Despite solid planning, changes in tax laws and the market can mean that when tax time arrives, you need to raise funds.

Upcoming tax obligations don’t have to disrupt your investment strategy or deplete your cash reserves. Borrowing to pay taxes may be a cost-effective way to make your tax payments while keeping your cash and investments intact for continued long-term growth.

What Matters to You

  • A securities-based line of credit may be a cost-effective and straightforward way to pay a large tax bill.
  • High net worth investors should work with legal, tax and financial advisors to determine the best solution for addressing their liquidity needs.

Options for Funding an Upcoming Tax Bill

  1. Cash: Paying cash is easy and straightforward. But relying on cash to cover tax bills requires liquidating cash reserves, which means losing out on the interest or growth that money would otherwise earn, reducing future flexibility.
  2. Liquidating assets: Liquidating securities is easy and relatively fast, but not immediate. A sale can also trigger unfavorable tax consequences, such as a capital gains tax, that add to your tax burden, and may disrupt your long-term investment strategy and returns.
  3. A line of credit: With a securities-based line of credit, you may quickly pay your tax bills without disrupting your investment strategy, depleting your cash reserves or creating unnecessary tax events. You avoid selling your assets, and continue to hold your investments.

Using a line of credit to fund a tax bill “provides clients a lot of flexibility and keeps their investment strategy in place, which could save them money,” says Jonathan Kessler, Head of Credit and Cash Management Solutions.

It’s not a solution available for, or applicable to, everyone, but understanding more about how this line of credit works might demonstrate how it could work for you — and not just for tax purposes, but for other liquidity needs as well.

A securities-based line of credit has several advantages 

Typically, investors won’t pay any fees for establishing a line of credit. Once approved, the client may draw-down against the line of credit; the funds will be deposited into their bank account for spending. Investors only pay interest on the amount of money they draw.

For example, as illustrated in Table 1, assume you have a $5 million investment account, and you have a $100,000 tax liability. You could sell some of your assets to pay that tax, but using a line of credit offers more flexibility and helps smooth out the financial impact. Additionally, a line of credit eliminates the possible need to sell into a declining market. For purposes of this discussion, assume that you repay the amount borrowed at the end of a 12 month period, paying only interest on the amount borrowed during that time. This would allow you to use recurring cash flow or liquidate securities over time in a more strategic manner. As illustrated using the assumptions in Table 1, including an average return on the investments in the portfolio of 6.50 percent, using this line of credit offers a $2,880 savings over liquidating assets to pay tax.

Table 1: 1-Year Projection - $100,000 Tax Liability

  PNC Client A  PNC Client B

Funded from Portfolio

1 Yr. Interest-Only Line of Credit at 6.0%
Starting Portfolio Market Value $5,000,000 $5,000,000
Liquidation Amount $100,000 $0
Remaining Investment $4,900,000 $5,000,000
Total Pre-Tax Portfolio Return[1] $318,500 $325,000
Realized Capital Gains Tax[2]


Portfolio Return After Tax on Asset Liquidation $316,120 $325,000
Total Line of Credit Interest Cost[3] $0 ($6,000)
Portfolio Return Net of Transaction Costs $316,120 $319,000
Line of Credit Value Added $0 $2,880

You can also take advantage of this strategy if you have a large, event-driven tax bill, such as from a large nonrecurring capital gain from the sale of a business. As illustrated in Table 2, assume in this case, you have a $5 million investment account, and you need $1 million to cover a looming tax bill. You could sell some of your assets to pay that tax, but that would shrink your investment portfolio to $4 million.

Instead, you could take an advance of $1 million against a securities-based line of credit. By borrowing, the full $5 million remains invested. Assuming a 6.50 percent return on your portfolio and taking into consideration the cost of the loan, using a line of credit provides a $4,668 advantage at the end of five years.

Table 2: 5-Year Projection - $1 Million Tax Liability

  PNC Client A  PNC Client B

Funded from Portfolio

5 Yr. Interest-Only Line of Credit at 6.0%
Starting Portfolio Market Value $5,000,000 $5,000,000
Liquidation Amount $1,000,000 $0
Remaining Investment[4] $4,000,000 $5,000,000
Realized Capital Gains Tax[5] ($23,800) $0
Total Line of Credit Cost (Paid from Income Each Year) $0 ($300,000)
Total Portfolio Return After Tax/Loan Cost[4,6] $1,480,347 $1,508,815

Portfolio Value End of Year 5 Before Loan Repayment
$5,480,347 $6,508,815
Loan Repayment - ($1,000,000)
Capital Gain Cost to Repay Loan[5] $0 ($23,800)
Portfolio Value After All Transactions $5,480,347 $5,485,015
Line of Credit Value Added $0 $4,668

“Everyone’s needs and portfolio will be different, which is why we always recommend discussing options with your banking advisor,” Kessler says. “Our advisors can customize solutions with you and assist you in determining the best options for your needs and particular situation.”

Liquidity when you need it

Beyond tax time, establishing a securities-based line of credit can offer liquidity for a variety of needs, including:

  • Taking advantage of investment opportunities, e.g., private equity or other business investments
  • Funding a philanthropic or estate planning strategy
  • Buying a new home before selling your current home, i.e., bridge financing
  • New home construction/renovation
  • Financing the cost of continued care facilities for a loved one

You’ve been smart with your money, investing wisely for your future. Given the right circumstances, by tapping a securities-based line of credit, you have the flexibility to take advantage of that wealth, while preserving your investment strategy.

Speak with your PNC Private Bank advisor today to determine if a line of credit is the right solution for you. 

Also, prior to implementing any of the strategies previously discussed, you should consult with your legal and tax advisors to discuss the impact on your specific situation.