frightening (for the bank)

dh2022 2y ago

How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.

ketzo 2y ago
If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US So, uh… it’s not different, no
- dh2022 2y ago
  I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
  - penultimatename 2y ago
    You could get a sub-3% loan with anywhere from a 5-15% down payment without any holdings in the ballpark that is being discussed.
- zeroonetwothree 2y ago
  Top 1% wealth in the US is around 13 million. So I would say you are very far off.

kumarvvr 2y ago

I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%. My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India. The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.

UltraSane 2y ago
10% seem very high for a that kind of loan.
- creer 2y ago
  Just about right for a different country than the US. Mortgage rates in India 8.3-9.5% right now, inflation 5-6%, benchmark rate 6.5% - and this may or may not be tax deductible in India, perhaps depending on the usage. And 25-44% yoy stock market gains. It's about the same as a 15-year fixed rate mortgage - same as in the US.
jjeaff 2y ago
Interactive Brokers gives you around 5% right now.
deleted 2y ago
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creer 2y ago
How is this used by the middle class in India? To fund day to day living expenses? to buy or build a house? for further investment? Do people tend to repay the debt now and then, or make it flow into their estate? how does succession / estate law treat that? Is this seen as prudent management? etc... I know these ways of thinking are very different between the US and western Europe (where for example a home mortgage is very cheap, and considered normal and indispensable investing, and stock investing can be crazy conservative - all the way to considered reckless, and estate law and tax is downright brutal). I wonder about India.

UltraSane 2y ago

If a houses can have property taxes then why can't shares?

BizarroLand 2y ago
Because that would negatively impact the economy and no political party has the chutzpah to pass a law that would make their benefactors mad at them. "Of the people (with money), by the people (with money) for the people (with money)"

qeternity 2y ago

Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).

altacc 2y ago
I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
- amalgamationga 2y ago
  > the incredibly low amount of tax paid by the ultra wealthy According to IRS data, the top 1% of earners pay roughly 40% of all federal income taxes.
- qeternity 2y ago
  You still have to pay interest. At 5% interest rates compounded after 4 years it’s cheaper to just pay CGT. The wealthy pay the vast majority of taxes. You might not think it’s enough, but let’s be realistic here. The biggest government expenditures don’t scale with someone’s wealth. So wealthy people aren’t consuming more government services yet they pay a much larger absolute sum.

lifeisstillgood 2y ago

Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point. Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.

eadmund 2y ago
> You have gained income from your capital at this point. No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back. Imagine that I am born with $100,000 in stock: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $0 Liabilities $0 Income $0 Expenses $0 Equity -$100,000 My net worth is $100,000. If I borrow $50,000 against my stock, here are my accounts: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $50,000 Liabilities Loan -$50,000 Income $0 Expenses $0 Equity -$100,000 As you can see, my net worth is still $100,000. I have $50,000 more in cash, but $50,000 less in loan. On the other hand, if worked a job instead and didn’t take out a loan, this might be the situation: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $50,000 Liabilities $0 Income $50,000 Expenses $0 Equity -$150,000 My net worth is now $150,000. I actually had income. Same $50,000 in my bank account, but now it’s income and my net worth has increased. What if I worked the job and took out the loan? Then it would look like this: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $100,000 Liabilities Loan -$50,000 Income $50,000 Expenses $0 Equity -$150,000 I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.

kelnos 2y ago

You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums. Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.

chx 2y ago

A better very through explanation is at https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...

omega3 2y ago

These are called lombard loans e.g. https://www.credit-suisse.com/ch/en/private-clients/investments/lombard-loan.html https://www.credit-suisse.com/ch/en/private-clients/investme...

SideQuark 2y ago

Anyone can borrow against their own assets: house, car, stocks, cash holdings, 401k, even their expected earnings (e.g., college loans). They can even borrow against nothing as far as they're trusted (e.g., credit cards). None of this is special to any class or income level. News at 11.

jerkstate 2y ago

I’ve been trying to model using a SBLOC in a FIRE simulator to cover the gap between retirement below 65 and when 401k/social security kicks in versus selling and paying capital gains, and it looks like you come out ahead of selling stock like 90% of the time, but 10% of the time it’s much riskier and you go broke.

valval 2y ago

Borrowing money in exchange for interest is a fair transaction. Taxes on the interest are paid by the company that lent the money. Suggesting anything else would be interfering with the market which is dangerous territory.