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I don't get how this is advantageous.

Let say a rich person needs $1M a year to maintain their life style.

He can borrow against his portfolio at lets say 4%, or $40K per year. That interest is deductible so maybe his effective rate is 2.5%.

Alternatively he can sell assets and pay cap gains at 15%. Even with a zero basis and paying 15% on the entire $1M of assets sold, after six years he will reach a break even point with the loan having paid 15% interest over the six year period (2.5% effective interest cost per year times six years).

The Cap Gain tax is paid once, but interest on the portfolio loan continues forever or at least until he borrowers estate is settled. So starting in year 7, he is behind and goes further behind each additional year the loan remains outstanding.


The difference is that the $1M remains in the portfolio, presumably gaining value/compounding.
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No. of Recommendations: 1
https://imgur.com/gallery/G7ybuun

Is this how it works? - SG


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I don't get how this is advantageous.

Let say a rich person needs $1M a year to maintain their life style.

He can borrow against his portfolio at lets say 4%, or $40K per year. That interest is deductible so maybe his effective rate is 2.5%.

Alternatively he can sell assets and pay cap gains at 15%. Even with a zero basis and paying 15% on the entire $1M of assets sold, after six years he will reach a break even point with the loan having paid 15% interest over the six year period (2.5% effective interest cost per year times six years).

The Cap Gain tax is paid once, but interest on the portfolio loan continues forever or at least until he borrowers estate is settled. So starting in year 7, he is behind and goes further behind each additional year the loan remains outstanding.
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No. of Recommendations: 2

I don't get how this is advantageous.

Let say a rich person needs $1M a year to maintain their life style.

He can borrow against his portfolio at lets say 4%, or $40K per year. That interest is deductible so maybe his effective rate is 2.5%.

Alternatively he can sell assets and pay cap gains at 15%. Even with a zero basis and paying 15% on the entire $1M of assets sold, after six years he will reach a break even point with the loan having paid 15% interest over the six year period (2.5% effective interest cost per year times six years).

The Cap Gain tax is paid once, but interest on the portfolio loan continues forever or at least until he borrowers estate is settled. So starting in year 7, he is behind and goes further behind each additional year the loan remains outstanding.


The difference is that the $1M remains in the portfolio, presumably gaining value/compounding.
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The difference is that the $1M remains in the portfolio, presumably gaining value/compounding. - leosource

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Good point. As long as interest rates stay low as they have been, even average portfolio performance should beat them. The Prime rate Right now is 3.25%. I wonder what rate an uber-wealthy investor would have to pay.


Also your cap gain tax would be paid with todays dollars, whereas your interest payments and eventual payment of the loan balance will be made with inflated dollars. Inflation is trending up which is likely to continue.
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"Is this how it works?"

It's not quite that simple (using wealth as collateral for loans).
Interest on the loans is not automatically deductible.

We all do this to some extent with home mortgages.

Rich people often have business interests that pay certain expenses for them (say travel, meals, cars etc.) but that's been tightened over the years. Business loans are mostly deductible.
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Interactive Brokers is at .86% on margin balances over ten million.


Jk
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Yes, I have done it for many years.

Juan@Austin
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Mike,

Your numbers are wrong, I get well below 1% on the margin loan on IB, and my assets produce a lot more than that. Keeping my assets pays ten times over the interest on the margin loan.

Juan@Austin
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Neuromancer,

You are right, You don't need to be rich, I am not, and I've done it for years.
I wrote about my strategy on this thread:
https://boards.fool.com/retroactive-changes-to-tax-rates-348...
And not only have I lived on borrowed money, I have paid college tuition for two kids and plan to buy a house.
All without selling a single share (I've sold many but for other reasons).

Juan@Austin
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