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> How is it not realized? Because of the definition of what realized income is. Borrowing is not income. You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000. You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative. ‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one). To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income. Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope. Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money. Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!). |
It would be workable to make borrowing against an asset at a certain value equivalent to crystallizing any gain on that asset, pro-rated on the amount borrowed: you own a 2M house, that you paid 1M. You borrow 500k against it, it would be as if you sold 1/4th of it and you would pay CGT immediately on the 1/4th of (2M-1M); the basis would be adjusted so that when eventually you sell the house you pay CGT only on the yet-unrealized gain.