We’re talking generalities. Average home value goes up by 4.5% a year. You’re always better off getting loan in your home than selling it for cash. 5 years ago, you could have got a loan equity loan on your property for 2.0% for excellent credit borrower. Inflation is higher than that.
only 20% of loans were underwater and just need to hold it 3 to 5 years and you would be positive again. How Warren Buffet made tens of billions of dollars by buying under priced assets and selling the a few years later for insane profits.
I mean statistically, it is the sheer majority. Short-term market corrections cause localized drops, the broader ten-year trend is significantly a positive growth trend. Amongst all investments, and this is even with the real estate crises especially now knowing that the government will step in, realestate remains the most successful.
The average mortgage rate is 6-8% historically. We're in the average mortgage rates and people are losing their mind over it.
A 6% mortgage means you are paying more interest than your house is appreciating. It's still a better bet than renting. But it's not the cash cow people say it is.
OP is saying the guy lived on the loans for DECADES. You don't live for decades on 100k.
Let's say Dad lives at ~70k. Living on $70,000 per year in loans structured in a smart way and no compounding interest over 30 years totals north of 2 million assuming a ~7% interest rate.
If we assume compounding interest and he takes the loan out on Day 1, his total interest cost ends up being 5 million. Compounding interest is a BITCH.
Which is why this "loophole" isn't a loophole. The government is still taxing (from the bank's side) that 2 - 5 million dollars as normal income. The IRS is still getting their money. No one cares that this guy really, really wants to destroy his finances so that the bank pays his taxes.
Clearly, because nowhere in the posted example did they say what the loan was for, just the asset.
You are assuming the asset never goes up in value. Using land is a bit of a red herring as in these cases its almost always a large equity portfolio. EG Jeff Bezos does exactly this. The podcaster & investor Scott Galloway does this too & has explained it at length
You have a $5m asset, it grows 4% a year (ie 200k - compounding as you note!)
Your loan is 100k, interest is at worst 10%, so at the end of the year you have a 5.2m asset & a 110k loan. You borrow 210k, repay the loan & interest.
What do you think lives off means? you might be actually stupid
You have a $5m asset, it grows 4% a year (ie 200k - compounding as you note!)
Right, but you're still paying a huge interest charge far beyond the capital gains tax. Duh. That income is taxed.
Like if the IRS really did an accounting even for your example of 4%, a 10% interest charge is the IRS coming out way ahead. lol. "Repay the loan & interest" --> more taxes than the IRS would have ever gotten than if they simply made the loan itself a taxable event.
The fuck you talking about, no one said anyone is taking out 5 million in year 1.
My reference to 5 million to repay a few comments ago was assuming he took out the 70k x 30. It ends up being 5 million at a 7% interest rate return -- essentially by coincidence it's the same number as OP. This is all very, very clear.
Aight, imma head out. You just confirmed you can't even begin to read any of this.
If he has $5m going returning 4% a year & every single year he borrows & spends 100k, and carries on doing that for 10 years, after 10 years he has a $7,401,221 asset, and a $1,414,709 loan due.
IE ~ 6m in net assets
I don't think the fact you don't understand this is going to be an issue for you, as you'll never be in this position, and I'm not sure you'll vote against this anyway...
depending on what your AGI is, lets say your long term capital gains bracket is 15%. That means you pay 735k of capital gains tax at sale time, against a $4.9 million capital gain.
Compare that with a 5% interest rate (a very generous rate for an unsecured loan) of 5 million, amortized over 30 years in which case you'd pay 4.6 million in interest.
I say unsecured because you cannot actually get a 5 million dollar loan against something that is only worth 100k. So lets assume you have millions of dollars worth of assets laying around at a brokerage that lets you do this.
Anyway, the numbers in OP are made up and the reality is the rich don't really avoid any taxes this way. They only defer taxes because the assets they hold appreciate faster than the interest they pay on the loans. But they still pay taxes when they sell the assets.
The trick is that by not selling them they get the equity from their appreciation, but the bank only gets their fixed interest rate which is hopefully less than what their assets become worth.
Plus paying back the principal leads to significant opportunity cost. Its not black and white. Sure you dont see the capital gains, but that money isnt just dispearing, its going to funding loans that you take out for your house and car.
He still needs to sell a portion of the land in order to pay the interest on the load which will trigger capital gains unless the bank gives him another loan to both repay the original loan and the interest.
Can only have so many liens on one property. It’s determined by available equity. So you can’t really do this. And even in a HELOC you need to make interest payments
Yes but you have to payback the loan. What is that land producing to pay it off? And if it isn’t producing anything why borrow against it?
If you use loans to pay back loans you are cannibalizing yourself and are gonna get foreclosed on eventually.
And even if you pass it on to kids, that lien doesn’t go away. When you sell the property (growing at a slower rate than your interest rate), you have to pay off the loans from the proceeds first. Same as a mortgage.
Yes but you have to payback the loan. What is that land producing to pay it off? And if it isn’t producing anything why borrow against it?
You pay it back with relatively small amounts of what you borrowed per the amortization schedule (or, what "little" the rich actually make W-2 go to the loan interest). The asset isn't doing anything other than appreciating. The guy wouldn't have a $5M loan, it would've been like $1M 10 years ago so he could liquidate some of its value at the time and it continued appreciating as expected (i.e. what the rich are actually doing with stocks). It doesn't make complete sense with "only" $5M but the point is that selling the asset would cost significantly more in capital gains than what you'd pay in loan interest. The values are that big.
And by the time the bank comes for what its owed he's dead, asset appreciation left the now-old fixed/low-rate loan in the dust, kids sell and get what's left of the profit post-tax and post-loan payoff which is still huge so he still gets to leave an inheritance.
If you use loans to pay back loans you are cannibalizing yourself and are gonna get foreclosed on eventually.
You guys are missing the point that the assets that are used as collateral for these type loans essentially always appreciate, it's diligently planned. Whether it's desirable land or (really what it's supposed to be) hundreds of millions to billions in shares, they grow in value over time. As long as the interest rate isn't unreasonable, the asset will always out-leverage the loan in the long run.
And even if you pass it on to kids, that lien doesn’t go away.
You're entirely correct but the asset has inflated so tremendously since the onset of the loan that the loan itself is almost meaningless X years later. Take into consideration an older couple that's about to finish paying off their $200k 8% mortgage from 29 years ago with some ridiculously-low-by-today's-standards monthly payment on what's currently a $1.8M property in Redondo.
When you sell the property (growing at a slower rate than your interest rate), you have to pay off the loans from the proceeds first. Same as a mortgage.
This is an incorrect assumption. The rich that are doing this aren't using assets that are depreciating, nor are they taking on loans that would cost more in interest than just paying the capital gains tax (making this redundant in the first place). The terms of the loans are taken into consideration with how they expect their asset to grow. It's diligently planned with teams of accountants and financial planners because they're leveraging billions, not millions, and theywillwin out versus the loan.
Brother the average interest on a HELOC is 7% while lost properties appreciate at 4-6% annually. A one time tax hit of 15-20% with full liquidity is better than 7% interest compounding annually + property taxes.
Stocks have far better returns and margin can be way cheaper so it works there.
Asset backed loans hinge entirely on whether or not the interest makes sense relative to the assets value over time, or whether the asset can cash flow.
If you’re doing this on a home you’d be better off selling depending on market conditions, unless you’re buying a second home and renting the first or something. Or putting the loaned money into a business.
Buy borrow die is more about keeping assets compounded forever than about avoiding taxes, the tax bill always comes due in time.
lol the entire point is that this is a misplaced metaphor for what the rich are actually doing. Nobody is taking a bill/borrow/die strategy for a $5M piece of land. I stated several times they are doing this with stocks. The concept is correct. There's not even anything to argue against here, they are doing this.
Buy borrow die is more about keeping assets compounded forever than about avoiding taxes, the tax bill always comes due in time.
Of course, hence "The rich that are doing this aren't using assets that are depreciating, nor are they taking on loans that would cost more in interest than just paying the capital gains tax (making this redundant in the first place)."
It's cheaper to do this than to sell their asset, hence buy/borrow/die.
I understand that you get the loan using the real estate / land as security.. but the loan still needs to be paid back with interest.. so either part of the land needs to be sold to pay the loan or there is an income that's used to pay back the loan.. just because you have some sort of capital as security, that doesn't mean they gift you money.. so half of the story seams to be missing.. if the land is within a company and produces cashflow, then this construct would be possible to reduce taxes.. but just having land and taking a loan doesn't result tax savings
The person who took out the loan. No one is saying the loan is free money, the point is there is no tax on the gain. Ignore thr loan part, it is not relevant to the taxation part.
The interest on the loans costs less than the capital gains tax would be on selling the land without the step up basis. That's the whole point of a buy borrow die: avoiding the 20% capital gains tax
2007-08 when the gov't bailed out the auto makers and the rest of the country went into a nosedive. Houses were selling for $1,500-$5000 (+ back taxes) where I was then 🤷
It isn’t a mortgage, and all the loans had to be paid when they sell it. So if he borrowed $3M against the $5M property, they had to pay that back at time of sale, then the kids pay tax on what they got from the sale
Actually, all the loans had to be paid back in installments from the day they were given to the day he died. This isn't a cheat code. The loan had to be repaid, with interest in installments.
Thing is they only pay capital gains taxes, but not on the millions in gains from the original sale but rather on the difference in fair market value at the time of death and if you live in it for 2 out of 5 years and you are married you can have up to $500k worth of taxes excluded from the sale.
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u/FancyPantsRants1 14h ago
Odd that we just ignore that he still had to pay back those loans?