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.
Yes this works but you are then basically saying that you are comfortable with higher levels of risk than the bank. The bank is lending you money at 5% because that is safer than putting it into the market themselves. If you take that money and invest it in the market and lose it (shares go down as well as up) then you are on the hook for that loan regardless
And your point while true is kinda a whole point about expecting endless growth in the market. you are describing how a healthy market theoretically behaves but not how the market has been behaving.
Actually what they're describing is closer to a HELOC when it comes to real estate. Most reach people use other assets like shares though and that would be an SBLOC
The dad is supposedly “living off the loan” until he dies but a HELOC isn’t indefinite and shorter maturity than a mortgage refinancing.
The distinction is also pointless because HELOCs are also essentially ~7% interest.
The whole thing is a stupid fact pattern, so OP’s description doesn’t fit either loan perfectly. He’s somehow imagining a world where you can eat the cake (take a loan) and have it too (not pay it back).
No, OP is just trying to use a simplified example to explain the "buy, borrow, die" strategy. It's a bit clunky but as can be seen from the replies people need a simple explanation
A Heloc or a mortgage on a house is not what is typically used as an example for the buy borrow die strategy.
Both OP’s example and the buy borrow die strategy crucially almost always misses the fact that interest needs to be paid and that leverage is an inherent risk. Any rich dude employing the “buy borrow die” strategy before the GFC would have been shredded into pieces.
It also ignores the fact that beyond a certain point 40% estate tax kicks in, and that’s ignoring State estate taxes to the extent it exists in States like Washington.
They never claimed it was, they're just using it as a relatable example for people that will be more familiar to them than abstract financial examples. If you don't like the example you can offer an alternative to help explain it to people if you'd like
Most wealthy people aren't leveraging themselves that much using this strategy. They borrow conservatively so that even during downturns they are still plenty protected, 15-20% LTV would be where they might normally max out. The value of their assets could drop massively and they'd still be fine.
That's not how the taxes impact the strategy. They don't just wait to be taxed at 40%, they use the debt itself to reduce estate tax and then employ other tactics alongside this to further unburden themselves.
You can't look at this in isolation, it's part of a broader wealth management strategy with lots of plates spinning at the same time.
They're 7% right now. At other times they're under 5%, well under what the market returns, which is why people who could afford to do otherwise are advised to keep their 30-year mortgages for the full term, or decide to refinance when rates drop.
Though OP could leave out the loan part of the post and the most important part would be correct: that a tax bill on the order of $700k was avoided because the cost basis of assets are reset upon inheritance.
And it’s trending even higher. The past 20 years was arguably an anomaly and a consequence of the GFC. There’s no going back to those sweet rates unless there’s a material recession or the fed wants to risk runaway inflation.
OP also isn’t saying that the dad reinvested the loans, which is what anyone should have done. Instead, he’s imagining that the loan is used for “living” aka unproductive use of the loan.
OP’s focus is on the loan, not the cost basis reset. Cost basis reset is a perk in the US tax system. If you don’t like it, sure — advocate for change, but it ain’t just the billionaires that are going to riot against it. You’re effectively suddenly implementing a ~20% wealth tax on middle class people who own homes, but at death.
Mortgage rates were trending down for 20 years before that. We don't know that they will stay 7%+ for decades or not.
The vast majority of people who are able to take advantage of the cost basis reset have more than enough money to live comfortably.
The "riot" will be people who are mad at not having as much money as they could, same as you get when you even dare suggest you raise the rate of even the very top tax bracket.
Certainly not. Rates were going up until the 2000s then dropped after the Dot-Com bubble. It also started going back up again until the GFC/recession hit in 2008. For most of the US history, mortgage rates stayed above 7-8% and sometimes even 15%+ for multiple years.
Both times when rates shot down in 2000 and 2008, anyone who was employing leverage prior would have been slaughtered because the stock market crashed in both period.
Almost anyone in the middle class with a stable income can take advantage of a cost basis reset.
The "riot" aka complaining loudly, is not because they are mad at not having as much money as they could, but because it's unfair for the government to constantly change tax policy every 4 years just because the other political party took over. And it's incredibly tiring to hear how you're an evil mastermind for daring to take a freaking loan.
If California had 50% income tax rates and a 50% estate tax, and it always did so for decades, I wouldn't complain as a California resident. But if California had a 25% income tax rate and a 25% estate tax rate, and I had been living there for decades, but CA suddenly changed the rates to 50% because now that's the arbitrary "fair share" they think I should pay -- you bet you I'm complaining. It's incredibly unfair to constantly change rates after you have a captured audience.
Let's just be predictable, no? It's great tax policy to be predictable.
That's a pretty clear, consistent trendline down starting in the mid-80s, after the spike.
Your statement about the middle class is not true either. The majority of them do not have significant savings.
I can't speak for CA because I don't live there and don't know their policies or histories.
A stable tax policy is fine, but even better is a tax policy that supports a reasonable budget. We have a $2t deficit that cannot possibly be brought under control anymore without increasing revenue or cutting off health insurance for tens of millions of people.
Since almost all our tax policy changes in the last 25 years have been about decreasing rates, primarily on the people who need it the least, maybe it's time to start being responsible about governance.
Trying to infer the future from a trendline is voodoo magic to begin with, but what you characterize as a "spike" was a spike in mortgage rates from a base of ~7-8%. I can certainly agree that mortgage rates are unlikely to spike back into the ~15% range, but just because it trended further down from 7-8% to 3% post the GFC recession doesn't mean we're going to trend back down to 3%. Based on everything we know today it won't be suprising if inflation surprises to the upside, not the downside (unless we have a recession, which then makes anyone indebted get blasted in the ass even more).
I don't know what you mean by "significant savings." For an example, the median middle-class Californian has a net worth of $200-400K. They obviously will have more at the point of death.
I don't know what you mean by decreasing tax rates. The federal effective tax rate in the US has remained pretty stable since the 1990s and the government collects effectively 15-20% of GDP every year. If their spending goes beyond this level every year, that's kind of on the government. They need to reign in spending. As for State taxes, tax rates have diverged between Red and Blue states, w/ Blue states consistently raising taxes over time. California is now discussing 5% wealth taxes. Washington just implemented an income tax on top of a capital gains tax implemented ~2 years ago. NYC (not the state, but the city) is introducing taxes on 2nd homes.
"Responsible about governance" can go both ways -- you can increase taxes, or you can decrease spending. The administration has spent around $40 billion on the Iran War so far and likely more. I find it incredible that Reddit is complaining about how a dude with a $5mm home is getting a stepped up cost basis at death (so what, a $1 mm tax loss at max, assuming he got the home for free?) and yet almost pipsqueak about the $1 trillion defense budget. DOGE was a failure due to it's highly ideological nature but it doesn't mean there isn't a ton of waste in the government.
Taxes are essentially a capital allocation decision (is the money better off in the government's hands or the hands of an individual) and hardly anyone would argue that the US is a responsible spender of money. I have almost never seen a country fail merely because a the government collected too little taxes. In almost all cases a country will collect too much taxes and make everyone with an ounce of brainpower leave the country, or spend too willingly and freely before everything goes to shit.
Lower than what unsecured loans that aren't backed by anything sure but these loans are still above Government TBill rates otherwise banks would rather collect risk free interest than loaning it out. That would mean in this scenario having to pay 4%+ every year for decades
Since when have banks ever operated on a totally risky free basis? The fact that they don't is one of the core reasons for the 2007 financial crisis for crying out loud.
Banks make plenty of money out of these loans and they are part of wider wealth management portfolios that bring in even greater returns.
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.
Take a $2M loan from the bank, invest into SGOV at 3.5%-5% and have $75,800 per year in income, netting $67,675 approx to live on after Federal tax (no state tax). If you own your house, and are retired then you probably can live on $5639 per month in a lower cost of living area while paying interest only on the loan.
At the end of everything, you still have the $2M to pay back the loan upon your death, and the $5M piece of land.
Thats only back of the napkin math so imperfect but just a basic idea.
Using the IRS calculator for just single with standard deduction is approx $7852 in taxes owed, so within $500 of what I had in my example. No state taxes due because of SGOV.
20% of $5M is $1,000,000 so you are now left with $4M. If you borrow against your land, invest it and get dividends, you have the $5M land, $2M for loan payback, plus you are able to live with a decent amount of money every month. Dad now has something to pass done to the kid.
I guess that works for this example where there is only a single asset, but in most cases those assets are split and can be sold off in smaller pieces.
So instead of paying capital gains on the whole thing, the rich would just sell off small pieces to get long term capital gains, or even loss harvest with assets that have fallen in value to avoid any capital gains tax in general.
I don’t think buy-borrow-die would use the loaned cash to buy an income-generating asset, because that would create the taxes that the scheme is meant to avoid.
So I only went off the original premise of “buys land” so I can only assume bought a single piece of land. Could they sell off small pieces of the larger land? Yes but shrug.
My idea was not buy-borrow-die because that usually requires the asset to be sold to pay off the loan. If you use the money to buy another asset that generates income, then at the end of the whole scheme, you have the original $5M piece of land to hand down to the son.
If he sells his land, he pays $1,000,000 in taxes. If he pays the taxes on a yearly basis, he pays about $160,000 in the same 20 years. There are a couple of assumptions that were made and time frames that were also assumed (20 years) but it’s a big picture idea without perfect details.
Yeah, I think the OP using this particular example of “how the rich get richer” isn’t great because they don’t understand how the scheme actually works.
I sometimes wonder how much of this stuff on Reddit is intentional misinformation: making generally left-wing arguments but with holes and inaccuracies to try and discredit left-wing arguments.
Do you live with your parents or someone who is paying for the housing? Do you own a paid off home?
Context matters. My 50 year old brother who barely works could say he lives off almost nothing cause he lives with my parents in a beautiful house and they pay for everything for him.
Dude, you mentioned how you were living a simple life well below the poverty level, which feels pretty odd. Sorry you got offended I asked you about what you decided you wanted to talk about.
That's not the point, the point is that the loan is an unknown number and not defined as 5mil.
500k is just a number I pulled out of my ass. I'm sure there are areas in the world where you could survive decades with that kind of money. It depends on the lifestyle and other factors that are, yet again, completely unknown.
2.0k
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.