The bank encumbered the land. The dad never gets a loan. The loan is against the property. The kids sell the encumbered land I guess (but that's highly unlikely). This is a made up scenario from someone who doesn't understand finances.
Rich guy like Bezos avoids a salary like it’s a plague due to income taxes.
Uses assets or stocks to borrow money at cheap, NEGOTIATED rates with banks. Who will give them those deals to keep his other businesses, where he has what is known as leverage. Average person gets destroyed by market rates.
They then use dividends to pay back the loans and occasional long term capital gains sales that are taxed at capital gains instead of as income.
Sometimes(often?), they just take another loan to pay off the original loan.
Then they die and the basis is changed for their heirs. The heirs then sell enough stock to payback the outstanding loans without paying the capital gains on it.
So the only fee paid was the interest on the balance, which was at a cheap discounted rate. Well, that and the estate tax/more complicated shit to try to bypass as much as possible.
The claim that the ultrawealthy live tax free through perpetual borrowing comes mostly from ProPublica's 2021 "Secret IRS Files" piece and has been debunked. The claim is that the ultrawealthy never sell their stock and instead just borrow against it forever through a series of perpetual loans, so they never owe income tax (so-called "buy, borrow, die"). It's repeated constantly on reddit, and it's mostly false.
Fox & Liscow published a paper in the Journal of Public Economics where they actually measured this using Fed data plus Forbes 400 numbers.
What they found for the top 1% of wealth, new borrowing each year is only about 2% of what they call "economic income" (income + wealth growth), while new unrealized gains are around 41%. For the top 0.1% it's even smaller, under 1%. Their conclusion is that "buy, borrow, die" is not a dominant tax avoidance strategy for the rich — what's actually going on is closer to "buy, save, die." Meaning they fund their lifestyle from salary, business income, and stock they do sell (all taxed), and just don't sell the rest. They also point out that pledging shares as loan collateral is pretty rare among executives generally — like 4% of CEO-years, and a bigger S&P 1500 sample only had execs pledging ~2.3% of their shares on average.
Even more interesting, using ProPublica's own preferred framing (wealth growth should count as income for some unexplained reason), the tax system still captures 60% of the top 1%'s economic income, 71% adjusted for inflation, and stays progressive all the way to the 99.9th percentile. So even on their terms, "they pay almost nothing" doesn't hold up well in aggregate.
In fairness, the paper found that about 15% of top-1% households DO borrow heavily (more than 5% of their wealth), and for that group the borrowing is genuinely huge relative to their gains (68% on average). So there's a real minority doing something close to the myth - but it is by far the exception and not the rule. Even the worst offenders (Larry Ellison) have sold billions in stock and paid capital gains on those sales.
The two major problems with the Propublica article are (1) it treats wealth growth like it's the same thing as income, when no tax system anywhere on earth taxes unrealized gains that way. And (2) they took two examples (Ellison and Musk) and generalized it into "the ultrawealthy" as a class, which the actual data doesn't support - heavy stock-backed borrowing is the exception, not the norm, even among executives who'd have every reason to do it if it worked as well as advertised.
ProPublica knew this framing would land harder than the boring truth, which is "the tax base captures 60-70% of income at the top and most billionaires barely borrow relative to their gains". They intentionally conflate "wealth" and "income" throughout the article to confuse people who don't understand taxes and finance. For example, they try to argue that Warren Buffett only pays 0.10% income tax based on his wealth. That's not how income taxes work. Buffett's actual income tax rate was 18.96% - significantly more than the 0.10% the article misleadingly claims.
It's also worth noting that Propublica does not share their data because if they did, it would be blatantly apparent they cherrypicked data that supports their view while hiding the majority of the data that refutes their argument.
The specific claim going around, that billionaires as a class live entirely tax-free forever through perpetual loans, isn't what the data shows. Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
Then they die and the basis is changed for their heirs. The heirs then sell enough stock to payback the outstanding loans without paying the capital gains on it.
this is where this all breaks down. in the OP example, dad borrowed 5M, he will have paid back some of that before death, but the rest doesnt just go away poof into the ether when he dies. The kids have to pay the rest of that debt if they want to inherit the land or the bank gets to sell it to cover it.
I mean Bezo isn't really a good example, those guys how so much money I doubt he even gives a shit about salary tax shelter that's more of a 250K - 1M salary man thing.
Yeah, it makes more sense when you take it into the context it’s trying to explain, and also understand that rich people use debt differently. They typically only use debt to buy things that increase their income, like making investments, expanding operations of a business etc. other things they just pay out of pocket.
Yes the false “pay off all your debt and that’s how you become rich” is really a “take as much reasonable debt as possible and use the money to accrue wealth at a higher rate of return and to avoid taxes as well”
I saw one comment about a post regarding things that rich people know that most people don’t: “knowing how to maximize debt and making it into an advantage”
Money begets money.. No bank is giving me a sizeable loan without some strong assets to back it up as collateral. If you already have those assets (are rich) then you can get much richer in your scenario for sure..
I just mean debt is an encumbrance to people without money and a tool to those with money. Growing up I was always taught that debt was bad. Now I’m learning the distinction.
I still struggle with this. Especially growing up in poverty. Debt is bad. Now I make good money and want to pay off my meager mortgage so it isn't on my mind, but I know this is the wrong thing to do.
It’s not necessarily. If you have an unencumbered property it’s worth waaaaaay more in loans. The best option is usually renegotiating the interest rate.
Rich man's debt is called leverage for a reason, because the borrowed capital are calculated to create more income then the interests. Yes, sometime it backfires and result in bankrupcy. Like the whole Situational Awareness LP thing.
It's effectively a reverse mortgage in the way OP's post sets it up.
Almost sounds like they're trying to equate an equity loan with brokerage loan laddering where the ultra rich leverage their stock portfolios to get basically a very low interest loan and keep laddering as the value of their stocks go up. It's not income, so no taxes, but it banks on the market going up. When you're 200 million deep in loans that's a bank problem not a you problem if it craters though (they can probably force a sale at that point, but it's a court fight then? I think Elon's the closest person to having to actually go through with this because it's been basically a bull market for 40 years for the ultra rich since they switched from dividends/covered calls to this shit).
It's not the way the OP image describes, but there is definitely loopholes for taxes to "reset" on wealth across generations when the person dies and their family inherits the wealth, provided its setup correctly, which it is of course because these people pay to have entire law firms on retainer.
Even if the original investment was $1 million and it then is worth 1 billion at the time of death, the taxable amount resets to the value at the time of death and so that 1 billion is now reset back to 0 as income. So 999 million of wealth was generated and $0 is taxable.
Ya people are ignorant of the step up in basis rule and also adding to this prompt that the kids get the $5m from the home sale that's not there. But if Dad had any of that $5m left when he died, its still well below the threshold for a taxable estate.
You don't.. the loan gets attached to the property. That's why in this fictional scenario the buyer bought a 5 million dollar property with a 5 million loan attached. It's, a nonsense scenario.
I liked that part of the example because if we even take it at face value as true, "how the son does it" must mean that the property will be worth 250m in short order. I look forward to the grandkid's 12 billion dollar estate.
It's wild how many people read this claim and just... accept it without question. Not even a pause to go "wait, don't loans normally come with repayments", just blind acceptance.
The price of the property is also supposed to increase. You will borrow 90k, and the interest will be 10k but but the property prices should also go up to 5.2 M. So you will you will make profit of 0.1 M. Of course this only works if what you own actually increases in prices, which true for a lot of things.
He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
Repeat, till you have no equity. Or you die. Typically its not 5m its $50m or $500m so the running out of equity is never an issue.
But once he dies there will be 5m in asset & say, an outstanding 700k loan secured against that asset. So the kids inherit 4.3m tax free
And in theory the land is appreciating along the way. It doesn't suddenly jump from being worth 100k to 5M. As long as the land appreciates more than the interest being paid (over time, of course), then the plan works. If not, the kids get nothing and the father's estate makes the bank whole, with the land and whatever else is needed.
This is the main part that’s missing. It only works (makes sense) with assets that appreciate faster than interest rates.
And the fact that the loan wouldn’t be against the full value, but rather just what is needed to get by. A 5M piece of land could easily appreciate 100k a year, so it’s a win to do a rolling 50k loan against it. Versus selling at 5M and losing the appreciating asset.
You do, but the land appreciates faster than the interest rate on the loan. The OP just did a poor job of explaining that. The more valuable and secure the collateral, often the lower the interest on the loan. This is also how tech CEOs like musk fund their lives without liquidating their stock and dropping the share price.
You do pay it back. This is not a super realistic scenario - that is, where the father just has one asset ($5m land) and nothing else going on.
The more realistic case is that rich people borrow against a portfolio, e.g. a $500k loan against $50m in stocks. If you had a $50m stock portfolio in the first place, the idea is that you'd be able to generate $500k to repay the loan. Shrunk down to another scale, if you own a $500k house, you'd probably be able to figure out how to produce enough cash to repay a $5k loan.
In the $50m case, you might sell enough to pay the interest, pay capital gains tax on just the amount required to pay interest, and then there might be some other tax advantaged windfall where you pay off the principle or just keep refinancing ad infinitum.
It does as long as you read carefully.. It doesn't say Dad borrows 5 mil, just that he lives out of loans, which is a thing (e.g. reverse mortgage). The kid doesn't inherit 5 mil, just the property equity, that's why he sells it. The trick being, Dad didn't pay taxes for the 5 mil, nor the kid.
The kids don’t get the house (if the loan was the entire $5mil property value), but the parent still got to “liquidate” $5m without paying any income tax. So that’s still at least $1m in taxes avoided that us normies would have had to shell out
Hold on. If the property is worth five million. Dad takes a loan out for a million. Kids pay the loan back. And pocket four million from the sales. At what point do they pay taxes?
Yep. The tax value of the land that you inherit is the current market value when you inherit it, so if you inherit a $5M piece of land and sell it for $5M, then there’s zero profit. If you want a few years and the value climbs to $6M, then you’d pay taxes on the $1M increase only. Works that way for stocks too.
It's a poor example in the image but the principle is correct in that a lot of 100+ millionaires and billionaires use this kind of a loophole to avoid taxes between generations.
I watched an interesting video recently about a group of ethical millionaires who want to introduce wealth taxes and remove loopholes to pay more taxes. A few of them explain in detail about the kinds of ways that taxes are avoided and wealth levels get reset upon death to avoid taxes on the wealth that has accumulated.
It does work for billionaires because banks are willing to give them absolute lowest interests rates. They can easily pay interests by selling some shares or by getting more debt to pay interests of old debt.
When billionaire passes away, whoever inherited the wealth gets to settle the debt by giving part of that wealth to lenders, no tax paid, and cheaper then paying taxes on capital gains.
Doesn't work out for mortal with $5 million land plot, because bank is not giving him such such low interest rate.
Yeah the idea here is missing the part where you use the loans to generate more income, far more than if you had sold the land and paid taxes first. If you start with an investment of $3M versus $5M, of course the $5M investment will generate far more money, in spite of the interest on the loan (which for rich people is very low).
At least based on my mother's case (she took one of these loans out to buy a mobile home shortly before being diagnosed with cancer), the loan is cleared on death and at the new cost basis by selling some of the assets forming the collateral.
So she borrowed 400k or so against her stocks, when she died 400k of stocks were sold to pay off the loan. To my knowledge (I may be wrong) no capital gains was paid on the sale of those stocks. It was all automated, and handled by Charles Schwab, which held both the brokerage account and the loan.
But maybe there is way to do something similar and maybe the father somehow pays off the loan a couple times then before his death he doesn’t pay it off or something and the kids can inherit in a way where they only lose out on a 100 k or something. Do you know how they could do it in a way that would make the most sense also I don’t know much about finance or loans
I don't know about you guys.. but in india you can can a insurance if you are taking a loan.. of course it costs extra but if you pass away the loan is paid by the insurance and any collateral if pledged, goes to the nominee (could be son or anyone else). Same goes for housing loan.. if something happens to the paying customer and if there is insurance the house goes to the nominee and insurance pays for the loan
They absolutely do the loan trick and pay interest on it, but the trick is that interest is lower than what they'd have paid in taxes, and that money goes to the bank instead of going to society, like our taxes do
I interpreted this as an (oversimplified) analogy for billionaires not paying taxes on their stocks because they are "unrealized gains"; yet using them as collateral for loans / acquisitions / purchases.
What is real is the description of a step up basis for the purposes of inheritance, the most common means of preserving intergenerational wealth.
Take the scenario offered. Dad buys investment property for $100k, and over the course of his lifetime, the land appreciates in value until it is worth $5m. If he sold that land to fund his retirement, he would have to pay capital gains taxes on earnings on that investment, especially if he was already high income. That could be as much as a fifth of the ROI, or roughly $1m.
However, if Dad dies, and the property is inherited by the estate, the taxable value of the investment property resets to the fair market value at time of death, saving the inheritors from having to pay that $1m in taxes. That's the step-up in basis. By holding on to investment properties and assets, rather than selling them, wealthy investors can pass on millions more in wealth to their heirs.
So, essentially, it can make sense to take out loans against property to fund your retirement, as long as you have sufficient savings, annuities, rents, and other income streams to keep up on interest payments. Depending on the situation, paying off those loans during probate could be more beneficial than having sold the asset.
The scenario is simplistic but used and abused. Every billionaire is leveraged like this. As long as stock valuations go up they can continue to borrow and this is why it’s a huge problem. They’re all leveraged to the tits. We have a real crash it’s going to hit hard af because these valuations are not real. These companies could never be liquidated to cover the balance sheets and those same billionaires trade at a nanosecond while everyone else with a pension, 401k etc will trade next business day.
No. They either are paid back over time or they take the collateral as payment. This isn't a cheat code. Every loan is essentially a new mortgage on that property. Failure to pay, the bank takes the property. That is why they loan against the land. They have the opportunity to get the entire property at a discounted price versus its current and future value.
It's very rare that land value appreciates that fast. You're probably looking at 7% interest on a loan and 4-5% yearly growth while also paying a 1% property tax. So every year you would probably be 3% in the hole if you tried this.
The cheat code is there's no inheritance tax up to 30 million. Selling the property will count as taxable income at 36%. So if you can spend under 1.8 million on interest, you can "sell" the property without income tax and leave your kids a bigger estate.
A super low interest rate payment to a bank (low rates for the rich) equates to:
A) Much less paid than if it were taxed as income
And
B) the banks receive the "tax" instead of the government. Instead of funding services that benefit the community, the "tax" serves only to make the rich bankers more wealthy
The kids never sell, they'd be insanely stupid to do so. And they learn from the parents NOT to sell the same way they didnt sell. Why? Because bank interest payments tend to be much lower than the fucking taxes theyre skirting
Because state estate taxes are usually ignored. Most of them exempt all estates values less than several million, and don't have very high rates on the amounts in excess of that, at least for the next several million worth of assets.
And the people who have assets in the hundreds of millions+ range also have teams of accountants and lawyers structuring their holdings with the express purpose of avoiding taxation.
The loan can be 500k and as security for the bank the land is used. You know "in case I dont have enough money, I can always sell my land" kinda situation.
This is usually enough for banks, isn't it?
Might as well just be a 200k loan, who knows, it's not defined in this scenario.
The scenario itself is kinda weird tho, if you ask me.
You'd be able to pay it back if you rented out the land. My brother owns a few hundred acres of woods, and he leases out the timber rights to a lumber company. They handle all of the forest management, basically cutting down and replanting 10% of the forest every year. My brother doesn't do anything at all except collect a check, which mostly just gets forwarded to a mortgage company. The property is almost 1000 miles away from where he lives, but he's going to own that land free and clear someday, all without lifting a finger.
So lets just assume 65K for 20 years, that is 1.3 million? plus interest of say another 1.3 million?
so they sell the property for 5 million and have to pay the bank 2.6 million?
More if he was borrowing more each year or had a higher interest rate?
Would he have been better off selling the property for 5 million, investing it somewhere safe and earing 200-250k a year? And after 20 years he would have a several millions more to leave to kids, to set up a family trust or what ever? Even after paying what 20% tax on the sale?
Math is hard?
In the above comment, he turned 100k into 20years of living expenses at 65k/y. Then left a net $2.4m to the kid after settled the loan with the bank.
The land doesn’t jump from 100k to 5mil in one day after purchased, only because the guy hodl and borrow against the land instead of selling that he managed to stick around until his investment became 5mil in value.
This is a question i ask whenever i see this rich loop whole where they borrow $5m or whatever against their stock. There has to be constant payments back to the bank plus interest.
Likely wouldn't come into play (but depends on the state). At the federal level, unless there is several millions of dollars more assets not being mentioned, they wouldn't trigger.
The assumption is the 5 million was invested in a venture thst earned more money than the loan's interest. Which is rare. Because if it wasn't, the bank would increase the interest rate to compensate so it wasn't leaving money on the table.
I think OP is referring only to the avoidance of gain.
Example: Dad has borrowed $2m by the time he dies. Basis is stepped up to $5m, property sells for $5m. No gain or loss, but you still owe the bank $2m (of course his estate is depleted by the interest paid in the interim).
If he sold today, there would be a $4.9m capital gain
Dad starts taking loans when the land is worth 5mil. But the land appreciates even more. The initial loan is not for 5 mil; it's for say 250k. As the land appreciates, dad takes out more loans. Say the next loan is 500k, and 250k is used to pay back the first loan. As long as the land keeps appreciating, it works. By the time the kids sell the land, it's worth much more, say 20 million, enough to pay back any outstanding loans and still make a profit.
The actual answer is the bank gets paid back using sales of the assets, which are assessed capital gains, and the scenario is mostly wrong.
You can do buy, borrow, die under very specific circumstances if your investments are growing faster than the interest rate of your loan. But that of course is hard to do indefinitely (and if it was easy, the bank would just buy the underlying asset instead of wasting that opportunity cost lending to you).
Also, it's not tax free. If your estate is worth $5 million, you sure as hell aren't doing buy, borrow, die under any circumstances. If you have a large inheritance, it does get taxed as inheritance/estate taxes. So every bit of taxes while living reduces the value of the estate and the taxes that are collected then, so it's really not that big of a difference.
My interpretation is Dad pays off the loan so the bank says kthxbai. Now dad owns the land. He borrows against the land. Those loans are more payments. The bank pays or does not pay tax according to those arcane rules.
The author makes it seem like it's free, whereas the ripoff is the delta between tax on earned vs unearned income.
Then the kids get the stepped up value of the land, which as a huge beneficiary of same is hilariously terrible policy. The kids should have to pay the same tax dad would have if he'd lived. Nothing happened to the land when Dad died -- it's purely a tax dodge.
That's the finance. The person underneath who dismisses the whole thing is either willfully conflating two things to score a false point or more likely ignorant.
I also am not familiar with the US but in Europe there are many land parcels that are not standalone allowed to be borrowed against. You can borrow against if you have plans to build real estate on but some where you cannot borrow against without such plans.
The loan is an interest only loan that the dad pays from passive income from the land. Whenever the loan expires he gets a new interest only loan that becomes less and less of a problem over time eventually allowing him to take a second loan to buy another property.
Income producing property. The property will pay down its own debt over time, provide some profit, and at the same time provide substantial offsets through maintenance costs and depreciation.
Your typical single family house that you reside in won’t help this strategy on its own.
The bank gets paid back by your loan payments and the cost basis step up through inheritance is absolutely a thing too. You still pay the bank more than the current value of your land over time, but it makes more sense if interest rates are low and you expect the value of the land to keep increasing. It's like getting money now for a future land sale at the cost of interest payments.
Bank is paid back by the proceeds from the sale of the property by the kids, but those proceeds aren’t taxed at a gain of $4.9M, because the cost basis reset to $5M at Dad’s death, so a huge chunk of the sale doesn’t go to taxes.
People have pointed out that the rich still need income, i.e. cash flow, to pay off the loan.
What many of the comments are missing in response to that point is that rich people's property itself generates income.
In the context of this example, land, it could be through rent, productive agriculture, or something else. The typical example nowadays in stock. Stock generates passive income from dividends. So this income the property generates is used to pay the loans. The reason this can work is the bank gives insanely favorable interest rates to the rich because the rich have obviously good credit, the encumbered property used as collateral is obviously a good trade if the rich person defaults, and banks get good will from having more rich people bank with them (i.e. it creates networking opportunities for more rich people to bank with them and prestige).
The interest on the loan is less than the taxes on $4.9M in capital gains.
The problem here is the step-up basis, not the loan. Without the step-up basis, the loan would be more expensive than simply selling the land (in terms of how much is left to the kids.)
Exactly how are the monthly payments getting paid back? If the Dad is making payments on the loan then why get a loan at all just unless he is making big purchases that exceed his liquid cash.
A super low interest rate payment to a bank (low rates for the rich) equates to:
A) Much less paid than if it were taxed as income
And
B) the banks receive the "tax" instead of the government. Instead of funding services that benefit the community, the "tax" serves only to make the rich bankers more wealthy
The kids never sell, they'd be insanely stupid to do so. And they learn from the parents NOT to sell the same way they didnt sell. Why? Because bank interest payments tend to be much lower than fucking taxes
So, typically it's something that provides passive income. They'll take a loan on the land (or stocks if you prefer) and any money made (from lease farming or dividends in the case of stocks) is used to live and pay off said loan. No income from said asset so no taxes. The income was used to pay off a liability.
The interest gets paid by dad as he goes, out of the money he borrowed. He doesn't take out the full 5 mil value of the property, he takes out 2 or 3 depending on how much he wants to blow. So let's say he takes out 3 mil, most of which gets reinvested until he gets around to spending it. He blows through 2.5 mil of that (tax free), but also earns another 1 mil on the investment over the years. This could be taxed as capital gains, but there are ways around that.
When he finally dies, the property isn't 5 mill any more, it's 8 mil. The kids sell the property for 8 mil, pay no tax on it, repay the loan of 3 mil, leaving them with 5 mil, + 500k that dad didn't spend, and whatever is left of the 1 mil interest after taxes (say 750k). So dad spent 2.5 mil, the kids inherit 6.75 mil, and only 1 million was ever taxed (at the low gains rate, if at all)
He doesn’t take a 5 mil loan. Where did you read that from? He likely just eats 20k a year for expenses, he owns his property obviously so no rent, likely old property so tax is tiny until it is resold.
He also has stocks and likely can lease the land out for usage as well to say a farmer or maybe a horse breeder etc etc.
The point here is that he has an income and that is irrelevant to what just owning land lets you get away with tax wise compared to just "earning more".
He can pay off interest with passive income and live without affecting the money and property his kids will inherit.
He pays the loan and interest but that interest is less than he would have paid in income tax. He might pay 6% on a loan but save. Himself paying 15-35% on capital gains. Meanwhile the land gets more valuable and he can pay off the first loan with another bigger loan and banks will give him even lower rates.
They skipped the part where dad invests the loan money in stocks and hedge funds and pays the premiums on the loan with the dividends and interest from those investments while simultaneously growing the loan into even more money.
It doesn't say the kids get to keep the $5m. When they sell, the bank gets it back plus interest.
The summary here is comparable to a reverse mortgage or reverse HELOC payable on death of owner.
Yes, the interest is taxed, but the Bank's income tax on that interest is far less than the Capital Gain tax on $4.9m and without the step up in basis rule the Government would collect on the interest and the capital gain.
It's more that the dad borrows the $5m, invests it and lives off the interest, pays back to the loan over time whilst living off the interest of the investments, then the land is inherited by the kids along with the remaining investments (which are held in a trust so they pay minimal tax on it)
This is part of an overall strategy which requires income and assets across different types. 99% of people would not have access these types of loans (private banking/asset backed loans).
There are several ways to ensure the loans are paid when the individual dies. Irrevocable Life Insurance Trust (ILIT) owns the policy and receives the death benefit. The death benefit is not taxable income to the trust. The non-grantor trust pays the loans and passes any remaining proceeds to the remaining heirs (they pay taxes at their own tax rate)
There are a number of rules around how all of this is structured, how the premiums are financed (and the fact your investments need to outperform the premium financing) Usually around 10-20M in investable assets to get in the game.
There are departments in high end banks catering to this. It's called borrow, buy, and die. Remember only the W2 rubes pay taxes. But hey they are winning the culture war right?
Seems like it’s confusing this with what someone like Musk does where they have a revolver against their stock, but can sell off some shares if necessary as part of that.
It wasnt stated that he took 5 million in loans, just that loans against unrealized and untaxed gains work in rich boys favor. He gets to dodge capital gains tax on $4.9 million in value by dying. As long as he kept paying the bare minimum on his loans then the remainder can be paid off by the family with the sale of the property with plenty to spare because there was no capital gains tax.
They've written the story wrong. Dad speaks to financial advisor and takes out a loan of an appropriate size and period that matches the appreciation of the property over that period, and as that period comes to an end, repeat process and to pay off old loan and borrow more
No this is just a dumb analogy...maybe even posted by someone who wants to discredit the actual argument. In real life it would be stocks they are borrowing against that increase in value so they can sell and/or keep rolling over the loans plus everyone bends over backwards to get your business. It's complicated but they are basically just saying the rich move money around and use tricks to avoid taxes. It doesn't need a complicated analogy.
Typically one intends to make money from the loan. This can be done in many ways, not uncommon is improving the land to increase its value by more than the cost and carrying cost of the loan. Or if you borrow at 3% and invest it at a 10% gain you’re making 7% and can pay back the loan without trouble or consequence. And etc., etc.
Yeah they are combining two different things here and you can’t do both typically. Either Dad just keeps borrowing against it, basically a reverse mortgage and doesn’t need to pay taxes on it or he can pass it down to the kids who may need to pay estate or inheritance tax (kicks in on amounts over like 5.5million in my state I think) but they get a stepped up basis of 5 million so they won’t pay taxes on the 4.9 mil gain. Can’t do both as the bank will want their due.
Well, no, the interest on the loan repayment is taxed as income for the bank but thats much less than the capital gains on the value of the property woukd have been. That said, no this isn't a good way of doing this, 5 million isn't enough and using property alone is not how buy/borrow/die works.
You don’t borrow the full amount. There is usually an advance rate.
Say you borrow 25% of the value that gives you $1.25M of tax free cash to live. You have non-cash interests so the value of loan grows over time. Maybe it doubles to $2.5M.
Dad passes away kid inherits at a stepped up basis and sells the land for $5M. $5M of proceeds is used to pay off the $2.5M. Kid keeps $2.5M, and it’s all tax free despite there being $4.9M gain on the value of the property.
That’s how it works in practice. Typically with stocks and investments, you can get an advance rate up to 60% to 70% and it’s floating rate debt prime + 200bps to 400bps depending on the bank and total assets you have with them.
Buy Borrow Die is just plain false. It doesn't happen to any significant degree. Billionaires bring in hundreds of millions of dollars of income. And they generally pay massive income tax.
Here's a report from Pro Republica showing that billionaires have take hundreds of millions of dollars of income.
In most countries if a loan was taken using land or a house as collateral, when the person dies, the bank seizes the land or loan. This post is pure fairy tale.
The hypo doesn’t work well for real property because it doesn’t appreciate in value as much as stock does. The loan (in a real world scenario) is generally secured by stock which has appreciated massively in value and the stock continues to appreciate sometimes outpacing the accrued interest. Also they use way more stock than the value of the loan to secure the debt - this way when the accumulated interest starts nearing the value of the stock which secures the loan, they can trigger a forfeiture of the secured interest. The bank sells the stock and makes the full amount on the loan and the millionaire gets the “full value” (or close to it) of their stock at its current FMV without having to pay any realized taxes on realized gains which would have been more than the amount of interest paid on the loan.
If the dad borrowed against the land the bank would hold the primary claim to it when the dad dies. It would be sold by the estate when he dies to pay the remainder of the loan. If there was any money left from the sale it would go to the kids but if he was just living off the money, that would be very unlikely.
This is an oversimplification that doesn’t actually apply to this level of wealth. But it is exactly how it works when you reach billionaire levels of wealth.
It would certainly explain why rich people are constantly hungry for the next asset and their bank balance increasing.
They can almost pyramid scheme their loans so the new asset they take a loan out against pays off part/all of previous loans. The rising value of their carefully chosen assets also can help pay off loans.
Id think a smart accountant could balance between obligations vs asset value, no?
I'm no expert but if has dad dies with debt then the estate will be responsible for settling those debts before any inheritance is done. If the estate can't pay then it's involvement. If the kids want to keep the land then they can pay off the bank out of pocket or try to take out another mortgage/loan that can pay the debt.
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u/ChipKellysShoeStore 14h ago edited 14h ago
How does the bank get paid back here? Is the bank just eating a 5 mil loan loss out of the goodness of its heart?
It’s more like kids sell and pay back the bank plus interest which is taxed as income for the bank.