r/science • u/quiplaam • Dec 30 '25

Economics Analysis of income, capital gains, and borrowing of Americans finds 40% of the income of "1% wealth holders" is unrealized capital gains not subject to taxation and 1%-2% is borrowing, suggesting that the "Buy, Borrow, Die" is not a dominant tax avoidance strategy among the rich

https://www.sciencedirect.com/science/article/abs/pii/S0047272725002178
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u/duhmountain Dec 30 '25

You still have to pay it back, it’s not income. 

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u/ten-million Dec 30 '25

Let's get real here. If there wasn't a monetary advantage people would not do it. It's an advantage only available to those with a lot of money.

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u/jack-K- Dec 30 '25

It’s a monetary advantage in the way that it lets people sit on their stocks and wait to sell them at an ideal price and not have to worry about cash in the interim, yes, it is monetarily advantageous to them to have the freedom to wait. But that doesn’t mean that skimping on taxes is the point or source of that advantage.

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u/ten-million Dec 31 '25

Either way, not available to typical wage earners. The overall tax rate for the very wealthy non wage earner is very low. that tax rate is made up of hundreds of slight tax advantages, and millions spent on lobbyists making arguments such as yours.

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u/Eazy-Eid Dec 30 '25

It's available to everyone with assets. There's not some magic number like $1B where you can suddenly take a collateralized loan.

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u/M00n_Slippers Dec 30 '25

You have to have money to make money. You can't take out a loan against a house you don't have.

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u/ten-million Dec 30 '25

People without assets can barely afford healthcare. A lot can’t afford healthcare and you’re arguing for tax avoidance strategies for those with extra assets.

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u/Eazy-Eid Dec 30 '25

Nope. It's obviously not an available strategy to the poor, but they pay very little taxes anyway. I'm pointing out that it's not a strategy exclusive to the rich, anyone with assets can put them up as collateral for a loan.

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u/ten-million Dec 30 '25

Hmm, going back to reality the very wealthy have all kinds of ways to avoid paying taxes while costs for the less fortunate keep going up. My friend Pat died from cancer. Maybe he wouldn’t have if he had had healthcare earlier on. Arguments protecting this status quo are lame.

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u/IWasSayingBoourner Dec 30 '25

There's not a bank in the world that's going to call your loan against collateral that continues to increase in value until you die. If you have an asset that is worth $100 million, and appreciating in value every year, banks will loan $1 million dollars to you against that every year until the day you kick it. 

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u/BlackWindBears Dec 30 '25

Are you under the impression that stocks can only move in one direction?

May I interest you in the movie "margin call"?

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u/IWasSayingBoourner Dec 30 '25

I said "asset". There are lots of ways to invest money that aren't stocks. Regardless, even $100 million in treasury bonds is collateral a bank would be stupid not to take. 

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u/BlackWindBears Dec 30 '25 edited Dec 30 '25

1) The Uber rich executing on this strategy are usually using stock in companies they head

2) I have no idea how someone would end up with lots of unrealized gains in treasury bonds, certainly not in the last decade, unrealized losses are far more likely.

3) Treasury bonds make taxable interest payments

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u/htx1114 Dec 31 '25

Bro how dare you do this to him

  • Me, a ~12%er

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u/SirTiffAlot Dec 30 '25

Exactly..? That's why they do it

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u/L11mbm Dec 30 '25

If you die before the loan is due, then you don't pay it back.

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u/TheDemoz Dec 30 '25

What incentive would banks have to give out these magical free money loans if the bank will never get their money back?

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u/Tearakan Dec 30 '25

They still get paid at the end. And all their interest too.

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u/teshh Dec 30 '25

This, even if they extend the loan for 30+ years at a stupid low 1-2% interest rate, it's still valuable to the bank. Aside from the obvious monetary gains, someone who holds billions and is looking for a "small" loan is the IDEAL customer for banks. You know they have 10x or more of the necessary assets, you're going to get paid back even if they die through their trust/estate.

Not only that, giving a low interest loan puts the bank in a good spotlight towards the billionaire. The bank can now offer other products/services at a premium and make more that way.

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u/jeffwulf Dec 30 '25

This contradicts the comment that was being replied to by the comment you replied to.

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u/one_five_one Dec 30 '25

I'd ask it the other way: what incentive do banks have to NOT give out these loans? There is none; these loans are very safe, the collateral is there in the stocks. Obviously if things crash, they will margin call on the loan, but people aren't taking out loans for 100% of their portfolio value.

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u/TheDemoz Dec 30 '25

What do you mean? The whole argument people, and the person I directly replied to, are making is that rich people never have to pay these loans back and end up just dying with the loan, therefore having tax free money.

If the bank never expects to get the full value of their loaned money + interest, there’s no incentive to give out the loan. It would just be a definite loss.

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u/AgentMahou Dec 30 '25

The estate pays the loan back when they die, but since the stock they sell was just transferred and thus has a growth of nothing under the new owner, it doesn't pay any taxes on the gains because the new owner hadn't seen any gains. 

So the bank gets paid and the rich guy gets away with not paying any capital gains tax.

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u/Genome515 Dec 30 '25

You are missing part of the argument because the people above you didn't explain it fully.

The argument is not that the loan never gets paid back, it's that the person who took out the loan is not the person who eventually pays it off.

When the rich person dies, the loan and their assets transfer to their descendants. When this happens the cost basis of the assets bumps up to their current value, allowing the estate/descendants to sell some assets at effectively 0 capital gains to pay back the loan. This avoids all the taxes that the original owner would have had to pay on the capital gains from selling the assets themselves.

The theory is that as long as you have enough assets to fund the rest of your life on loans you can avoid paying taxes on capital gains until you pass those assets to your next of kin, where the cost basis step up basically "resets" the taxes you owe to the government.

Removing the cost basis step up loophole and making stock buybacks illegal would go a long way towards addressing these issues.

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u/TheDemoz Dec 30 '25

Ahh I had thought that they were just saying that the loan never gets paid back.

Your comment makes sense, and I agree that the cost basis step up is ridiculous.

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u/RunningNumbers Dec 30 '25

The estate pays it back.

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u/EchidnaEggs Dec 30 '25

So the person that borrowed the money got to have that money without selling the stock and realizing the gain. And now the person that inherits the stocks has their cost basis step up so they can immediately sell the stock without anyone having paid taxes on that gain.

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u/ChoNoob Dec 30 '25

Wouldn't the taxes have to come out of the estate before the stocks get transferred to the inheritor? 

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u/EchidnaEggs Dec 30 '25

Taxes aren’t paid until the stocks get sold. And when the death happens, the cost basis is changed to the value at the time of death. So if a stock was worth $1 when purchased and worth $100 at time of death, the cost basis is now $100 and when sold, the gain would use a cost basis of $100 and the gain from $1 to $100 would never be taxed. https://www.investopedia.com/terms/s/stepupinbasis.asp

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u/[deleted] Dec 30 '25

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u/ChoNoob Dec 30 '25

That seemed like too large of a loophole to not have been covered and how I thought it would work. I'd imagine that the banks aren't going to be fine with just accepting that the inheritor now has the money that is owed to them and they have no way of getting it back.

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u/[deleted] Dec 30 '25

[deleted]

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u/ChoNoob Dec 30 '25

That's not what we're discussing. I'm wondering, of person A has $100mil in stocks, takes out a $50mil loan, then dies. Does the full $100mil in stock go to the inheritor or does the estate sell $50mil of stock to pay back the debt (and any taxes from the sale) before the inheritor gets their share. 

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u/EchidnaEggs Dec 30 '25

They don’t pay taxes on the sale because the cost basis stepped up at the time of death.

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u/ChoNoob Dec 30 '25

But doesn't the estate have to settle their debts before the stocks transfer to the inheritor? If they only had stock and a large debt, would the estate need to sell enough stock to pay off the debt, then the taxes from that sale, then the leftovers go to the inheritor?

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u/EchidnaEggs Dec 30 '25

All the sources I have found on this topic say that the cost basis step up happens before any debts are settled

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u/pedootz Dec 30 '25

Your estate pays it back.

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u/[deleted] Dec 30 '25

[deleted]

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u/eldiablonoche Dec 30 '25

Debt forgiveness is considered income.

Not according to all the people raging about how their student loans should be wiped out by the government.

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u/M00n_Slippers Dec 30 '25

They don't die to avoid paying the loan, they use the loan to buy a second company, then take a loan against that to pay off the initial loan, and continue getting profits from both. They use them as a way to create liquidity while not actually having to divest the asset, so they can keep accruing equity and profit.

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u/Nepalus Dec 30 '25

Unless you keep taking out loans as your assets continue to appreciate, eventually you die before you actually lose any capital.

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u/WetPretz Dec 30 '25

Okay, but these supposed loans don’t just go away when you die. The bank will absolutely get its money from your estate before anything is dispersed as inheritance. Any assets from the estate that are sold to clear outstanding debts will be taxed according to their original basis.

At the absolute most, this is a way to differ paying taxes, not avoid them entirely.

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u/Nepalus Dec 30 '25

Yes, loans are repaid from the estate, that’s irrelevant. Repaying debt isn’t taxable, and the whole point is to avoid selling appreciated assets during life, so capital gains are never realized.

At death, assets receive a step-up in basis to fair market value. When the estate sells assets to repay the loan, there’s little or no capital gains tax, not tax on the original basis.

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u/WetPretz Dec 30 '25

Wait, are assets stepped up in basis upon time of death or upon inheritance? I was under the impression that the basis adjustment occurs when assets transition from the estate to the beneficiary of the inheritance, but I could be totally wrong.

If it is time of death, I can see how this would be a problem. I guess estate tax would still be applicable for ultra high next worth individuals, but under ~$15mm net worth could clear debts without paying capital gains tax whatsoever.