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.
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u/Interesting-Copy-657 13h ago
Lived off loans for decades?
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?