[no_wizard]

That’s not it. That’s too general.

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

[Aloisius]

I've tried to get people to explain to me how this works and I have yet to hear a answer that doesn't end with, paying far more in interest than one would have paid in long-term capital gains or needing to die a few years after the loans to prevent that - or having to sell stock in order to make payments thus paying not only interest, but also capital gains tax.

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.

[no_wizard]

So called Buy Borrow Die strategies are one way[0][1]. Another (and this is what I’m referring to) is leveraging SBLOC[2][3], USLOC, HELOC and alternative asset type loans to borrow against their assets without tax consequences. These loans are made at below market rates of interest more often than not as well. They’re not paying 7.25% on these loans. Yes, banks are willing to take a potential loss on these loans to service the broader financial need of these clients. Particularly if they bring their corporate or investment vehicle business with them.

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...

[Aloisius]

> They’re not paying 7.25% on those 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.

[no_wizard]

If you want to know what they’re paying interest rate wise you aren’t going online to find it. We are talking about private bankers and exclusive preferred lender terms. These do go below (sometimes far below) market rates.

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

[Aloisius]

I gave example for a $10 million line of credit. The assets required for that it is $50 million.

For goodness sake, the interbank rate right now is 4.8%. No one is getting close to that no matter how much they are worth.

Someone like Mark Zuckerberg does not need this for anything but short-term cash - where you don't want to, or can't do to trading rules, liquidate assets immediately or all at once. Instead you get a loan, sell assets slowly to cover it and repay it as quickly as you can.

The idea that someone in their 40s is living off debt as a capital gains tax avoidance strategy frankly sounds like someone has mistaken a financial services advertisement for a sound strategy.

[no_wizard]

What you describe in your last paragraph and what I’m describing are actually very very different things.

These types of loans are absolutely used as part of tax avoidance strategies employed by net worth individuals of a certain asset class. It is unlikely anyone on HN is doing this successfully if at all. As I repeatedly indicated it’s used successfully by people in a certain asset class, and it’s part of a broader strategy regarding how wealth is managed for the individuals that are able to take advantage of this.

I also linked several articles on how these things work, here’s another that talks about the tax loophole specifically: https://equitablegrowth.org/closing-the-billionaire-borrowin...

I did not say it’s the only way people live off their wealth though. That is something I never stated or indicated

Now as far as the rates go I wish I could find the article that that talks about it from earlier this year, but yeah if you really are super high net worth you aren’t paying 7%, but even if we take that off the table for the sake of argument, if you expect to net more than interest paid by a significant enough margin the loans still make sense, and for the class of folks I’m talking about they will almost always be able to outpace the rate by a significant margin