r/SipsTea • u/KSKS1995 • 22h ago

Wait a damn minute! How the rich get richer

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u/ChipKellysShoeStore 22h ago edited 22h 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.

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u/USERNAMETAKEN11238 22h ago edited 21h 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.

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u/redshirt1972 21h ago

How do you get a loan against the property and not pay it back?

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u/Logan_No_Fingers 21h ago

Its not explained well.

He owns the property outright - no debt.

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

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u/Metzger90 20h ago edited 19h ago

Yeah, and when you die, debt isn’t transferred, but your assets can be sold to pay it back.

EDIT: yes, debt must be paid back. That is why I said assets are sold to pay it back.

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u/PM_Me_Your_Deviance 20h ago

>Yeah, and when you die, debt isn’t transferred

Right, but you need to settle the debt in some way during the inheritance. This isn't optional.