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0 pointslitoE1mo ago0 comments

Plus, the money he borrows is not taxable. If he sold stock he would have to pay taxes before he could spend the income. Sure, he now owes money to someone, but he can refinance those loans again and again, and live tax-free the rest of his life while we, poor working stiffs, pay the taxes that built the airport where he parks the private jet he bought with the money he borrowed.

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naniwaduni1mo ago· 5 in thread

People seem to get the weird idea that borrowing against their stock holdings is some special thing rich people get to do with products that the rest of us don't have access to. It's not. Margin loans are widely available to the tune of ff+1%ish or lower, and if your brokerage's publicly offered rates are probably a ripoff, they're almost certainly negotiable. The bar for access to "institutional" rates is basically 100k, the regulatory requirement for portfolio margin.

Yes, there are specialized products catered to billionaires. But those aren't getting them better rates than someone with a $200k portfolio (Zuck is not conventionally a less risky borrower than the Options Clearing Corporation!). They exist to work around the fact that some borrowers can't just casually liquidate their stock on the open market, let alone at face value. By all accounts these products are more expensive than retail.

Mostly this is an expensive (but maybe still less expensive than taxes, depending on the rate environment—it's more of a no-brainer in ZIRPland) way to diversify out of a single-stock portfolio without selling by adding leverage. At Zuck's age, it's still very unlikely to make sense to borrow instead of sell to spend. He's been known to pay real taxes in the past, they just look small relative to his imputed wealth growth because rich people don't spend a lot relative to their wealth growth because they, quite by definition, have a lot of wealth.

_DeadFred_1mo ago

I think people take issue with the taxes loophole. They have GAINED from the VALUE of their stocks, but they don't pay taxes on that. It should be law if you realize value from stocks you pay capital gains on those stocks. So if a loan is collateralized by $1,000,000 worth of stock value taxes should be paid on $1,000,000.

grebc1mo ago

I wouldn’t exactly call it a loophole as such. And you can’t just Willy Nilly tax loan values.

Any asset a bank is willing to take is collateral has the same issue, it’s just very pronounced in this instance.

If you take your idea at face value, anyone who borrows against their property to renovate/upgrade would be up for tax.

naniwaduni1mo ago

The trouble is that a bank is not lending against the nominal value of the stock as collateral. That number is almost entirely fictional. Taxation of capital gains at time of sale is less a loophole than a reflection of the difficulty of assigning a fair price to assets that are not perfectly liquid.

Also, you'd totally gut retail home equity lending as collateral damage, with disastrous social policy consequences.

bombcar1mo ago

I’ve never seen it explained as to how it’s different in kind from a home equity loan - you still need income from something to pay the loan back (and if you say you pay it from the loan proceeds you’re just donating to a bank with extra steps).

litoEOP1mo ago

It's very simple: if the terms are satisfactory and against an agreed upon collateral (e.g. shares) banks will give you a loan that does not require periodic payments. The interest on the loan does accumulate of course, and is just added to the principal that the borrower owes. The bank is happy as long as the value of the collateral is higher than the current outstanding loan. If the loan is in danger of going "under water" the bank can either liquidate the collateral to pay itself, or the borrower can renegotiate the loan and deposit additional shares.

It's similar to a reverse mortgage. Say Fred and Wilma own a house worth $4MM with no mortgage on it. With a reverse mortgage a bank will lend them $2MM. Fred and Wilma make no payments and continue to live in their house, spending the $2MM while the interest on that loan just increases the amount they owe the bank. After both Fred and Wilma have passed away the house is sold and the proceeds are used to pay back the outstanding loan. If there's still money left over, it goes to their heirs. If the sale comes up short, the bank loses money, which is why these reverse mortgages are typically less than 50% of the value of the house and they typically have higher interest rates than conventional mortgages. From Fred and Wilma's point of view, they can use the value of their house now, while continuing to live in it. They essentially spend their children's inheritance.

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