Thank you.
As a preliminary matter, as investment vehicles publicly traded stock is a liquid asset, whereas real estate is an illiquid asset. Generally one invests in liquid investments so that they can be readily converted into cash when needed.
From the tax perspective a building/building owner would at all times be subject to continue paying property taxes. If there were some equivalent wealth tax for stock holders then at least society wouldn’t lose out entirely on this kind of tax avoidance scheme designed for the rich, but I’d still probably prefer these billions in bank loans go to qualified home buyers before lending it to the world’s richest man to circumvent a taxable event.
It could change rapidly and people can get wiped out quite quickly when it does.
On the flip side, selling the assets would have no strings attached to the cash.
Further, it is definitely not guaranteed as you assert.
So if you don't sell the stock and thus have no applicable capital gains tax, then you can be loaned NaN dollars?
Most of the ultra-wealthy live on debt. Here's the basic scheme:
- Let's say I own $10B in startup.com stock, but haven't sold it. My income tax burden is $0.
- If I sell the stock, and taxes are 40% in my country, I get $6B, and the government gets $4B.
- If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes.
The trick is to never realize gains or income. Debt lets you do that.
One more trick is that a lot of purchases are "investments." If I buy a mansion, yacht, and Picasso on debt I can use them. When I'm bored of them, I sell them, and pay off that debt. I've probably made money on the mansion and Picasso, and lost money on the yacht.
I've paid a little bit of interest and a little bit of tax, but much less than I would have otherwise.
Another is that, should the need arise, stock can be sold at the drop of a hat. It is liquid and fungible so a stock-collateralized loan is seen by banks to be a very safe investment. Houses are not.
In this case explicitly I suspect it has more to do with the uncertainty of the deal going through AND not wanting to incur the tax penalty ALONG with the share penalty (liquidating $30 billion in TSLA would affect its price for sure). If you sold the shares to raise the cash, paid the tax, and then the deal didn't go through and bought the shares back, you'd be out the tax (with a stepped-up cost basis to be sure).
I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
Let's say you have 10 million in stock.
A typical margin account allows you to borrow up to, say, 40% of that. That's 4 million dollars.
Let's say you borrow $1 million and spend it. Currently interest rate on a margin loan is under %2. So every year the amount you need to repay grows by $20k (2% of $1 million, for simplicity I don't count compounding).
So in 10 years that would be $1.2 million to repay. But you're authorized for $4 million.
If in those 10 years the value of stock doubles to $20 million, then you're authorized to borrow $8 million - the amount you can borrow grows faster than the amount you need to repay.
To be clear: eventually you have to repay it but in the corner case it could be done when you die.
There are of course caveats. If interest rate increases dramatically, then the amount to repay will grow much faster etc. but you can see how e.g. if you have $10 million then you could borrow and spend $100k to live a good life and never have to sell your stock to fund your life (especially if stocks keep going up faster than interest rate, inflation and your spending habits)
I guess the risk here would be that the stock goes to 0, you get margin called AND you are now on the hook to pay taxes.
I know Ken Lay did that exact chain of events a lot to cash money out of Enron before it's bankruptcy.
Aligned self interest is the engine of capitalism.
You don't care if society would be better of if you donate your time and skill to company X for free. You care that company Y will pay your for your time and skill and that's why you work company Y.
The good of society doesn't enter your calculus. Only the good of throwawaycities
Similarly the banks don't care what is optimal way to allocate capital for the good of society (apparently as decided by you).
They care about their self interest. Their business is providing loans so they provide loans to people most likely to repay those loans.
From the perspective of the bank, margin loans are the safest loans they can give because the collateral is fully liquid and under the control of the bank i.e. the moment the borrower crosses margin loan threshold, he gets margin call and the bank sells his stock to ensure the loan gets repaid.
Study the wildly successful economies of communist countries to see what happens when people think they know better that free market what should or should not be allowed in the economy.
So far good intentions have vastly inferior economical results than lightly regulated free market where, for example, participants decide what kind of loans they want to make.
Musk is putting up some of his Tesla stock as collateral on the loans. The effect of this is pretty similar to if Musk had sold his Tesla stock and used the money to buy Twitter, but avoids some of the tax and regulatory consequences of doing that.