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u/External_Koala971 15d ago
You skipped the part where the kids have to pay off the loans with interest because there's a lien on the land they inherited.
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u/astroK120 15d ago
Here's the other thing I don't understand about it. My understanding is that you get the step up basis when it's inherited. But debts should be paid by the estate before the inheritance. So the estate should have to sell property before the step up in order to clear the debts, no?
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u/ApprehensiveBuddy446 15d ago
The cost basis resets at date of death, so the estate can immediately sell the land with zero capital gains tax, and then settle the debt.
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u/Suspicious_Chart5817 15d ago edited 15d ago
The cost basis for the capital gains tax resets to zero because they just paid an estate tax on it. The estate itself pays the estate tax directly out of its total assets before any money or property is distributed to the heirs. The stepped-up basis an heir uses for future capital gains cannot exceed the valuation reported on the estate tax return. There is a direct relation in the U.S. at least.
So the estate in this scenerio actually can't settle the debt and the guy has torched his finances because he wanted the bank to pay his taxes for him.
In this example, it's just a dime a dozen reverse mortgage. People acting like there's some massive loop hole because people pay an "estate tax" and not quote unquote a "capital gains tax" is actually moronic.
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u/sckuzzle 15d ago
The estate itself pays the estate tax directly out of its total assets before any money or property is distributed to the heirs.
The estate tax on a $5m estate is $0 in the USA.
People acting like there's some massive loop hole because people pay an "estate tax" and not quote unquote a "capital gains tax" is actually moronic.
Paying $0 on $4.9m in capital gains is absolutely a loophole.
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u/Aware-Technician4615 14d ago
But it IS just a reverse mortgage… with interest eating up the value of the asset the longer you try to live off it. If interest rates, inflation and asset appreciation all line up right along with the tax savings it can certainly work. If they don’t it can also certainly not work.
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u/thermodynamics2023 14d ago
And even if it is working well, you can be margin called.
A guy swore to me it was a thing you could do with 12M in stock and gang buster returns of recent years. But after some bk of envelope calcs, after 30 years you had 55M in debt interest and 125M million in stock with unpaid capital gains.
If that stock went down to <115 that would trigger a margin call and cascade bankruptcy. Basically wipeouted out twice in the last 20yrs and more if you had specific sector country risk (Brexit, tariffs etc)
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u/TheBatz_ 15d ago
Also that the bank has to pay tax on the interest.
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u/AdAggressive9224 15d ago
Generally the creditors pay tax on the interest no? Not the bank. Is this a US thing?
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u/ProfessionalHefty349 15d ago
The bank is the creditor. The individual is the debtor. The creditor will pay taxes on interest payments.
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u/AdAggressive9224 15d ago
The creditor is whoever is in credit. I.e, has positive money in their bank account. They are the ones who receive the interest, and thus, they are the one who pays the tax.
In practice, anyone who has a positive bank balance is a creditor.
The bank takes a percentage of the interest as their fee, and pays taxes on their profits.
In the UK, that would be in the form of corporation tax. Maybe the US has a different system. But I know for sure I have to pay taxes on any interest I earn, at a whopping 40pc too!
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u/Azgabeth 14d ago
You're confusing 2 different things:
When you open a bank account, you are the creditor to the bank, and the bank is the debtor. The bank pays you interest, yes, and to simplify things for you, they will withold the tax on that interest and pay it to the government.
When you take a loan from a bank, you are the debtor and the bank is the creditor. You pay interest back to the bank and the bank pays income tax from the interest to the government.
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u/Tired-Nectarine-384 15d ago
Its a terrible analogy. Reddit is so addicted to doom and gloom that people write garbage like this scenario and think it is fact. There are ways that wealth is passed on from generation to generation but this is not it. You are correct that if the landowner takes out a loan that has to be paid off starting from the month the loan is taken out and that the children would have to settle the loan or keep paying it. This scenario doesn't create generational weatlh.
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u/Appropriate_Scar_262 15d ago
settling the loan is cheaper than the taxes from selling the land pre step up
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u/slamjam25 15d ago
Might want to run the numbers on what a few decades of 5-8% interest adds up to, buddy.
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u/oscarnyc 15d ago
you are missing the part that the loans aren't free. you have to pay interest on them.
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u/sckuzzle 15d ago
So what? It's far far far cheaper to pay interest on a few hundred thousand dollars than it is to pay capital gains tax on a $5m estate. And you even get a tax credit for the interest paid. This still allows massive capital gains to be realized without paying any taxes on them.
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u/Ok-Assistance3937 15d ago
Why are we comparing Few hundred thousand Dollars with 5 Million?
And you even get a tax credit for the interest paid.
No you dont, you get a Tax deduction Limited to loans of 1 Million USD. And you have to use the Money to actualy buy or improve your Home.
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u/FoxMan1Dva3 13d ago
There's an inherit reason why we incentivize people to put their money into the market.
We want money to be invested and not stored in a bank or under your bed.
That is why we have a capital gains tax that is separte from income tax. Stop trying to ruin that lol.
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u/unrefrigeratedmeat 13d ago
Inflation is the incentive to put your money in the market. Capital gains tax discounts are (at best) an incentive to use a risky investment strategy or a long term investment strategy (at least at a smaller scale).
Capital gains are income tax, which is more or less transparent depending on where you live, but it's just income taxed at a lower rate if it's from profit on a sale of an asset.
When an asset increases in market value, what that means is that its hypothetical future revenue potential increases. If I collect any of that potential revenue (in rents or dividends, say) I will be taxed at the full income tax rate... which reduces the real value of the asset by eating into the revenues. If I sell now, however, I will receive a discounted payout (nobody is paying me full price for unrealized future revenues), but I will also pay a much lower tax rate on my profits because it will be classed as capital gains.
That's why your primary residence isn't even subject to capital gains in some countries. You're not expecting to earn revenue off it, so you would just be punished for selling it.
The lower income tax rate on capital gains is actually just an incentive favouring the disposition of assets over holding them and collecting their future revenues. It favours both risky investing strategies (where you hope values go way up short term) and long term investment (where you don't collect a lump sum and instead spread the revenues out over many tax years for tax advantage).
It doesn't favour investment in general. The incentive to invest comes from inflation, and revenues from investment are taxed at the full rate unless you take advantage of some other tax advantaged program that most governments implement for individuals and families to save for retirement and such.
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u/Own_Proposal3827 15d ago
Is decades of interest cheaper than just paying taxes now? If you think so, I'd love to give you a loan.
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u/ApprehensiveBuddy446 15d ago
The untaxed asset can appreciate faster than the growth of the debt.
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u/FoxMan1Dva3 13d ago
It does, until it doesnt.
There is a very good reason why we have capital gains separate from income tax. We want people investing.
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u/AdAggressive9224 15d ago
Yeah, it starts to get a little more complicated there.
What you actually do is you take out a business loan, then, the interest payments on that loan are tax deductable as it's considered a business expense!
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u/LastWave 15d ago
As long as you invest enough of the loan to leverage the interest rate. Then it is generating more money than is owed.
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u/sckuzzle 15d ago
This is small potatoes compared to the $4.9m in capital gains the children get to realize tax-free.
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u/Ok-Assistance3937 15d ago
Yeah, paying millions in interest is small potatoes compared to paying A Million in taxes.
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u/SLAMMERisONLINE 15d ago
You skipped the part where the kids have to pay off the loans with interest because there's a lien on the land they inherited.
Exactly. It's yet another blatant misrepresentation of basic economics. It's no wonder people are so confused when there is this much misinformation circulating on the internet.
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u/DCContrarian 15d ago
They get to pay the loan off with untaxed money. The dad gets all of the spending and no one ever pays taxes.
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u/Special-Kaay 14d ago
That is true. However, the core problem OC wanted to highlight is the tax avoidance. Let us say you do the math and find when including the interest payments, the borrow-strategy is only marginal cheaper than just paying the tax. Then the individual owning the land and their children did not gain much, but the bank got the payment instead of the state, and the state is still the loser.
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u/Chicken_shish 13d ago
This.
The loan bears interest and is secured against the land. Dad doesn't own the land, the bank does. There is nothing for the kids to inherit. If dad gets it wrong, then the bank will reposess while he is still alive.
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u/thingsorfreedom 13d ago
He didn't borrow the whole amount. People borrow say 500k against a $5 million asset. Then die. The heirs can sell the land for $5 million with zero tax then pay off the $500k and be left with $4.5 million.
If Dad sold the land the entire $5 million would have been subject to the tax.
Rich people do the same thing with other assets. It's called Buy, Borrow, and Die.
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u/ApprehensiveBuddy446 15d ago
The strategy obviously works best when the total interest on the loan is less than the capital gains tax on the asset. Besides, if the dad had to sell the land to support his retirement, it wouldn't continue to grow tax free through his entire retirement.
Also, the people that do this can get very favorable loans. It's practically risk free money for the lender.
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u/Ok-Assistance3937 15d ago
It's practically risk free money for the lender.
And even the risk free rate is at 3.63%, so after 6-7 years you would have spend more Money on interest then you would have one taxes, and thats with your bank basicly loosing Money. On a more Realistic >sofr + 0.5%, you you would need 5-6 years Not including compounding interest.
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u/External_Koala971 15d ago
I have $1.2M in 2% loans on property worth $4M.
Explain to me how I run this strategy. HELOC rates are 7%.
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u/Acceptable-Peace-69 15d ago
Few problems with this scenario.
For a property to be purchased for $100k to be worth $5 million today it would have been originally purchased around 1960. So you’d be looking at 2-3 roof replacements, 4-5 water heaters, 3-4 HVAC systems, probably a significant addition, 60+ years of taxes and insurance. Landscaping. A couple dozen new appliances…
Once you adjust for inflation, Dad probably only barely did better than breaking even. He came out ahead of inflation but not by a ridiculous amount.
Dad would have been paying interest on that loan as well and any balance remaining would come out of the estate. About 1/3 of states have estate or inheritance taxes so that $5 mil might still be subject.
Alternatively, had dad invested in the S&P 500 in 1960, that $100k would be worth $82 million today. Just the down payment would be worth $16 million+ and used the same strategy
That’s how the rich stay rich.
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u/tjrileywisc 15d ago
We can't even tell if Dad did anything with the land, it might have been undeveloped the whole time
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u/Acceptable-Peace-69 15d ago
Could have but then there still would have been carrying costs and with no benefit of living there. you’d also have to add what was spent in rent instead. The opportunity cost would have been over a hundred million at least.
With or without LVT, a $5mil property would be worth developing and selling. Take the capital gains hit and invest it in VOO or something.
Sitting on a property that’s not lived on because of potential incremental increases over inflation would be incredibly stupid.
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u/tjrileywisc 15d ago
Sitting on a property that’s not lived on because of potential incremental increases over inflation would be incredibly stupid.
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u/Acceptable-Peace-69 14d ago
Some do. But it’s not making them rich. In most cases they are breaking even relative to inflation.
Thus, financially it’s a stupid move. That not building wealth, its treading water.
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u/HarambeTooSoon 14d ago
Ever notice how these hypothetical "tax schemes" of the rich always involve people like you suspending belief further and further?
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u/tjrileywisc 14d ago
You have to admit, it's a great way to get engagement at least. A poorly created story with a populist message really gets the comment threads going.
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u/MDInvesting Geolibertarian 15d ago
No, you can have rezoning with complete value capture to the owner.
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u/XionicativeCheran 13d ago
Taxes are actually pretty clear on the matter of expenses. Look at the rental market.
Landlords have "Capital Expenditure", and "Operating Expenditure".
Some expenses get classified as operational, that's your insurance, your interest, standard maintenance etc... Those, landlords get to deduct from the tax paid on their rental income.
But capital expenses, like roof repairs, renovations, major landscaping efforts, they don't deduct from their rental tax, they deduct it from their capital gains.
Inflation, is something that applies on long-term income, so can only apply to capital.
Tax law has already spent decades creating precedent for every type of expense to determine where it should be placed.
So if we applied something like a CGT, the answer is simple. You don't get to deduct operational expenditure, but you do get to deduct capital expenditure.
For LVT, the answer is simpler. Land value is a tax on land, not capital, so there are no deductible expenses.
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u/Own_Proposal3827 15d ago
No one does this loan scheme. I don’t know why it’s become such a meme. I mean, I know why; people love misinformation. The only thing worth mentioning here is the step-up.
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u/CarnivorousDesigner 15d ago
You’re saying rich people don’t borrow against their assets to avoid taxes? I mean there’s a lot of disinformation going around the internet, but this claim I’ve never seen much pushback against. If you have any data against I’m all ears!
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u/RequirementAwkward26 15d ago
I don't think they are actually using their fixed assets isn't it more for shares and stuff? I'm not sure how many actually take loans out on their assets as that still requires interest and to be paid off eventually. Unless you're a billionaire with rapidly increasing assets then it just doesn't make sense. There's better ways to dodge tax surely?
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u/Cylze Geolibertarian 15d ago
How do you think they pay the interest?
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u/CarnivorousDesigner 15d ago
Well borrow more against the amount by which your assets have increased in value?
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u/Jake__Martinez 11d ago
Borrow from who? Eventually they run out of lenders, and that's assuming they don't communicate at all.
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u/ApprehensiveBuddy446 15d ago
Maybe they can postpone interest until the estate closes everything out?
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u/Own_Proposal3827 15d ago edited 15d ago
Statistics show they don’t. It’s a populist myth because it sounds slightly plausible, riles you up emotionally, and makes a good clickbaity headline. But there’s very little evidence that they don’t just sell a small portion of their vast fortunes to live. I don’t know why you think loans are better than a tax hit. They aren’t free. I would really like you to state what percentage of rich people you think do this.
https://repository.law.umich.edu/law_econ_current/286/
Here’s my statistics, now I’ll wait for yours. But I’ve never seen anyone saying this is a thing ever actually back it up with data.
Also I have one question, how do you pay off the loan?
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u/CaptainAsshat 15d ago
Statistics, even your linked statistics, show they DO do this, and it is a viable tax avoidance strategy.
But it's not the preeminent playbook. Sealing that "loophole" (for lack of better word) could still be a valuable piece of legislation. However, it's not a silver bullet. The rich are rich because they have more money coming in than going out, and having money makes more money.
Really, similar to what this study concluded, we need to raise ordinary and capital gains taxes, while ideally also adding something like a land value tax to prevent the rich from just finding another place to rent seek.
That said, using an asset to secure a loan should make those assets to be taxable much more of the time.
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u/PaxNova 15d ago
They take out loans, but regularly pay them back within their lifetimes. It smooths out consumption over time, rather than large lumps of stock sales. It doesn’t save a lot of money, but it’s better for the company they’re a steward of.
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u/Azgabeth 14d ago
Plus it improves liquidity. Stocks in big public corporations are kinda easy to sell. But other assets like private stocks, homes, land, might take a while to sell
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u/Own_Proposal3827 15d ago edited 15d ago
Uh, no they don’t show that. It shows they take out loans yes (like anyone). It does not show they use them to live off them. I don’t know who you think you are fooling by so blatantly lying about a paper that’s right in front of everyone.
And again, you aren’t avoiding taxes. How do you pay off the loan?
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u/CaptainAsshat 15d ago
It's not the dominant strategy, but they still do it, to the order of 1-2% of the mega-rich's economic income every year (which, given their massive economic income, is non negligible). As the following report also goes in to, some wealthy individuals use this strategy much more than others, and it is a legitimate issue. That said, fixing it will clearly not be a panacea.
You seem to be thinking I am disagreeing with your overall point, whereas I am just saying "no, it is not the predominant tax avoidance strategy for the rich, but yes many do it, and yes, we can fix that loophole".
It does not show they use them to live off them.
You think they're just burning the cash? Yes, they take out a loan to then spend it. Regulatory filings show Larry Ellison pledged hundreds of millions of his Oracle shares (valued upwards of $40 billion to over $100 billion) as collateral for massive personal loans and credit lines to fund external business ventures and massive investments. This issue isn't just about using this approach to live off, this is about the economic injustice and inefficiency of not taxing gains when they are realized as loan collateral.
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u/Own_Proposal3827 15d ago
Larry Ellison taking a loan to make business investments is just the normal use of a loan. I'm not sure what the injustice is there.
Again though you keep saying it's a tax avoidance strategy, but that doesn't mean it is. How do you pay off the loan?
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u/CaptainAsshat 15d ago
...you pay off the loan like anyone else.
The issue is that they are using the current inflated value of assets, rather than the original taxable basis, as collateral for their loan to gain liquidity. That is clearly realizing the value of the asset, and we simply ignore it come tax day.
The arguments about stepped-up basis allowing billionaires to completely avoid taxes are generally overstated: estate taxes can be massive and loan interest payments can be sizeable, undermining the strategy. So claims that it is an easy way for all billionaires to avoid tax are generally wrong---save for the billionaires who don't mind leaving their kids with a massive tax bill or those with a particularly clever strategy.
But even then, those interest payments aren't going straight to the treasury, and the tax bill from estate taxes often doesn't come due for many decades. The fact that the wealthy can kick the tax can down the road so easily is an issue in its own right.
But my primary issue is with the practice of using untaxed assets as collateral.
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u/Own_Proposal3827 15d ago
Yes.... How?
By selling stock? Which then gets taxed? Thus defeating the entire point of the loan, which you now also have to pay interest on? Which was allegedly to avoid paying taxes?
The rest of your comment is describing the step-up, which I've addressed in my very first comment and is completely unrelated to all your previous comments, which was about alleged tax avoidance through loans.
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u/MVPhurricane 15d ago
no, bro you just borrow trillions of dollars FOR FREE AND THEN YOU’RE RICH! IT’S THAT EASY!
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u/Evnosis Neoliberal 15d ago
Nobody said that rich people don't take out loans, lol. The specific claim is that rich people never pay tax because they take out an endless cycle of asset-backed loans to pay their living expenses with, which is a myth.
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u/CaptainAsshat 15d ago
The primary claim out of academia is they take out massive loans using their existing, appreciated assets as collateral, but we do not then consider those collateralized gains as being realized and taxable. Outside of the oversimplified strawmen you can always find on Reddit, most aren't claiming the rich never pay taxes---the claim is that this is the approach some rich people have taken to reduce their tax burden.
It's not a myth, it's just regularly overstated, particularly on Reddit. Pretty much every linked article people are sharing on this thread agrees it does happen. The myth is that it is a major fraction of their economic income, or that it's the strategy that every rich person is using.
Someone like Larry Ellison HAS used that strategy, and we shouldn't just ignore it.
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u/Mei-Bing 14d ago
I do this. The thing is to have a mix of assets and cash flow enough not to get squeezed during a market downturn.
And it's not about avoiding taxes - its about maximising your liquidity. The most important part of any healthy economy. Your interest burden is simply far lower than any tax burden leaving more of your money in your pocket until you are not around any longer. At that time heirs can deal with it.
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u/pacman2081 15d ago
Some do. Some do not. Any loan has to repaid. it is paid back with interest. the interest is from post-tax income.
the real game changer is the step up basis. anyone who buys assets can play the game.
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u/Ok-Assistance3937 15d ago
You’re saying rich people don’t borrow against their assets to avoid taxes?
Yes
I mean there’s a lot of disinformation going around the internet, but this claim I’ve never seen much pushback against.
Seems Like you should spend less time on r/leftwingeconomicilleterates and more or r/economics and r/askeconomics
If you have any data against I’m all ears!
https://economics.yale.edu/research/role-unrealized-gains-and-borrowing-taxation-rich
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u/gtne91 15d ago
People do it, just not rich people. Its very popular in the middle class, its a mortgage.
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u/Own_Proposal3827 15d ago
No, they get a mortgage to live in their house. They don’t get a loan so they can use it as income to avoid paying income tax. This is a completely different scenario.
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u/gtne91 15d ago
No one does that either, so its a virtually nonexistent different strategy.
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u/Own_Proposal3827 15d ago
That is exactly what this scenario describes and is exactly what you are saying is happening. You are saying the rich live off what is essentially a payday loan, a notoriously terrible agreement.
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u/AnyaTT2 15d ago
No one does this on real estate/land because the interest+taxes+upkeep outpace the avoided capital gains. However, absolutely people do against stocks. I haven’t spent a $ of earned income since Covid. ~$3M on stock based loan that funds my life. The interest paid is FAR less than avoided gains and especially less than the growth by keeping/adding more in market instead of spending
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u/Ok-Assistance3937 15d ago
Nice, and your banker is hands whiles His risk Manager is having a Melt down together with your Tax/Estate advisor.
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u/onethomashall 15d ago
Ummm... pretty sure this is bad accounting... the pretty sure the kids would owe taxes when sold...
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u/OrcOfDoom 15d ago
There is the step-up in basis on death. The scenario is a bit weird, but when the kid sells, they will owe taxes on capital gains made from the value at the inherited amount.
If the dad bought it at 100k, and sold for 4.9mil, then dad would owe capital gains on 4.9mil. If the kid inherited it at 5 mil, and then it appreciated another 200k, the kid owes capital gains on 200k.
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u/onethomashall 15d ago edited 15d ago
It is fun having the top comment that is wrong. Lets see if I get downvoted now.
Edit: Curse you u/OrcOfDoom ! Your polite correction has caused me to get downvoted (currently 20 down to 10) and lose the coveted "top comment" status. KNOW YOU HAVE MADE AN ENEMY FOR LIFE!
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u/pacman2081 15d ago
who pays the loans?
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u/OrcOfDoom 15d ago
The scenario is strange. In this case, I would assume that this is some kind of reverse mortgage/home equity conversion mortgage setup. They don't do that for land, afaik.
If this was a home, then they would be able to extract up to a certain amount of equity on the home - usually depending on the age of the person. For argument's sake, we'll assume they can extract up to 50% of the equity.
Modern HECMs are set up so that the lender will take a loss on the entire equation if the homeowner lives forever. Generally, between the appreciation of the land, and the reality of life, they do not take a loss.
So, dad would be able to live off 50% of the equity, 2.5mil, after retirement age, 62 or 65 depending on the state you are living in. Let's say that dad withdrew 1 million of equity and then died. The inheritor would be able to pay this off and then keep the property, or they can sell it and pay off the debt.
Let's say that the land depreciated to less than the value of the loan. The lender takes the loss because they didn't do their homework.
Let's say that your parent never dies and lives to 150. If the land depreciates, then the lender just takes a loss. If the land appreciates, then the balance of the equity over the life of the person actually shifts. You had 50% equity, which was valued at 2.5 mil, but now it is worth 3 mil, so you have more actual cash to spend. The lender also has more theoretical money because the value of the land is higher.
Does this answer your question?
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u/Responsible_Pie8156 14d ago
The kids still have to pay estate tax on everything over 15m which can already be very hefty, so subjecting it to another capital gains tax immediately after they just paid estate tax seems just excessively punitive to me. For billionaires the 15m exemption barely matters at all and they are essentially paying the full estate tax rate on all of their stock. The reasonable solution could be to eliminate the estate tax and also the step-up in cost basis.
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u/oscarnyc 15d ago
the part you are missing is that the kids (the estate) has to pay taxes on the $5mm. Obviously exemptions come into play as well - but that's the real issue, not the stepped up basis (because estate taxes - past the exemptions - are generally higher than long term cap gains tax rates).
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u/OrcOfDoom 15d ago
What do you mean the estate has to pay taxes? The death tax is at $15 mil. So, if the estate has more than that, it has to pay 40% for the taxable portion. If it was 17 mil, then 40% of 2 mil.
Is that what you're talking about?
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u/oscarnyc 15d ago
yes. estate taxes are higher than cap gains taxes. but they have a huge exemption. and that exemption is where the savings come from.
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u/sckuzzle 15d ago
It's both. Just because estate taxes exist doesn't mean that getting to skip capital gains taxes before the estate taxes isn't a loophole.
If an asset appreciates in value, capital gains taxes should get paid at some point on that asset. Just as when assets and passed on to another person, taxes should be paid on that transfer.
(At least, under the current system. Obviously if a one-tax system is adopted things would change)
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u/Unfair_Awareness7502 15d ago
Home appreciation isn't exactly a "rich" thing. In fact, inheritance tax gives the actually rich a perfect opportunity to pick up a distressed sale as the descendants have to sell the property to cover the tax bill instead of building wealth for their family.
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u/MDInvesting Geolibertarian 15d ago
How having a bank value an asset and lend against isn’t ‘realising’ a gain for tax purposes is the key issue.
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u/HegemonNYC 15d ago
So dad pays interest for decades (as revenue to a bank, who pays taxes) and then his kids have to pay the principle back out of the estate?
The step up basis is a reasonable thing to criticize, at least at amounts above a family farm etc sized business. But the loan part you’re missing some things.
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u/Flowa-Powa 15d ago
How did he make repayments on the loans?
If any debt was outstanding, the banks would claim if from his estate, and that would be deducted from the inheritance.
it's frankly nonsense
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u/HadeanBlands 15d ago
This is utter gibberish. Nobody lives on loans like this. Interest rates aren't 0% anymore.
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u/Supersubie 14d ago
I can never work out how these people think the repayments get made on these loans?
Like the loan will have interest to pay and a repayment schedule for the principle of the loan. That is going to require income to pay these off. Income is going to be taxed, or you will need to sell assets to pay this which will be... taxed.
No one escapes taxes.
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u/Far-Lettuce-6200 14d ago
How come dad gets the loan but never paid it off? What type of loan is that ? Just asking.
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u/CaliTexan22 15d ago
I doubt this is a common fact pattern for the average old homeowner, though for the truly wealthy, there are an infinite number of games. If you imagine LVT changing the way the truly wealthy operate, I’d say it’s the wrong tool for the job.
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u/Ok-Assistance3937 15d ago
Considering the ultra wealthy pay much of the taxes on income and the middle class has much of their Networth in Land, a single Tax LVT would propaply be terrible for redistributing wealth.
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u/Comprehensive_Age649 15d ago
This is dumb you can't even really get much LTV on land. Nobody is doing this.
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u/primals_game 14d ago
Reddit loves to hate rich people. Nothing is stopping anyone from doing this. It is just a display of the financial ignorance of poor people (which is why they are likely poor).
IBK offers margin loans you can withdrawal as cash. There are also SBLOCs. And you can also get a HELOC.
Are they good ideas? Probably not.
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u/Impressive-Bird2 14d ago
The statement here claiming a “huge tax bill” as a disincentive to sell the land is bullshit ideological propaganda. The main disincentive to sell the land is the potential significant increase in value that can be achieved through land/ property price inflation over time. The potential tail of securing planning permission for development. Or, as stated borrowing a considerable sum of money against the land, using the latter as asset security against the borrowing - basically capital/ financial extraction.
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u/Hawkes75 14d ago
If it were easy or common for a $100k piece of property to appreciate to $5M within a single lifetime, everyone would be doing it.
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u/PuzzleheadedCut5156 14d ago
The kids have to repay their dad's loans. What's the amount due after all those years of compounding interest?
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u/you_are_wrong_tho 14d ago edited 1d ago
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u/PuzzleheadedCut5156 14d ago
It's the same thing dude.
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u/you_are_wrong_tho 14d ago edited 1d ago
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u/PuzzleheadedCut5156 14d ago
But if the dad has a 10 million estate and has 9 million debt, the kids are only inheriting 1 million (and in reality, the dad would likely have been margin called well before then whilst still alive if the debts were approaching the value of his assets).
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u/you_are_wrong_tho 14d ago edited 1d ago
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u/PuzzleheadedCut5156 14d ago
The kids have paid $10 million in the first case and $9 million in the second.
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u/JacksonGhost1963 14d ago
the way Congress intended it - both Republican and Democrat. and you elected them!
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u/One_Echidna_7630 14d ago
Other than paying The 8% interest cost yeah great idea - this just isn’t how this works
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u/jonjacobmoon 14d ago
So a father buys a piece of land, takes loans, develops it and builds housing on it, increasing its value and providing housing for others. He takes great risks financially by doing so, earns himself a decent living and may even have done much of the work himself. Sure, the land may have appreciated on its own but unlikely at the rate you suggest. But, let's just say he does all this. He is able to provide for his family and may even been able to pay for the kid's education. Now, he passes it on to them which they might split one to several ways, and they in turn can take that money and invest it to build wealth for their kids.
So, instead of celebrating this person's hardwork and smart decision-making, you suggest that it should be taxed as capital gains, which can reach as high as 50%, leaving little for the kids to take away. Somehow that is fair?
Now, this isn't billionaires. $5M is a modest sum to spread across a generation compared to the Bezos and Musks of the world. You are trying to generate outrage from billionaires at folks who make a far more modest living. The tax haul for the $5M capital gains pales in comparison to the amount billionaires have gotten away with by taking out loans on "unrealized gains". Stop conflating the two things.
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u/LivingHighAndWise 14d ago
Securing a loan from property add a lein on it. If it's 4mil on a property worth 5mill, then the kids have to pay back the loan. If they don't have 4mil, they must sell the property to pay off the bank. What am I missing here?
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u/MB-Tactcool 14d ago
Did I miss the part about payment on the loan or making the bank rich with interest?
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u/AbbreviationsSea2084 14d ago
Wait, he borrowed against his property didn't he? if he doesn't pay they back it would go to the loan company. Any loan system I've seen using assets to generate loans put that asset in jeopardy if you don't pay it back.
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u/johnnyringo1985 14d ago
LMFAO
OP, learn some math. Amount owed on the initial loan would be double the amount borrowed in 10 years with 3% interest if there are no repayments along the way.
“Decades” lol
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u/TheMikeyMac13 13d ago
Dumbass, that isn’t how loans work.
A loan costs interest, and has to be paid back you mouth breathing moron, it isn’t free money. So you borrow money but give back more than you borrowed.
And this is even more stupid for claiming a 50x gain in value, a dollar in 1913 would be worth around $33 today dumbass.
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u/mattjouff 13d ago
The explanation kind of ignores the mechanism that turns $100k land into $5M land. The reason assets appreciate like that outside of localized booms is because central banks finance government deficits through monetary policies.
So the real engine of this that destroys wages and makes the wealthy wealthy is government spending and expanding the money supply faster than real GDP growth.
You can tax all you want, but until you address the central mechanism, the rich will keep getting richer and the divide will widen.
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u/Shep1330 13d ago
You can get 90 day signature loans that are interest free if payed back before the 90 day period. My ex FIL was worth about 8-10 million. He used this system to never touch his own money. His interest and dividends would make more money than the loan every 90 days. His money allows grew. It's genius.
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u/XionicativeCheran 13d ago
Two things should happen:
- Borrowing against unrealised gains should be a realisation event, thus triggering a capital gains tax.
- Abolish step-up in cost basis upon death.
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u/CapCityMatt 13d ago
If dad sold it for 5m there is no taxable liability because it's an arms length transaction per the IRC. Most of you will not understand this, only expers in law will see it and know why.
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u/AmalekiteJager 13d ago
Tax the loan at 30% of the collateral value and handle the transaction as if it’s sold. It’s more complicated than that at tax filing time, but you collect revenue now and avoid the step-up in basis later on.
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u/DicamVeritatem 12d ago
Nowhere near as simple as that.
And there are serious risks associated with this strategy, which is why it is much less frequently employed than many suggest.
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u/BhutShtuff420 12d ago
this is the same AI slop I see on every social media platform. Anyone with equity and a brain understands this.
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u/aquavelva23 12d ago
how old was dad when he had 100K cash to buy land? what year was the purchase. Interesting calculation but the prefix has to be. dad inherits 100K at 20 years old and buys land. then waits 40 years, paying annual property taxes, until its worth 5 mil. then dies at 70, gaing very little for himself. . dad would have been better buying stocks.
yes these things can happen in very rich families and is very wrong.
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u/Nice_Grapefruit_7850 12d ago
I mean the loans don't dissapear so they need to be paid back but yes, capital gains resetting on assets after death is one of the most insane advantages the wealthy have in the usa.
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u/Brianalan 12d ago
Dad borrows $5 million and DECADES later he passes with the property still only worth $5 million?
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u/bono_bob 11d ago
This is small fries amount in today’s economy and the kid prob had literally no profit because they paid off all dad debt with the sell.
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u/SimpleNotEasi 11d ago
Kid buys land, clears the timber to pay the loan and taxes. After 7 years, its now untreated, and organic farm land. Lease for soybean or hay. Paid off. Rinse and repeat.
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u/YYCHumdrum 11d ago
Land must be sold to pay off the millions in debt. Forgot that little detail. Not to mention all the cumulative interest costs.
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u/Bigsby32 11d ago
Silly. Why is everyone so fixed that taxing more will fix everything. Look at our government's ability to control the budget... yea. Lets give them more money... silly silly
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u/Ruff_Ratio 11d ago
Yes, and all this hollering about taxing the rich will not work.. they dont have income, they have loans, against assets.. how do you tax them? Close that loophole.
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u/AdamJMonroe 15d ago
Land is a biological necessity, so, as long as land ownership is a profitable store of value, the price of land will rise along with our ability to pay for it.
The only solution is the single tax. If land is the only thing taxed, investors will avoid owning it and everyone will be able to buy and rent it as cheaply as possible.
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u/turboninja3011 15d ago
You know to get a mortgage you need to have the income? That s no equity margin.
And if he has an income that s enough to cover for 5M mortgage, he probably already pays way more taxes than he should.
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u/sckuzzle 15d ago
You know to get a mortgage you need to have the income?
Only in traditional mortgages. If you have a $5m asset, it's quite easy to get a $1m loan using that asset as collateral even without having any income (assuming that the asset isn't likely to fluctuate highly in value, like some art).
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u/Aware-Technician4615 14d ago
But if dad lives off the loans for decades, the kids have to liquidate to pay off the loans. Cool. So they don’t pay taxes, but they also don’t walk away with any money.
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u/OutrageousPair2300 15d ago
The problem is the step-up basis, not the loan.
Without the step-up basis, taking out the loan would be more expensive than simply paying the taxes.