Applying a tax when the financial purpose of the loan is solely to avoid paying any taxes on realizing the gains is what I’m talking about. This is demonstrably a vehicle of tax avoidance used by wealthy individuals to avoid taxes on what they would otherwise have to because they would have to sell the asset otherwise
These are variable rate short-term loans. Even the best, in the US, is WSJ prime rate - 0.75 points - that would be 7.25% right now.
Maybe when interest rates were near 0, you could have stretched it for a while, but it still sounds like little more than living off credit cards.
In the most simplified version of any of this though it either allows you to do the following
- delay paying taxes until you can’t snowball loans any longer. Then you transfer (not sell!) the assets to the bank and they sell it to cover the loan
- pay off the loan through the estate after death, which has its own tax implications can be structured in such a way to further avoid or mitigate taxes on these assets
- In the most common cases it allows the delay of sale long enough that you can cover the loan with a sale of other assets, e.g. real estate which have a different tax structure as well on income derived, and cover the loan that way.
Usually these types of loans are used to buy another investment vehicle, like real estate. Then those assets appreciate and are used to payoff the loan or roll into a bigger loan etc.
You really have to be of a certain asset class to do all this
[0]: https://smartasset.com/investing/buy-borrow-die-how-the-rich...
[1]: https://www.wsj.com/articles/buy-borrow-die-how-rich-america...
[2]: https://www.finra.org/investors/insights/securities-backed-l...
[3]: https://www.businessinsider.com/securities-asset-backed-loan...
The rate I gave was for Bancorp's best SBLOC, for loans of over $10 million.
HELOC rates (home equity loan) are anywhere from 7.65-8.6% right now.
It doesn't take many years before you end up paying more in interest than you would have had to pay in capital gains - and of course, you need to pay back SBLOCs every year with interest, so you're having to sell assets - and paying capital gains.
It wouldn't have been quite so bad when interest rates were low and you could get a line of credit for 3%, but those days are long gone.
We are talking about folks who typically have 50 million USD+ in assets. They may even do all this via their own private corporation investment vehicles which further skews things.
This is why I was talking about wealth qualifications. all these loan types can be used in other scenarios, but the scenario I reference has a certain pattern to it that is unique to tax avoidance schemes. It’s a combination of factors not only one thing.
Let’s take it at face value though. How fast do you think Mark Zuckerbergs wealth grows in a year? Or how about the CEO of any major corporation for that matter? Or even someone who heads a private company with say $150 Million ARR?
Do you think it’s less than 8%? Heck do you think it’s less than 15%?
And this is before we start accounting for things like tax deductions for the interest paid on the loans
