how borrowing against stocks works

[GrayHare]

To avoid incurring capital gains tax from sales of stock, some people instead borrow against those stocks to raise spending money. Online info says interest rates for this type of borrowing are currently near the 2% to 3% range. I figure this borrowing works best for short terms only because if you pay that interest for many years, eventually it will total more than the income tax you would have paid due to simply selling shares originally. What other factors come into play?

 

[jazz4cash]

I usuaally see much higher rates than that but I think Interactive Brokers is famous for very low margin rates. Some borrowers of highly appreciated stock don’t want to ever pay the debt. Many stocks + dividends will appreciate more than 3% per yr.

 

[RetiredHappy]

The rates are usually a couple of percent above Prime rate. When interest rates were close to 0, the leverage rate on the brokerage account was about 2 to 3 percent. You may be looking at old posts.

 

[RunningBum]

If you are a VG Wealth Management Customer, the rate is 6.75%. If not it starts at 9.5%. It's an alternative to a bridge loan if you want to buy a house before selling your existing one but 9.5% is pretty steep if you can't get the existing house sold pretty quickly.

 

[GrayHare]

Fido is saying the rate for a Securities Backed Line of Credit is 1.9% to 3.1%. Am I misreading that, and instead those are the rates in addition to Prime? Securities Backed Line of Credit (SBLOC) | Lending Solutions | Fidelity

 

[RetiredHappy]

Fido is saying the rate for a Securities Backed Line of Credit is 1.9% to 3.1%. Am I misreading that, and instead those are the rates in addition to Prime? Securities Backed Line of Credit (SBLOC) | Lending Solutions | Fidelity

It is Prime plus 1.9% to Prime plus 3.1%.

 

[GrayHare]

Ah, OK, at those rates it doesn't take many years to exceed the taxes on capital gains. There must be other benefits to the borrowing approach.

 

[RetiredHappy]

Ah, OK, at those rates it doesn't take many years to exceed the taxes on capital gains. There must be other benefits to the borrowing approach.

People using this as short term borrowing, for instance buying another home while waiting for a home to be sold. I have used this before and it is much easier to setup than a HELOC.

 

[bada bing]

It is part of a strategy used by the uber wealthy for decades. Here's a video that explains how it works

 

[pjigar]

My understanding is the same: SBLOC can help as a bridge for short-term capital needs. SBLOC looses its luster for long-term use because the total interest paid will be more than the capital taxes eventually. I am not sure why popular literature says "ultra-wealthy borrow till death". May be they know something I don't.

 

[COcheesehead]

I looked into this as a potential bridge when buying a house. There are some gotchas in the process ( need to segregate the collateral, can’t touch the collateral without further steps, etc ) and the rates were in the 7% range. No free lunch.

 

[silvor]

My understanding is the same: SBLOC can help as a bridge for short-term capital needs. SBLOC looses its luster for long-term use because the total interest paid will be more than the capital taxes eventually. I am not sure why popular literature says "ultra-wealthy borrow till death". May be they know something I don't know.

I heard a baseball executive talk about this. I think it’s mostly these billionaires have capital tied up in illiquid assets and borrow against it to fund their lifestyle.

 

[Surewhitey]

Maybe living in California & planning a future move to a no-tax state? Would save considerable bucks.

 

[COcheesehead]

It’s also a way to avoid taking capital gains.

 

[mrfeh]

Another recent thread on SBLOCs

Anyone use a Pledged Asset Line?

We are considering using a Pledged Asset Line of credit against our taxable brokerage account to help us control our taxable income in the future. https://www.schwab.com/pledged-asset-line The idea is to borrow funds that you don’t have to pay taxes on, avoid paying capital gains taxes, and...

www.early-retirement.org

 

[GrayHare]

I am not sure why popular literature says "ultra-wealthy borrow till death". May be they know something I don't.

Exactly my thoughts. Seems like there must be other benefits besides avoiding tax on cap gains. Maybe it facilitates creative accounting when the borrower dies?

 

[Ivo Archer]

I also use this line of credit as my 2nd year of cash backup if the market hits a lull. Instead of cashing out to replenish my cash buffer (which I do when the market is up), I will draw on this LOC for spending cash to wait out (6 to 1 year) lows caused by tariffs, corrections, etc. The interest paid over six months is usually a lot less than the market rebound, and this frees up that 2nd year of cash to stay invested in the market.

Note that as I am retired but under 60, I am not yet pulling money from PreTax or TaxFree accounts, just from Taxable brokerage dividends and cap gains.

 

[ncbill]

I looked into this as a potential bridge when buying a house. There are some gotchas in the process ( need to segregate the collateral, can’t touch the collateral without further steps, etc ) and the rates were in the 7% range. No free lunch.

Yep, I paid around that when borrowing via a SBLOC to help the kids with house down payments.

I knew I could pay off what I borrowed within a year or so from cash flow.

If you're worth high 8 or low 9 figures from concentrated public or private equity ownership you could well find a boutique lender willing to accept part of that equity as the interest payment.

But us hoi polloi have to pay the interest in cash on the barrelhead.

 

[Koolau]

Sounds interesting but I think I'll pass on this opportunity.

 

[HappilyRetired]

People using this as short term borrowing, for instance buying another home while waiting for a home to be sold. I have used this before and it is much easier to setup than a HELOC.

Thanks for your advice. I have never implemented this strategy. And I’m not sure I fully understand. So you put up your stocks as collateral and borrow against them? You can’t sell them until the loan is paid off? And the interest on the loan is deductible from any capital gains you have when selling them? How exactly does that work? Thanks!

 

[RetiredHappy]

Thanks for your advice. I have never implemented this strategy. And I’m not sure I fully understand. So you put up your stocks as collateral and borrow against them? You can’t sell them until the loan is paid off? And the interest on the loan is deductible from any capital gains you have when selling them? How exactly does that work? Thanks!

Yes, you borrow against your brokerage account and not let the account drop more than the amount that you can borrow from. You can continue to trade and withdraw from the account. The interest from the loan is not tax deductible.

 

[hpnutty]

I looked into this as a potential bridge when buying a house. There are some gotchas in the process ( need to segregate the collateral, can’t touch the collateral without further steps, etc ) and the rates were in the 7% range. No free lunch.

What did you do instead to bridge the gap?

 

[pb4uski]

I looked into this as a potential bridge when buying a house. There are some gotchas in the process ( need to segregate the collateral, can’t touch the collateral without further steps, etc ) and the rates were in the 7% range. No free lunch.

We used Schwab's Pledged Asset Line of Credit with my brokerage account as collateral as a bridge loan between buying our Texas house and selling our Florida condo.

I was able to trade as long as the collateral value continued to exceed the loan. The collateral value is a percentage for each holding... generally 70-75% for most funds and 96% for money market funds.

I just looked back and I made some buys of preferred stocks and some sells of SWVXX to cover the buys.

 

[COcheesehead]

We used Schwab's Pledged Asset Line of Credit with my brokerage account as collateral as a bridge loan between buying our Texas house and selling our Florida condo.

I was able to trade as long as the collateral value continued to exceed the loan. The collateral value is a percentage for each holding... generally 70-75% for most funds and 96% for money market funds.

I just looked back and I made some buys of preferred stocks and some sells of SWVXX to cover the buys.

If I remember right, you had to have Fidelity’s permission to trade within the segregated account.

 

[HappilyRetired]

Yes, you borrow against your brokerage account and not let the account drop more than the amount that you can borrow from. You can continue to trade and withdraw from the account. The interest from the loan is not tax deductible.

here is what I can’t wrap my mind around … I don’t see how the Loan somehow bypasses the capital gains tax. I’m not an idiot and I may be when trying to figure out what you guys are saying! If I borrow against my assts, I understand that part. The part that I don’t understand is how claiming the interest on this loan bypasses the capital gains I have to report when I sell the equities