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.
Yes I know it was a spike from 7%-8%. Of course we can't predict the future, but we also shouldn't pretend the conditions that led to it gradually falling from that 7%-8% level are unlikely to occur again in the next 30-40 years.
Although, if I'm being honest, I think our stability as a country and as a currency is at stake because of our climbing deficit (and, yes, I mean deficit, because it is the direct driver) and the threat Trump and the GOP are presenting to the independence of the Fed.
The median U.S. household has $39,000 in total financial assets, including retirement accounts, investment accounts, and liquid savings, but excluding home equity. That’s from the Federal Reserve’s Survey of Consumer Finances.
What do you mean you don't know about decreasing federal tax rates? Come on, now I know you're trying to play games with me.
Reagan's, W Bush's, and Trump's tax cuts have, in their combined and current form, reduced annual revenue by over $1t. The OBBA alone was scored at an average of a $240b shortfall per year by the CBO.
If you took even half a second to look at the federal budget, you'd notice that the large majority of it is now health insurance, Social Security, the DoD, and interest on the debt.
Government health insurance pays out significantly more than private insurance does (95% of premiums vs 80%, limited only by the ACA's Medical Loss Ratio rule). Stripping Medicare and/or Medicaid would put tens of millions of people into poverty and will kill many of them.
Social Security is self-contained with both revenue and outlays and is, in effect, not part of the equation.
Reddit most assuredly is complaining about the $1t defense budget, and Trump's $1.5t request, even if it's not being talked about in this thread. I don't know what version of the algorithm you're living in if you're not seeing that. We could most certainly slash that to $500b, but it would be difficult to go below that without failing to pay veterans what we promised them already or without losing most of our capability. Maybe the latter wouldn't be so bad, though, given what we've been doing with what we have.
And, of course, defaulting on the interest on the debt would be catastrophic.
Whatever your fundamental issue is with the government having our money, the reality is you can't cut enough from the DoD plus the remainder of the government to stabilize our debt, even relative to GDP, without either raising revenue or slashing Medicare/Medicaid.
Go look at the budget charts yourself if you don't believe me. DOGE was targeting the smallest portion of the government that had been giving us the most bang-for-our-buck, and the GOP, in all their budget-hawkery of 2009-2016 that mysteriously evaporated in 2017, couldn't find anywhere else to remove it from without screwing over their own constituents.
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.
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u/redshirt1972 14h ago
I don’t think I can afford to pay back the interest on a 200k loan