Finra reports that margin loans on securities have grown some 60% since January 2020. The lack of tax wrinkles only increases these loans’ appeal.
“The S&P 500 has averaged 13%-plus for the last 10 years while interest rates are close to 3%. When you borrow against your portfolio, you’re paying the lower interest rate while receiving the higher interest rate,” Mathis said.
“The punch line for all of these strategies is that the gains on your stock and real estate portfolio will likely never be taxed,” Mathis said. “Because if you do not sell the asset securing the loan, the cost basis of the security or real estate will step up to the fair market value of the security or real estate on the date of the owner’s passing.
“This is true even if I borrowed $350,000 against my Tesla stock,” he added. “Not only would I never pay tax on the gain, but I wouldn’t pay tax on the $350,000 I borrowed. For the ultra-wealthy, these numbers are relevant on a much larger scale. Elon Musk owns billions of dollars in Tesla stock and could borrow, quite literally, billions of dollars using his stock as collateral without paying a penny in taxes.”
This works particularly well with a long-term plan, in what Mathis noted is sometimes called a “buy-borrow-die” strategy.
“A tax isn’t triggered until an event occurs—usually the transfer of ownership. Financing arrangements are set up to gain access to accumulated profits without transferring ownership,” Cordasco said.
“The client doesn’t have to sell appreciated assets and pay tax on the gain. If the client holds the assets [until] death, the assets receive a stepped-up basis and there is never a tax paid. The assets can then be sold to pay off the loan,” Sharfman said. “Many clients also purchase life insurance that can be used to pay off the pledged account loan.”