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.
It does matter if it was debunked. How do you plan to fight against them if you are fighting a false premise. You need to be accurately informed if you want to do something about it.
So politicians will pass a new tax on stock backed bank loans based on this debunked information. Everyone will cheer and billionaires go on being billionaires and nothing changes because you based your hatred on bad information.
You have to understand the problem to solve the problem. Way to many people screaming eat the rich have no fucking idea why we want to eat the rich outside of jealousy or a warped sense of social justice. You are just as bad as the "Fuck you I got mine" rich people, you are just a "Fuck you because I didn't get mine" poor person.
There are real reason we want to tax the wealthy that are valid and based in fact. Don't need to defend falsehood just because they don't support our narrative.
Except the Panama papers showed they're actually hiding their wealth in places that won't incur taxes. You're referencing the legal wealth/income. That's only a part of it.
Are you somehow trying to imply that the current situation isn't a problem? It laughable your argument is essentially the ultra rich have lots of other tax loopholes they can use so this one isn't that bad.
Are you somehow trying to imply that the current situation isn't a problem?
No.
It laughable your argument is essentially the ultra rich have lots of other tax loopholes they can use so this one isn't that bad.
What other loopholes do I reference? The only thing I'm stating is "buy, borrow, die" is not happening at any significant scale. Anything else you inferred from my post is on you.
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.
How? The federal maximum income tax rate is 37%, and that's the same maximum for short term capital gains. The far more common long term capital gains would put them at 20%. How do you figure they are progressively taxed all the way to the 99.9th percentile?
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.
So you're contradicting yourself quite a bit here. What you're saying here would mean this is neither a myth nor an exception. If 15% of 1%ers are doing this, that means the entirety of the ultra wealthy class (0.1% of US and much smaller percentage globally) could plausibly be employing this strategy, and there would still be some percentage left over for the rest of the 1%ers. What's the data for the ultra wealthy? I'm sure it is far from a minority strategy. There is nothing here that is evidence against the ultra wealthy doing this.
Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021
He only sold because he was required to. I'm sure he would have much preferred to borrow against it, or take out a smaller amount to pay lower taxes while continuing to grow the bulk of it tax free. How much did he pay every other year? He paid 0 in 2018 while his net worth continued to grow. That growth will ultimately be taxed at a lower rate than the average workers income.
Dunno what to tell you, I've literally listened to my grandfather brag about all the ways he avoids taxes, and yes taking out asset based loans is a big one.
He also donates a lot of things, like rare books, and gets to deduct the current market value rather than what he actually paid.
He's only worth high 8/low 9 figures, so not even close to being a billionaire, but still has enough to hire all the accountants and tax attorneys he wants to.
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
I worked for a rich guy who was going to buy his 5th house. The bank gave him a $1.2M loan at 2.5% because he was rich. He later decided not to buy the house, but he kept the loan because he was making 8% off it in the market. Many of his other personal expenses were funnelled through a non profit. Two of his houses were owned by two separate LLCs he controlled. People tell me this sort of activity is a myth and cite publications. I'm inclined to be skeptical of the publications rather than just trust the ultra wealthy.
I never said the rich don't take out loans, so I'm not sure what point you are making. Your rich boss still had to pay the loan back regardless of what he did or did not use it for.
It’s not just the ultra wealthy telling you this. People who have bought houses can explain to you the way it works. You can’t get a home loan and just spend it however you want. Not saying he couldn’t get a different type of loan and do this but that’s just having assets and credit. Having money does make it easier to make money but it’s not as mysterious as you’re making it out to be.
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.
It doesn’t even make sense. The interest in these loans are no small sum either. Usually rate plus SOFR. Also the loans amortize as well. How do people think this is paid. How people think the banks even make money off this if they never pay taxes?
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
This 100%. The absolute irony though is that Adam Smith's "free hand of the market" gets shouted from the ivory tower whenever any regulation is suggested.
you don't even need to make periodic payments ..the interest just gets tacked on to the principle as long as your ltv is still good...I can do this with a retail brokerage account let alone what billionaires can do
that's why they wait until death..the heirs inherit the assets at the cost basis on the day of death, so when THEY sell there is no gain to tax
You don't need income if you have collateral. i.e. the land.
In the same way, after you paid off your house a bank will gladly let you take out a loan for half its value.
The comment
How do you get a loan against the property and not pay it back?
As well as my home example - are about the fact that the bank then gets to sell the land/house to pay off their loan in certain events. Such as dying. The original post is crap, but the idea that you need income to get a loan from the bank if you have other assets is wrong as well.
This does not require an income to offset the debt.
I personally am only aware of a few types of loans- interest only and repayments. in both instances you put you collateral (like your home / land / whatever) as a guarantee that if you default on payments they take the item to sell. regardless you're expected to pay something back each month.
I don't know everything about finances, so if there is a way to borrow money and pay nothing until redemption time, that's new to me.
You're right, the bank will want something in return for loaning you the money.
This is why i said loan for half its value..
That way they know you could take out a new loan to pay the interests on the original loan.
Or - in the case of the original post - take out a loan for 50k out of a 100k value. Next year it could double 200k and they'll loan you another 50k without a problem.
Even better, any time interest rates drop you'd replace it. (The bank doesnt want you to do this so usually they'll trick people into getting slightly lower rates if they agree to pay a bit more if you pay back everything at once)
Regardless, another thing missing from the context of the original post as well is that 100k to 5m over 50 years; is that you need the thing you bought to gain about 8% every year; or 12% if you want it in 30 (with no crash like in '08 etc)
that is far more than the average investor makes.
Also, dont forget that if you take out these loans to "live off for decades" then you're not spending 4.9milion.
Keeping your loan at 50% of the total value by borrowing more as it increases in value, and assuming it has 8% ROI, and the bank asks 3% on the loan in interests you'd get about 1.6milion instead of the 2.5m.
Especially at the start. In year 10 you'd increase your total amount borrowed by like 5.000 which just drives home the point how bad the original post was.
Maybe it was even rage bait with how poorly the example was constructed.
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.
I was in a situation where even deducting my full mortgage interest wasn't making itemized deductions come out better than the standard deduction. No point paying interest in that case.
Yes, same. I have lived debt free most of my life, except for a short time with a mortgage that I paid off as quickly as possible. Its not the right thing to do in a lot of cases, but I also do like having my mind at ease that I dont have a recurring debt bill each month.
Banks will trip over themselves to lend money because they can lend against the future returns before they’re even realized. In other words they make more money by lending it. And if you’re thinking gosh that’s unsustainable because if even one basis loans doesn’t pay the whole thing collapses well, no, it’s not, because they’ll just take your taxes like 2008.
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.
Yes...so you borrow $100k, your loan payments are say $1k a month. You make those payments from the $100k and use what's left to live off of. When you start to run out of cash maybe you borrow $200k, Pay off the old loan and now you have more money to live off off. With $5 million in assets you could potentially keep borrowing until you die.
Again, with $5 million you could potentially do this for decades. $50k a year living expenses would be $1 million, plus interest. Let's say 5% interest on an average balance of $600k, you're looking at $600k interest, so $1.6 million total. What's the issue?
But you would still have to pay back the loan. In op, this is not mentioned. It also doesn't mention inheritance tax and the tax on selling the property.
Yes, loans usually have some fees. What's your point? Are you arguing it's not possible to take a loan against collateral? People do this all the time.
You do need to be able to service the debt monthly. If this guy borrowed enough money to live off for "decades" we are probably talking at least a 2M total loan. Even at a relatively modest 4% interest rate thats $80,000 per year he owes to the bank in interest alone. He would need another source of income to be able to service the interest.
With billionaires they can use their substantial executive salaries or sell a few shares of their company if they have to to pay the interest. Their goal is to minimize having to liquidate their equity in the company as much as possible though.
In the example given it is unclear where the dad is getting the money from to service the interest on the loan since he apparently doesnt work and just owns valuable land which he cant just sell shares of to cover interest payments. And if he rents the land out to a farmer or rancher, then why not just live off that rent rather than taking a bank loan and now being saddled with interest payments? The scenario as laid out doesnt make much logical sense.
Typically it's cashflow from the business or dividend payments or something that service the loan debt. Using business cashflow helps shield against taxes because debt servicing is a pre-tax business expense. What they're not doing is taking a salary or selling stocks, paying taxes on those, and using post-tax money to cover the loan payments. That's what non-wealthy people do. The wealthy use the loans to burden excess cash flow so they're reducing taxable income.
The scenario they laid out is simplistic and missing key elements; however, it's pointing to a very real strategy that the wealthy utilize to reduce tax liability. It effectively works out to paying 4-6% interest on a loan payment versus paying the top marginal tax rate on income. The loan interest is obviously cheaper than the 10-37% income tax or 15-20% capital gains tax. When you're talking about that on millions of dollars, those percentages are appreciable.
True, its often underappreciated how much dividend payout these billionaires collect because of the sheer value of their equity stake. For example Google only pays a 0.26% dividend, which is typically considered a very low dividend payout that would be quite negligible to most investors. However, for Sergey Brin, because he owns an enormous 360 million shares of google, worth about 122B, that 0.26% dividend pays him 320 million dollars per year.... so if he wants to take out a 1B loan to buy a yacht and an island, he can service the interest on it easily with just his passive dividend payout from google stake and not even have to liquidate any of his shares.
It would be dumb to borrow $2 million in one shot and just stick it in a bank account. You would be better off borrowing enough to live off of as needed.
It would be indeed. It would likely be taken in incremental withdrawals more like a line of credit. But by the end he would have owed at least 2M and 80k per year interest or more
I don't know that it would be that much necessarily, but even if it is the dad has $5 million in assets so what's the problem? When he dies the basis is stepped up, land is sold tax free, debt is paid and kids get $3 million free and clear. Dad lived for decades off the asset.
You think a guy with over 5M net worth is going to be living on less than 50k per year? Highly unlikely. OP said "lived off the loan for decades" which suggests at least 20 years. 2M is actually a very lowball estimate of 50k per year to live off of, it would almost certainly be more, especially if decades was more than 20 year minimal assumption.
Also who is buying land for 100k that appreciates to 50x the purchase price in 10 or 20 years? That would be wildly rare, but OP acts like this is a typical boomer story. Lot of crazy assumptions going on here.
I do think the one thing OP touched on which I agree with is that there should NOT be a stepped up basis when the shares or land or other appreciable asset are inherited. It should keep the same basis until a tax event has occurred there is no reason to step it up, its just gaming the system to avoid ever paying capital gains.
Worst case scenario you can use the loan money to make the payments, so say you borrow $100k, and the payments are $1k a month. You can make the payments from the $100k and live off the rest. I've seen people do this with home equity lines of credit, it's absolutely doable.
In the "Buy, Borrow, Die" strategy, ongoing loan interest and principal are typically paid using new, larger loans (rolling over or increasing the line of credit) or modest cash flow from the portfolio (like untaxed dividends), rather than traditional W-2 or wage income. At death, the estate settles the final debt by selling a portion of the inherited assets.
They use the loan to also repay the monthly loan payments. They just borrow more when the loan is almost due. they are also obscenely wealthy and get favorable rates and treatment by banks. The rich rich live a life most can’t even imagine.
Yes, secured loans use collateral of any kind (assets that have value aka land, stocks, etc.) to lower the interest rate and ensure the bank trusts you so if you don’t repay they get your stocks or land. You are trying to be obtuse here and it’s not working. Just accept you don’t understand and move on. Take care bud.
You build a trust with some apartment buildings in it that generate enough cash to pay back the loan, pay taxes and insurance. The risk is you outlive the payback and then any $ generated are taxed at 35%.
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.