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Comment by colmmacc | Hacker News Reader

How do you think very wealthy people who subsist on rollover loans, secured against their assets, should be taxed?

For example, an on-paper billionaire whose wealth is stock ... gets a loan, secured against that stock (which they never sell). When the loan is due repayment, they roll it over with more debt and go again. Works fine when the loan is a small enough proportion of their wealth that rolling over is no issue. Should they simply never pay income tax?

They've received money, but they haven't sold.

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I'd personally tax loans on securities and from a HELOC or similar as income.

I don't think it's practical to tax unrealized gains nor do I think that taking stock options should incur a tax until they are sold or borrowed against.

E.g. a mortgage should be taxed?

Well, mortgage might be special because you don't outright own the property until you pay off the mortgage. Now using a paid off property as a collateral to buy another property might be considered as realized gain according to OPs argument.

Yeah, or to extract earned equity.

> mortgage might be special because you don't outright own the property until you pay off the mortgage

I don't see how this is different.

From the lender's perspective, the property is just like any other security: it reduces the risk of the lender so they can reduce interest rates and compete. The same with ownership of a company.

From each lendee's perspective, their loan comes at a cost: if the thing they are using as a security falls through, they could go bankrupt paying it back, and lose their home as part of that process.

From the government's perspective: they've written the rules this way so that loans are not taxed, presumably for a good reason. It would be good to know that reason before we start changing the rules.

> I don't see how this is different.

When you buy a house with a mortgage, you are valuing the property as X, and the lender is also valuing the property as X. That's your cost, and no gain yet. If the value increases in a few years, it's unrealized gain.

Now, if you want to use the increased value to get a HELOC, that would be considered 'realizing the gains'. If eventually you pay off the mortgage and either sell the property or use it as a collateral to buy another property, that is also 'realizing the gains'.

Indeed, now the sticky part of this, user takes a loan out in the same line as a HELOC, either on real property or securities - they pay the loan off, what do they do?

My answer is to give them tax credits, transferrable tax credits, they could sell those credits and then pay the tax again, apply the credits to the tax cost of the underlying asset at the time of liquidation, or even transfer them with the asset to a third party as part of a sale. They could also even apply those credits as a rebate in the event they sell the asset for less than the original taxed amount.

Any case where you are extracting unrealized gains should be taxed.

A first mortgage probably not, but we tax reverse mortgages, why not tax other vehicles?

> A first mortgage probably not

Is this because you'd like to have a mortgage and not pay tax on a debt, or is there a financial principle behind this?

Let me attempt (not sure I agree, but just so I can understand the principle):

You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here. Your net worth has not increased. So there should be no income tax applied.

Later, you want to refinance. Your home is now worth $600K, and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K, and you have realized the gain and are directly benefiting from this through your loan. In principle, you should pay either capital gains or income tax (or something!) on this income. Otherwise, you've found a way to gain income tax-free.

You should pay tax on that gain, and the asset's cost basis should be adjusted to $600K at that point, in case you later sell.

>> You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here

Correct. You have a $400K asset and a $300K liability giving you $100K in equity.

>> Later, you want to refinance. Your home is now worth $600K, and

Nope, no "and". Before you even consider refinancing, you now have an unrealized gain. You have a $600K asset and a $300K liability giving you $300K in equity for an unrealized capital gain of $200K. Whether you take out a new loan or not, your net worth has increased $200K.

>> and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K

No, your net worth increased when the value of the house went up, not when you took out the loan. The loan is not income.

>> and you have realized the gain

No, the gain is still unrealized. You have a $600K asset (the house), a $200K asset (cash out from the refi) and a $500K liability (the new loan) giving you equity of $300K. You have not realized the capital gain. You have not made any income.

What you are trying to do is to use a refi as a trigger for taxing unrealized capital gains.

OK yes, I agree that everything you said is evidently how things work today in the real world, and your correcion about the definition of unrealized. I was trying to articulate into words the principle OP was getting at: That we should use lending activity "as a trigger for taxing unrealized capital gains". I think there are reasonable arguments for either side honestly.

> Whether you take out a new loan or not, your net worth has increased $200K.

Nitpick: it was already this, but in the house equity.

If I roll over a personal loan repeatedly of any amount, should I be taxed? This seems a matter for the lenders' appetite for risk, and nothing to do with the government.

If you are using a collateral, you and your bank are basically valuing it and realising some gain from that value.

Well, there's also risk. I can remortgage my home and get money now, with the promise of paying it back later. But I might not pay it back if I lose my job.

That seems like it's mostly caused by QE policies/zero interest loans (which is already just giving money to rich people). No one's going to take out a loan at 5% interest to avoid 20% capital gains on 10% growth (i.e. a 2% tax).

For your unicorn growth billionaire, like someone else suggested, you could require realization at the time you value the asset to put it up for collateral.

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