7 ms·

This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole! But wait, this was a loan, not a gift. So

This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole! But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes? Edit: To people bringing back the "buy, borrow, die" story: (a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2] (b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.) (c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets. [1] https://news.ycombinator.com/item?id=41411737 https://news.ycombinator.com/item?id=41411737 [2] https://news.ycombinator.com/item?id=41410808 https://news.ycombinator.com/item?id=41410808

lesuorac 2y ago
You just delay selling the stocks until death. At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax. So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
- blast 2y ago
  > At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
  - JumpCrisscross 2y ago
    > Is this a special provision that kicks in only on death To my knowledge, yes [1]. [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis > How long has that been in place? Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].) [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis [2] https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short... [3] https://itep.org/federal-estate-tax-historic-lows-2023/ https://itep.org/federal-estate-tax-historic-lows-2023/
    - PaulDavisThe1st 2y ago
      The USA still has an estate tax.
      - JumpCrisscross 2y ago
        > USA still has an estate tax You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1]. [1] https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
        PaulDavisThe1st 2y ago
        That Bloomberg article is provocatively named. You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.
    - 2y ago
- PaulDavisThe1st 2y ago
  > the current price resulting in a large capital gains tax. There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.
bdangubic 2y ago
Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die https://equifund.com/blog/buy-borrow-die
vineyardmike 2y ago
The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die. (1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today. (1.2) Estate tax rate and capital gains rates are different. (1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do. (1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit (2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore. (3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls. (3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.
cryptonector 2y ago
> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.
- attentive 2y ago
  Pay taxes once vs pay interest forever? At what point it'll break even and go negative?
  - cko 2y ago
    Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
  - cryptonector 2y ago
    Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.
    - deleted 2y ago
      [deleted]
    - chii 2y ago
      > You'll die and still have the lion's share of your wealth and i don't see anything wrong with that at all. It seems, recently at least, that a lot of people believe they're somehow entitled to the wealth that these high networth individuals have managed to accumulate.
yieldcrv 2y ago
what you’re missing is that its not controversial or a loophole sometimes they pay it off, they just dont have to do that every year yes, you can do it too, but you would need income to pay it they already have other assets post tax to pay with, if it ever comes down to that
nobodywillobsrv 2y ago
It's leverage. That is all. And tax efficient.

lesuorac 2y ago

You just delay selling the stocks until death. At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax. So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.

blast 2y ago
> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
- JumpCrisscross 2y ago
  > Is this a special provision that kicks in only on death To my knowledge, yes [1]. [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis > How long has that been in place? Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].) [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis [2] https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short... [3] https://itep.org/federal-estate-tax-historic-lows-2023/ https://itep.org/federal-estate-tax-historic-lows-2023/
  - PaulDavisThe1st 2y ago
    The USA still has an estate tax.
    - JumpCrisscross 2y ago
      > USA still has an estate tax You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1]. [1] https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
      - PaulDavisThe1st 2y ago
        That Bloomberg article is provocatively named. You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.
  - 2y ago
PaulDavisThe1st 2y ago
> the current price resulting in a large capital gains tax. There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.

bdangubic 2y ago

Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die https://equifund.com/blog/buy-borrow-die

vineyardmike 2y ago

The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die. (1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today. (1.2) Estate tax rate and capital gains rates are different. (1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do. (1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit (2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore. (3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls. (3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.

cryptonector 2y ago

> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.

attentive 2y ago
Pay taxes once vs pay interest forever? At what point it'll break even and go negative?
- cko 2y ago
  Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
- cryptonector 2y ago
  Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.
  - deleted 2y ago
    [deleted]
  - chii 2y ago
    > You'll die and still have the lion's share of your wealth and i don't see anything wrong with that at all. It seems, recently at least, that a lot of people believe they're somehow entitled to the wealth that these high networth individuals have managed to accumulate.

yieldcrv 2y ago

what you’re missing is that its not controversial or a loophole sometimes they pay it off, they just dont have to do that every year yes, you can do it too, but you would need income to pay it they already have other assets post tax to pay with, if it ever comes down to that

nobodywillobsrv 2y ago

It's leverage. That is all. And tax efficient.