Buy, Borrow, Die. Legally Never pay Taxes.

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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 3:57 pm

Xan wrote:
Tue Jun 15, 2021 3:36 pm
Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.
...

Maybe I'm still missing it, though.
You might be missing how compounding works. Here is a quick and dirty spreadsheet that I just threw together to show how your two scenarios would play out.

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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 3:59 pm

Mark Leavy wrote:
Tue Jun 15, 2021 3:57 pm
Xan wrote:
Tue Jun 15, 2021 3:36 pm
Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.
...

Maybe I'm still missing it, though.
You might be missing how compounding works. Here is a quick and dirty spreadsheet that I just threw together to show how your two scenarios would play out.


Screen Shot 2021-06-15 at 10.54.51 AM.png
Why are you paying taxes as the assets grow? Doesn't that only happen when you sell? And regardless, your two final amounts are almost identical.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 4:31 pm

Xan wrote:
Tue Jun 15, 2021 3:59 pm

Why are you paying taxes as the assets grow? Doesn't that only happen when you sell? And regardless, your two final amounts are almost identical.
As a quick example, I showed what would happen if you periodically paid taxes instead of only at the end. I chose paying every year just to throw something together.

Whatever you do, you end up with more if you only pay taxes at the end.

And even more more if you never pay taxes.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 4:46 pm

Mark Leavy wrote:
Tue Jun 15, 2021 4:31 pm
Whatever you do, you end up with more if you only pay taxes at the end.
Definitely not true: simulate taking the 20% off the balance at the beginning, as opposed to taking it off the end or in the middle. You'll get the same end result as paying at the end.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 4:48 pm

Xan wrote:
Tue Jun 15, 2021 3:59 pm
And regardless, your two final amounts are almost identical.
This is a good point, in the sense that for this to work, the gain should be greater than the interest payments on the margin.

Maybe I'll make a more detailed spreadsheet this evening that tries to account for the cost of carrying the loan and see how it stands up.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 4:50 pm

Xan wrote:
Tue Jun 15, 2021 4:46 pm
Mark Leavy wrote:
Tue Jun 15, 2021 4:31 pm
Whatever you do, you end up with more if you only pay taxes at the end.
Definitely not true: simulate taking the 20% off the balance at the beginning, as opposed to taking it off the end or in the middle. You'll get the same end result as paying at the end.
I'm not following. I'd have to see some numbers to understand what you are saying here.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 4:56 pm

Mark Leavy wrote:
Tue Jun 15, 2021 4:50 pm
Xan wrote:
Tue Jun 15, 2021 4:46 pm
Mark Leavy wrote:
Tue Jun 15, 2021 4:31 pm
Whatever you do, you end up with more if you only pay taxes at the end.
Definitely not true: simulate taking the 20% off the balance at the beginning, as opposed to taking it off the end or in the middle. You'll get the same end result as paying at the end.
I'm not following. I'd have to see some numbers to understand what you are saying here.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 5:01 pm

Xan wrote:
Tue Jun 15, 2021 4:56 pm
Mark Leavy wrote:
Tue Jun 15, 2021 4:50 pm
I'm not following. I'd have to see some numbers to understand what you are saying here.
tax_screenshot.png
Thanks. I understand now.

That scenario has nothing to do with the approach I am discussing. I assume that you are starting with $1M after tax dollars to invest and you either pay taxes on the gains each year, or you defer the taxes and pay later. The deferred taxes always win. There is no scenario where you would pre-pay $200K in taxes.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 5:11 pm

Mark Leavy wrote:
Tue Jun 15, 2021 5:01 pm
Xan wrote:
Tue Jun 15, 2021 4:56 pm
Mark Leavy wrote:
Tue Jun 15, 2021 4:50 pm
I'm not following. I'd have to see some numbers to understand what you are saying here.
tax_screenshot.png
Thanks. I understand now.

That scenario has nothing to do with the approach I am discussing. I assume that you are starting with $1M after tax dollars to invest and you either pay taxes on the gains each year, or you defer the taxes and pay later. The deferred taxes always win. There is no scenario where you would pre-pay $200K in taxes.
Okay, great.

I find it startlingly common for people to think that "the magic of compounding" means that paying taxes at the end is always better, and are startled to find it doesn't actually make any difference whether taxes are paid ahead of time or at the end.

I think this is related to what you're talking about: the difference of whether to pay in the middle or at the end is pretty minor.

Avoiding completely via step-up, now we're talking.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Smith1776 » Tue Jun 15, 2021 5:35 pm

The commutative property.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by ahhrunforthehills » Tue Jun 15, 2021 7:10 pm

Hi Mark,

Great topic. I too have been curious about this. I just ran a spreadsheet that would account for the margin, LTV, etc. over a 50 year period.

It appears based on my data (which might be riddled with errors) that in order to do this somewhat safely you would need to keep your Withdrawal Rate at approximately 1/3 of your whatever your annual growth rate is for the overall portfolio. At a 1% margin, it will limit your overall loan exposure to about 15% of your portfolio value.

The real problem seems to be keeping a broker giving you that 1% margin. As the margin % increases, you also appear to need to have your market performance increase in-step as well (otherwise your LTV starts becoming dangerous). However, I am not sure this is possible since rising interest rates should theoretically be a drag on equities.

I am interested to see if you come to the same conclusion in your research.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 7:31 pm

ahhrunforthehills wrote:
Tue Jun 15, 2021 7:10 pm
Hi Mark,

Great topic. I too have been curious about this. I just ran a spreadsheet that would account for the margin, LTV, etc. over a 50 year period.

It appears based on my data (which might be riddled with errors) that in order to do this somewhat safely you would need to keep your Withdrawal Rate at approximately 1/3 of your whatever your annual growth rate is for the overall portfolio. At a 1% margin, it will limit your overall loan exposure to about 15% of your portfolio value.

The real problem seems to be keeping a broker giving you that 1% margin. As the margin % increases, you also appear to need to have your market performance increase in-step as well (otherwise your LTV starts becoming dangerous). However, I am not sure this is possible since rising interest rates should theoretically be a drag on equities.

I am interested to see if you come to the same conclusion in your research.
Awesome. I just finished a first draft of my spreadsheet and read your post.

Depending on the numbers you use, it can take about 80 years to reach LTV convergence.

With 4% withdrawal, 2% interest and 6% growth, your leverage converges at 2X in 77 years and then stays there.
With 2% withdrawal, 2% interest and 8% growth, your leverage converges at 1.33X in 53 years.

Obviously real world conditions would be quite variable, but... pretty easy to do some back of the envelope calcs to check your risk tolerance.

In the spreadsheet below, I assume that loan interest payments aren't actually paid, but just increase the size of the margin loan.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 7:41 pm

ahhrunforthehills wrote:
Tue Jun 15, 2021 7:10 pm
I am interested to see if you come to the same conclusion in your research.
Yes, pretty much. I don't have a closed form solution yet, but it looks like I converge to 1.37 for 9% growth, 3% withdrawal and 1% interest.
Again, this is counting the interest payments as being drawn against the margin loan - in addition to the cost of living withdrawals.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Tue Jun 15, 2021 7:52 pm

Mark Leavy wrote:
Tue Jun 15, 2021 3:57 pm
Xan wrote:
Tue Jun 15, 2021 3:36 pm
Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.
...

Maybe I'm still missing it, though.
You might be missing how compounding works. Here is a quick and dirty spreadsheet that I just threw together to show how your two scenarios would play out.


Screen Shot 2021-06-15 at 10.54.51 AM.png
Mark,
I'm totally confused now. I thought the two scenarios were (1) selling assets from the portfolio to pay living expenses, and paying the capital gains arising from the sale versus (2) not selling assets to pay living expenses and instead incurring margin or pledged asset debt.

Your spreadsheet is simply comparing pay now or pay later taxes. But what about the money you're withdrawing for living expenses under scenario 1 versus paying back the loan plus accrued interest at end of term under scenario 2?
I'm expecting scenario 2 to result in a materially larger compounded portfolio at end of term, even after paying off the accrued debt because nothing has been sold or withdrawn for living expenses, and no taxes have been incurred. That's the whole thesis after all.
Have I missed something?

BTW, on a related note, I would presume that under this type of strategy, you would use debt to purchase new assets in the course of rebalancing. The idea being to never, ever sell anything at a gain during the term (your lifetime). I see this question has come up in the thread.

Also, don't these types of margin loans accrue interest, which does mean you are incurring interest on interest, but that's still cheaper than withdrawing from the portfolio?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 7:56 pm

glennds wrote:
Tue Jun 15, 2021 7:52 pm
Your spreadsheet is simply comparing pay now or pay later taxes.
That was only to answer a specific hypothetical from Xan as to what would happen if the feds eliminated the step up on basis at death.

I'm not proposing any "pay later taxes" at all :)
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Tue Jun 15, 2021 8:21 pm

Mark Leavy wrote:
Tue Jun 15, 2021 7:56 pm
glennds wrote:
Tue Jun 15, 2021 7:52 pm
Your spreadsheet is simply comparing pay now or pay later taxes.
That was only to answer a specific hypothetical from Xan as to what would happen if the feds eliminated the step up on basis at death.

I'm not proposing any "pay later taxes" at all :)
Got it.

I hope you model the two scenarios as a comparison. Of course I have to remind myself that the uber wealthy are doing this sort of thing while they hold stock that is appreciating at phenomenal rates, certainly in comparison to a Permanent Portfolio.
But I think your question of whether it will still be beneficial to mortals is a good one. I'm expecting the no-withdrawal, tax deferred or avoided scenario to result in a much larger ending portfolio even after deducting out the accrued debt.

Interesting topic.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by tomfoolery » Wed Jun 16, 2021 1:06 am

Mark Leavy wrote:
Tue Jun 15, 2021 4:48 pm

This is a good point, in the sense that for this to work, the gain should be greater than the interest payments on the margin.
You could make a spreadsheet with different potential outcomes. For example, annual growth between -35% and +35%, and margin interest between 1% and 15% seem like fairly reasonable extreme ends for scenario planning.

There’s also sequence of returns risk as part of this, if year 10 has the -35% drop, it’s a lot less bad than if it happens in year 1.

You could likely come up with a safe withdrawal ratio based on this analysis. Perhaps a floating SWR which aligns with your goals of spending more as you become richer.

There will be an eventual point in time when your margin interest expense outpaces your growth potential. I guess it’s not technically guaranteed to occur, if interest rates stay at 1% and growth rates stay at 20% forever. But eventually you will have taken out so much money that even at modest interest rates, there’s not enough capital left to compensate.

I’d also forecast probabilities of margin call events based on SWR. For example a 0.5% SWR likely has a near zero margin call risk, unless we have something like 15% interest rates for several years with -10% annual returns over years. Which is actually the environment I expect to happen in the near future. Stagflation. Where cash is best but you’re going short cash.

Any kind of USD-denominated debt is effectively a short USD position. How can you have a PP in this way? I guess you could effectively be holding extra cash to offset the margin debt. For example, $1m portfolio, with $250k in each asset class. You have $50k of margin debt so you need an extra $50k in the cash portion to offset that. If you want a true PP. Then this plan isn’t giving any leverage, it’s purely about deferring capital gains tax.

If you want to pursue this, I’d first ask yourself, do you want a real PP or do you want to be levered? It seems counter to PP to be levered since the debt is short cash and should reduce the cash portion of the portfolio. The thought experiment is: if we have stagflation and gold, bonds and stocks all go down, and you had 20% of your assets levered as margin debt, you’ll get margin called potentially, but won’t have any cash left over after paying the margin call.

Also, something about climate crisis and mask-wearing.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by tomfoolery » Wed Jun 16, 2021 1:14 am

Mark Leavy wrote:
Tue Jun 15, 2021 7:56 pm
glennds wrote:
Tue Jun 15, 2021 7:52 pm
Your spreadsheet is simply comparing pay now or pay later taxes.
That was only to answer a specific hypothetical from Xan as to what would happen if the feds eliminated the step up on basis at death.

I'm not proposing any "pay later taxes" at all :)
Either you care about what you’re leaving to heirs, or you don’t care.

If you do care then the potential for removal of stepped up cost basis is important.

If you don’t care, then it doesn’t matter.

What you should care about is if you do this plan, what happens when you hit your safe margin level, of maybe around 20%? Do you start spending down the stocks, selling then, triggering taxable events?

And if you never get lower than that safe margin level, you will die with 80% of your money left over. Which is good for heirs, but that only matters if you care about them.

So I’m curious, what drawdown methodology exists with this method to die poor?

Perhaps you spend down until you wind up with 20% margin debt. At that point, you shouldn’t take any more margin debt or risk a margin call in a market downturn. But what if the market is down during this time, you don’t want to sell assets to live off in a down market. But if using PP, something is always up, in theory.

But, if you sell underlying assets, you shift the margin ratio. For example if you have $1M securities, extract $200k. You hit your maximum safe margin level. If you then sell $100k of underlying securities, you have the same $200k of margin debt, covered by only $900k of securities, and have exceeded your safe 20% ratio.

So the plan would need to be, hit the safe margin ratio, sell securities, more than you need in cash to spend, also to pay down some of the outstanding margin debt. The question would be, how far to you repay? Back to zero margin debt? Down to 15%?

Probably needs to be based on your other income for the year, what kind of cheese—phaseouts exist, and determine year to year. Which seems like a potential hassle but might be more fun than a crossword puzzle to keep your mind active. Does make you susceptible to emotional decision making.

Also something about Juneteenth federal holiday.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by tomfoolery » Wed Jun 16, 2021 1:17 am

Xan wrote:
Tue Jun 15, 2021 3:59 pm
And regardless, your two final amounts are almost identical.
Looks to be about a $130k difference. Seems fairly different to me.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Wed Jun 16, 2021 7:31 am

tomfoolery wrote:
Wed Jun 16, 2021 1:17 am
Xan wrote:
Tue Jun 15, 2021 3:59 pm
And regardless, your two final amounts are almost identical.
Looks to be about a $130k difference. Seems fairly different to me.
It's right at 5% over a period of 20 years. It's a lot of work and risk for a result that'll be lost in the noise of actual investment returns / taxes.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by ahhrunforthehills » Wed Jun 16, 2021 1:27 pm

I just ran a comparison between living off of margin vs paying annual capital gains taxes.

It seems to really boil down to portfolio performance and how many years you will still be in the market. A high annual return combined with a low withdrawal rate makes living off a margin loan a winner after just a few years.

But if the portfolio performance sucks going forward, those margin loan payments start becoming a drag on performance and, as a result, your leverage will start climbing (risking the possibility of a margin call)... even at conservative 1-2% withdrawal rates.

Assuming that my data is correct (which nobody should do), to stay safe it seems like you would need to only withdrawal approximately 1/5 to 1/8 of whatever the growth rate is for the year. This should keep your leverage between the 15%-25% levels. Obviously large fluctuations in the market year to year would throw this off and change the risk.

With all that said, the REAL problem I see when crunching the data and comparing both scenarios is how painfully clear taxes erode your real net worth. This is something that is rarely paid attention to since most worksheets exclude tax impact (since it is so individualized).

IMHO, if you have a substantial net worth (can easily weather a 3-5 year draw-down) in non tax-deferred accounts, the PP would be a pretty leaky boat anyways. All of that income being thrown off by half of the investments and the rebalancing is just a drag on performance. With a sizeable nest egg you don't need to care as much about year-to-year volatility (assuming you don't have excessive living expenses).

There are a lot of "ifs" in making an investment plan. But paying taxes is an absolute certainty... once you write that check it is 100% guaranteed your Uncle Sam will cash it. Deferring as much of your tax liability as possible is absolutely the name of the game. You never know when a tax loophole or favorable tax law will give you an opportunity to come out ahead in the future.

One thing is for sure, if they raise the cap tax rate, living off of margin loans becomes a lot more attractive.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Wed Jun 16, 2021 1:59 pm

ahhrunforthehills wrote:
Wed Jun 16, 2021 1:27 pm


One thing is for sure, if they raise the cap tax rate, living off of margin loans becomes a lot more attractive.
Great feedback, thanks.
I might suggest a qualifier to your comment above - if they raise the cap tax rate AND assuming interest rates stay low. Either one moving in either direction impacts this scenario.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Wed Jun 16, 2021 7:38 pm

Given that it could be feasible under the right conditions (thanks! ahhrunforthehills), the last piece of the puzzle seems to be how to handle re-balancing.

My first blush at that would be to just buy a single ETF that is a bond/equity mix. And then also hold some physical gold outside the system. The ETF stays internally balanced and I would adjust the gold holdings judiciously.

Other ideas for keeping a balanced portfolio without generating taxable events?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by ahhrunforthehills » Wed Jun 16, 2021 8:31 pm

Mark Leavy wrote:
Wed Jun 16, 2021 7:38 pm
Given that it could be feasible under the right conditions (thanks! ahhrunforthehills), the last piece of the puzzle seems to be how to handle re-balancing.

My first blush at that would be to just buy a single ETF that is a bond/equity mix. And then also hold some physical gold outside the system. The ETF stays internally balanced and I would adjust the gold holdings judiciously.

Other ideas for keeping a balanced portfolio without generating taxable events?
If you haven’t seen this before, you might find it helpful:

https://youtu.be/MhszdAX9Leg

This is a really good topic... I couldn’t convince my wife to do the Puerto Rico act 60 and I couldn’t find anyone to donate my land to as a conservation easement. So I am definitely on the lookout for options.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Wed Jun 16, 2021 8:51 pm

Mark Leavy wrote:
Wed Jun 16, 2021 7:38 pm
Given that it could be feasible under the right conditions (thanks! ahhrunforthehills), the last piece of the puzzle seems to be how to handle re-balancing.

My first blush at that would be to just buy a single ETF that is a bond/equity mix. And then also hold some physical gold outside the system. The ETF stays internally balanced and I would adjust the gold holdings judiciously.

Other ideas for keeping a balanced portfolio without generating taxable events?
Yes, re-balance by borrowing to buy the lagging asset rather than selling anything. No taxable event.
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