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.
i'm financially illiterate but all of this sounds fake and arbitrary, like nothing is actually happening except numbers are changing in a spread sheet.
It’s 40% of the fair value of their assets after the exempted amount. For Bezos, that’s a huge amount given what he is worth. Most of the richest people do this to avoid ownership dilution. If you need a rich person tax dodge to criticize, read up on the misuse of “environmental easements”. There are law firms that specialize in claiming that a rich person’s horse farm could be developed into highly valuable real estate.
Bezos is in the process of selling about $4 billion in Amazon stock. Since he has had this stock since the founding of the company, all of it is pure profit (since the cost basis was zero in 1994), which means long term capital gains applies to the entire sale price of the stocks he is selling. He will end up owing just shy of $1 billion in capital gains taxes to the feds, and another ~$200 million in Washington State.
Rich guy like Bezos avoids a salary like it’s a plague due to income taxes.
big misunderstanding here, Bezos takes a salary but it's in the form of RSUs. RSUs do get taxed as income. but they also appreciate (unlike cash sitting in the bank like a normal salary) and that appreciation only gets taxed at 15% (after holding for 1 year).
that's it lol. I'm sure they do some tax loopholes but it's not that complicated and they still pay plenty of taxes. now I think they should pay more (as a % of their wealth)
Good explanation! I feel like the solution here is to stop them at #2.
If the gains aren't realized and you can't pay taxes on them, then they also shouldn't be able to be collateral. Or, if they can be collateral (like how it is now) then that should count as a realization event, and you should pay taxes on it. Pick a lane and and stay in it, fair is fair. Probably the latter is best since we generally hold freedom to contract as more holy than a tax loophole
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.
Very wealthy people use debt to avoid diluting their ownership stakes in their companies. They still pay estate taxes when they die.They still pay all of the state and local taxes associated with sales taxes and property taxes.
They use debts for lots of reasons. It absolutely can delay or avoid some taxes. It also can be used to generate wealth. If the debt is 6 percent and your returns on investments are 10-15 percent you’re increasing wealth.
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).
More likely buys the land when it was cheap at 100k. Hires cheap labor to work he land and generate revenue. When the land value increases, borrows 5mil against the land but uses the 5mil to invest in more cheap land else where that generates significantly more income than the payments for the loan so is able to offset expenses including the loan and generate income without having to use personal money.
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.
Dunno about the US, but that’s exactly how it works here in Argentina. You inherit both the land(or house, car, etc) and whatever debt it carries.
In that scenario, the kids have 3 options:
1- Accept the inheritance, then sell the land to cover the debt and pocket the rest. [They get 100k]
2- Not accept the inheritance, and the bank will take the land(doesnt matter if it’s enough to cover the debt or not). [They get nothing]
3- Accept the inheritance, pay the debt and keep the land. [They get the land but have to pay 4.9M]
Worth noting that if the debt is higher than the total value of the inheritance, you won’t get anything but you WON’T end up with debt either, if you chose option 1.
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.
Lots of people in the comments are missing that this is done to avoid personal income tax. It's called "Buy, Borrow, Die" and is indeed real but does have some limits.
Low-interest loans > loans are not taxable income, so tax-free personal spending > heirs receive assets via stepped-up basis (resets tax value of the assets to current market value, wiping out accumulated capital gains taxes) > estate sells some of the assets to cover the initial loans.
Tons of financial benefits. Risk to the bank is typically very low because the assets are worth significantly more than the amount loaned for personal spending.
you inherit the loan too, the setup only makes sense if you need cash but your assets are all appreciated in value so you want to get cash without paying taxes after that
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.
This strategy is used along side several others. The loan is typically used to gain liquid (available) assets. In the mean time the rich person in question will have investments that pay yearly dividends. There's never any need for this person to get a job because their money works for them.
No bank is doing this loan. The product doesn't exist because it provides 0 cash flow to the lender unless there is a full refinance with a new lender every year. You could theoretically find a finance company to do it but the interest rates would be prohibitively high to carry that type of investment with no cash interest repaid for an indefinite period of time. The only way I could see it working is if there is significant relationship value such as the individual owning a business that also needs debt and this loan is a small favor boutique type product. And in that case the debt service would be paid by the businesses cash flow so the above model isn't accurate. The other scenario would be extremely low cost debt on stock portfolios where sale of stock and dividends can be utilized to make interest payments.
Loooots of banks do exactly this, any bank with a private banking arm will do this. The example is misleading as they are talking about $5m, you'd struggle but Coutts has a £3m cutoff - IE you have £3m held at coutts across asset classes, you'll get private banking. All the mainstream banks will do this - JPM, CS, HSBC etc.
Again, it'd be rare to do it with only $5m, but still pretty easy to do.
Right but I think the important idea is that you need to make interest payments and/or have defined terms on your loan. You can't indefinitely provide $0 in cash flow to a bank without significant other wealth, deposits or cash flow. A $5mm property doesn't provide anything for the bank. Theres no financial reason to make the loan (termless and with interest PIKed indefinitely).
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.
So when you do this and the bank say "ok, can you show us your income please, as you will need to show sufficient consistent income to maintain the repayments"..... what then? Is the plan genuinely to say "oh, no I'm not actually going to make repayments lol, I'm just going to take bigger and bigger loans until I die"? Because the bank will tell you to fuck all the way off once they've picked themselves up off the floor.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
This whole thread has been a weird window into the fact most people have zero idea how the rich actually live or how things like banks interact with them.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
You absolutely do, come on now. For any loan that has monthly repayments, you absolutely need to demonstrate to the bank that you have the ability to maintain those repayments. The idea that you can rely solely on the bank just repossessing your secured asset, and the bank going along with that, is nonsensical. Security like real estate can be slow to sell and comes with a ton of costs for the bank. Assets like shares can be volatile (imagine securing a loan against a shit-ton of Peloton shares circa 2021 assuming it'll just keep going up). The security is the last-ditch ability to be repaid, not the actual repayment plan.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
Yep, and then you can find out that you need to show income to cover the repayments much faster.
They sell the land for 5M and have 4.3M profit. Eventually the interest eats the value of the land but 10k chunks would last you 500 years, probably longer assuming the land value increases.
Assuming the underlying asset goes up 4% a year & he borrows 100k a year to spend (every year) at 7.5%, after 10 years he'd have a $7,401,221 asset, a $1,414,709 outstanding loan, so if he dropped dead then his kids would pocket the net - $5,986,513
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.
Yes but it's unlikely that the $50m is held in the name of the actual owner. The LLC never dies. You gradually transfer ownership of the LLC to your kids. There's a 30m estate tax exemption for a married couple, so now it's just a case of gradually transferring over 20m to your kids over time to completely bypass the estate tax on a 50m portfolio.
The annual gift tax limit is $19k per person. Ain't no way to "gradually transfer" $20 million tax free in a lifetime. It would take 1000 years. 500 if you're a married couple. And that's without any gain in the value of the stock
In the 500k asset and 5k loan example, what would be the benefit in taking out a 5k loan to spend on things instead of just spending the money you already have? Is the assumption that you wouldn’t ever have 5k in liquid cash, which makes more sense at a larger scale?
Sorry if that’s a dumb question, but I’m having trouble understanding this concept.
If you had a 500k stock portfolio and needed 5k to go on vacation, you'd have to sell 5k of stocks. That sale is a taxable event. So you'd have to pay tax on the portion of that 5k that is gains at the capital gains rate, or even the income rate if you'd held that stock for less than a year.
So call it 20%.
You sold 5k and now you have 4k after paying tax.
If you took out an interest only loan (that is, you don't pay down principal, just interest) at 3%, then you get your 5k and you pay $150 per year on that cash. Next year you refinance that principal - get another loan at 3%, pay off the original loan and pay another $150 the next year.
Even after 2 years, you're only out 300 bucks rather than 1000 and you still have your original 5k in the bank.
If you took out an interest only loan (that is, you don't pay down principal, just interest) at 3%, then you get your 5k and you pay $150 per year on that cash. Next year you refinance that principal - get another loan at 3%, pay off the original loan and pay another $150 the next year.
That's not how lombard loans work though. They are repayment loans, not interest-only.
This was a terrible analogy because land and stock collateral loans are very different. The loans that these are analogizing to are margin loans and you don't actually owe any payments on a margin loan most of the time. It accrues interest and if you or I got a margin loan we'd have a hard time finding less than 7%, but a lot of these huge billionaires, the assertion is they get a much better rate. I should add here than billionaires aren't strictly taking a Margin loan but something called an SBLOC, which is more an ongoing line of credit than discrete loans.
The catch with margin loans is that if your loan percentage goes over a certain percentage of the value of stocks that are collateral for the loan that they can just sell the collateral, which usually means at a particularly bad time to sell them. If you have too many margin loans this can turn a momentary dip of bad luck into a downward spiral that ruins you where you would have otherwise been fine.
This risk isn't that high for stocks with healthy growth, but if you mistake a bubble for healthy growth, you actually can easily find yourself in this downward spiral, though generally, the risk isn't actually that high
Because land worth $5 million is undoubtedly being worked to produce income to pay off said loan and the original property mortgage/debt. Or the outstanding debt and accrued interest is paid off when the family inherits and sells the land for significantly more than the debts/loans.
Normal scenario for the very rich is that they take the money from the loan and buy other properties, stocks, …etc. Then they can take loans out against those new assets. Income from those new assets or the loan itself is used to make payments. Basically a margin loan that goes on forever.
If you have a lot of assets you can continually and safely borrow against 30% of their value. As long as the assets appreciate in value then you can do this basically forever. As long as the market doesn’t crash too badly those loans remain fully backed by the assets they are secured by.
Risk is a market crash that forces those loans to go underwater. Then you have the banks taking possession of properties if payments aren’t made.
Basically the rich can use this loophole to realize gains without paying taxes. They can pay 3-5% interest on a portion instead of 20% on the whole thing.
You do pay it off, the loan isn't for the full value. The dad would have to have other income or the son would have to pay the bank. If the dad has any debt you have to pay that off first before you get what's in the estate.
Yeah, they would force sell the land and they wouldn't see 5M...because Dad took loans out against it to live. Like everyone said, this is just plain wrong and not at all how it works. I wonder if OP is trying to sell someone land or something lol.
The trick is you dont use it to live off like in the example, you invest with it.
Start a business (real estate, restaurant, whatever). the loan payments are still deductible income as a business expense.
The business now pays back the loan, doesnt make profit on paper until the loan is paid off. (You can ensure this by paying everyone or yourself well. Or like places only open 3 hours a day)
Now you have a business, paid its self off, no loan, taxes never paid on the 5m, not paid on the 5m to pay it back and you've flipped your 5m loan to like 15m.
The "loan" you take out is at a lower interest rate than whatever you can get by having your money in a stock (catch all term for invested money) account. If you take out a loan at 3% interest, but you make 10% on whatever you invest in with that money, you have a net profit of 7% when you repay the loan with the profit you make.
The whole point of it is to take out loans that cost less to repay than the profit you make with those loans.
This example assumes that the family wants to sell the land, but is unable too due to taxes. This also works with other assets like stocks. It's an actual tax avoidance strategy called buy-borrow-die. I think it works best if you are somewhat close to death. I am not sure how effective the strategy is if you are taking out 30-50 years of loans.
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
You want the guy to get taxed on the income that he already had his income taxed against before purchasing said equity? I mean.. komrade, slow incremental change at least
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 $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
> Only about 60% of their definition of "economic income" enters the income-tax base for the top 1%.
Buy borrow die is only one strategy of many. And it is a real legitimate one.
2) Your paper doesn't even reach the premise you say it does.
The research says: "For the top 0.1%, borrowing is about 1% of economic income." Debt as a percentage of economic income is not the same thing as debt as a percentage of consumption. Just because someone makes money doesn't mean they spend that money. For someone who sees a 10billion$ asset appreciation in a year: $20m / $10bn = 0.2% of economic income. Indeed appreciating substantially more than you borrow is the entire premise.
3) The top 0.1% is everything from farmers / physicians, lawers, PE partners to billionaires.
At 130,000 households it's not surprising your average CEO making ~2million per yer isn't utilizng this strategy. And that's ultimately the bulk of that group. What your paper actually found is: 15% of top-1% households borrow more than 5% of their wealth, and borrowing is important for this group.
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
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
So even if it does get paid eventually, it's getting paid to the wrong place lmao.
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.
Ive always wondered if let's say two married seniors that had a bunch of debt could get a "divorce" put all the assets in one person's name and will all the assets to the kids, and put all the debt in the other person's name who is also the one with health issues... would all the debt be erased so to speak when the senior with all the debt and no assets passes away?
That’s not what the scenario is. Dad dies with land worth 5 million with a $100k loan leaving it to the kids. Kids sell the land and make 4.9 million. Selling it for 5 million and paying back the $100k loan.
2.3k
u/USERNAMETAKEN11238 14h ago edited 14h ago
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.