Yes but as a shareholder I get an untaxed unrealised capital gain instead of a taxable dividend. I’m not a fan of taxing unrealised capital gains but this particular loophole could do with closing
But the tax will be paid when the stock is sold. It is more like letting the investor choose when to realise the gain and trigger the tax vs dividend that will happen regardless of wether the investor needs the money at that time or not.
People who talk about "buy, borrow, die" never seem to mention interest.
Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes if you realized it every year. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead? That's also assuming you're not already receiving some dividends/income or can't be selective about tax lots to sell.
You could say "well you can simply accumulate an interest balance without ever repaying the loan, and hope the assets appreciate faster than the interest compounds", but then shouldn't you have already levered up prior to ever considering taxes? So taking on additional loans pushes you outside of your risk tolerance? Do you borrow or pay taxes depending on your portfolio performance? How does this work?
I'd be interested in seeing what someone with an actual finance background has to say about this "strategy". The popular image is just "free money", but while I have enough assets to start buying things with margin loans myself, I'm failing to see how to get some of that free money.
It seems generally reasonable that using an asset to collateralize a loan should be a taxable event, but the narrative about how this gets used seems off to me when trying to figure out the details.
> Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead?
You're assuming that someone has a portfolio that has a cost basis that is very close to the current market value. Most ultra wealthy folks have holdings that have been held onto for a very long time, with cost basis' that might as well be $0 compared to the value of the assets. Even non-wealthy folks that saved in a traditional brokerage would have a cost basis that is very low compared to the value of the assets. During the 'accumulation' phase, there likely is not much being sold at all.
If you want to access this capital, then you're paying 20% on every dollar. You don't need a 2% interest rate to make out ahead in this situation, it can be substantially higher and still be a better deal than paying the cap gains taxes.