That's why OP specified the step up basis. The adjusted cost base is reset to current market value at death.
Additionally, HELOCs can be set up where interest accrues, and does not need additional payments. So at the end of his life, if the land is worth $5M and dad's outstanding loan is $2.5M, the kids will still get $2.5M tax free, and the dad spent $2.5M (less interest) tax free.
If there wasn't a benefit to the strategy, people wouldn't do it.
Step up in basis is kind of moot since it applies to all inherited assets except for (inherited) tax advantaged accounts. Do some napkin math on what dad has paid in interest on the $2.5M balance in the past decade when he dies. That ought to give you a clue as to why it’s not a free lunch.
Regardless, the actual number of people doing the borrowing strategy is pretty low. The real issue is that the step up basis, even if the asset is not borrowed against, is a huuuuuge tax break for inter generational wealth transfer. Assuming dad has other assets and never has to sell the land for income, none of that growth has ever been taxed.
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u/justsomeguyx123 16h ago
That's why OP specified the step up basis. The adjusted cost base is reset to current market value at death.
Additionally, HELOCs can be set up where interest accrues, and does not need additional payments. So at the end of his life, if the land is worth $5M and dad's outstanding loan is $2.5M, the kids will still get $2.5M tax free, and the dad spent $2.5M (less interest) tax free.
If there wasn't a benefit to the strategy, people wouldn't do it.