The 'Buy, Borrow and Die' Wealth Strategy Has Become a $5T Market
wsj.com
wsj.com
Here's an idea:
- Capital gains become taxable when you borrow against an asset, proportionate to the amount borrowed. - The gains which have already been taxed are added to the asset's cost basis, so they're not taxed again on sale (basically same as sell and rebuy).
If the shares subsequently tank, you can carry forward the loss against future gains on the same asset, but can't claim a refund or offset unrelated gains (to avoid incentives to transfer value to a different company and dodge liability, etc.)
For example:
2000: I buy $1M of S&P 500 ETFs.
2026: They're worth $8.5M ($7.5M gain). I borrow $2M against them, effectively realising ~24% of the gains (~$1.75M), and pay CGT on that amount. My cost basis increases to $2.75M.
2030: I sell up for $10M. Instead of paying CGT on $9M of gains, I pay it on ~$7.25M, since the rest was already taxed.
So I earn $A and pay $B income tax leaving me with $C.
I take $C and use it to buy stocks. I later want to borrow money against my $C (+ gains, $D) of stock, and now I pay income tax on $C + $D presumably at the same rate as I paid on $A, let’s call that $E.
Later I sell up, with an additional $F of gains. Now I pay capital gains on $D+$F, call it $G.
So from my $A+$D+$F of income (the initial income plus the capital gains on my investment), I’ve paid $B + $E + $G in tax (income tax on the full amount I earned, income tax on the amount left after I paid the first batch of income tax plus income tax on any gains made on my investment before I took out the loan, and then capital gains on the full gains both those which have already been taxed at the income tax rate and those which haven’t yet been taxed).
Not sure that’s actually easier.
Perhaps for the initial purchase this type of income-based approach on debt financing could be waived as an exemption, and could apply to financial products like home-equity line of credit (HELOC) loans.
I borrowed against my house to buy it. Why shouldn't I be taxed when I got my mortgage?
If you are borrowing to buy the house in the first place, then all of the capital gains have already been taxed, so it's not analogous to this scenario.
Depending on the housing market a property price could rise that much while still under mortgage and not everyone pays mortgages off in term.
The fundemental issue with tax law imo, is that tax lawyers write it and the spend years in the dark offering their services to bypass it.
It would be like there being a category of specialist lawyers who openly offer hidden options to murder people.
It really is quite bizarre in my opinion.
We already have definitions of what realized and unrealized capital gains are and we already have the rule about how much capital gains on a primary residence are exempt from taxation.
> A new survey of 57 of the world’s biggest private banks and other lenders, conducted by Deloitte and reviewed by The Wall Street Journal, offers the fullest picture yet of this opaque corner of finance. Banks don’t always break out such lending on their balance sheets, and there is no central tally of how much is outstanding. The report finds that stock-based lending, better known as Lombard loans to borrowers in Europe and Asia, is increasingly available to those lower down the wealth scale.
> ...
> In mid-October, Charles Schwab said its pledged asset line product available to people with at least $100,000 in nonretirement assets drove a 35% surge in bank-loan balances, to $72.3 billion in the third quarter. A spokeswoman said usage grew after Schwab launched a fully digital process three years ago that can get the loans approved within minutes.
Mixing "buy, borrow and die" up with a pledged asset line is ridiculous and clickbait to the point of disrespect for the reader's intelligence. The former is a boutique product used by the uber-rich (net worth in 9 figures minimum) to get around estate tax. They're certainly not using a pledged asset line, which is available to you and me but doesn't do anything for estate taxes.
The cynical read into this is WSJ is trying to whitewash the "buy, borrow and die" strategy using "hey, if the same strategy available to the plebs, then it must be morally justified, right?"
this project is not done, it’s not close to done, but improvements in this space have led to more people being able to access this lending market
I see that improving beyond publicly traded equity and real estate
I can see arguments that the Walton family deserves to be ludicrously rich. I don't see why they should have access to tax avoidance strategies unavailable to Bertie the Janitor. I also don't see why someone merely Porsche-rich should have access to those, either.
I think you would appreciate how this contributes to it, Bertie the Janitor should be able to use their kitchen table, furniture and objects around them as collateral too. This is the direction it’s all going as all the frictions to trade, liquidity and price discovery go away.
Regarding tax, the state is not a responsible spender with a balanced budget, its services are paid for by its bonds and the tax is one of many revenue sources to pay the interest the state owes. I’m writing that to point out that the ire is put towards the wrong participants. It doesn’t make sense to ask why we aren’t getting taken from equally, when why are we being taken from at all is also valid.
Driving one town over to pay a lower gas or sales tax is equally weighted as all other tax avoidance
Regarding the payments themselves, this strategy does involve paying the banks interest. As far as convenience goes in this article’s behavior, you’re either paying the government or you’re paying the bank. This is normal enough for me not to really have I guess the vitriol about it.
I see the different ways that people think about it, but it hasnt solved the state’s own borrowing and spending problem, and usually doesnt address that at all. They just want others to feel the same pain they feel, which doesnt make sense to me. I would be more aligned with proposals to address the state’s spending.
you have things of value all around you, captured value that you cannot turn into cash because of its poor liquidity and poor institutions for that asset class, you don't need to be at the top. there is a collector of old concert tickets, a collector of your digital footprint, a collector of your furniture, a collector of the junk you've been hoarding. you just can't find those people, get a fair price, avoid getting scammed, or have any remedies if you did get scammed, compared to assets that institutional banks service. And because you can't, the banks can't either and have the same issues, hence why there is no lending market or way to mitigate risk.
I didn't write in this thread to have a contrarian view, it's a system I'm aware of and am impressed by its growth.
I'm not here to sell you on it but like I wrote to the other person, it doesn't make sense for people to just want others to experience more of the pain they experience, the state is not a responsible party to have a piece of everyone's transactions. You should be asking why any of us are experiencing pain instead of ire at those who have an easier way to avoid the pain. Taxation is just one of the state's revenue models, its other methods can grow, additional methods can be employed, its spending can shrink, and right now all of its revenue is just going to pay the interest on debt it already accumulated. With that understanding I can't view proposals based on punitive hate seriously. You're proposing to give a degenerate spender more money, just because you found someone that's not paying the degenerate? And any amount you give the degenerate doesn't even pay down its debt, just the interest? And that just makes it more credit worthy to continue accumulating more debt? Not everyone needs to pay the degenerate, get in a place where you don't either.
Modern taxing authorities aren't even that old. It's hard for me to treat it as time immemorial because its not and you can influence how exposed you are to it.