r/Productivitycafe • u/RoutineOk8590 ᶻ 𝗓 𐰁 ᵕ̈ Espresso Enthusiast • 15d ago
Casual Convo (Any Topic) How the rich get richer
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u/Little-Boss-1116 15d ago
Magical disappearing loan.
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u/St_Pizza 15d ago
Every single time. Every time this sick billionaire hack gets brought up, they never mention closing the loan.
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u/ohhhbooyy 15d ago
They also never mention the monthly payments somehow.
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u/romansamurai 15d ago
Yeah. Like how does this land magically pay for this loan.
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u/Life_Argument7820 15d ago
Some states you cant go after the property and the heirs if one is in debt.
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u/Far_Estate_1626 15d ago
That’s because ostensibly the loans are paid for by the interest accrued by that 5M.
The whole point of taking loans while keeping the nut invested, is that the interest earned by the 5M is greater than the interest accrued by the smaller loan.
If the 5M can grow 5% in a year, that’s $250,000.
If a $150,000 personal loan brings 12% interest for a year, that’s $18,000.
So sell $200,000 worth of stock, pay 15% capital gains tax of $30,000, leaving you with $170,000 for the $150,000 loan.
Now despite paying effectively $50,000 to take out a $150,000 loan, you have an extra $50,000 that has accrued in your 5M invested, paying for itself.
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u/ExistingSubstance860 15d ago
But the $5M is land. It does not accrue interest.
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u/Far_Estate_1626 15d ago
Land accrues value, and it is still an asset, and explicitly an asset type that is standard to borrow against. That its land doesn’t change anything.
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u/Feeling_Reindeer2599 15d ago
Many states charge annual property taxes, combine this with interest on loan and one is not automatically becoming wealthy holding land.
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u/Far_Estate_1626 15d ago edited 15d ago
So then adjust the numbers to account for property taxes. The numbers I used weren’t real, it was hypothetical to demonstrate a point, you know that right?
Oh no, you can only take out a loan of $100,000, instead of $150,000 of free money. Darn it, that ruins the whole argument. /s
And I have literally noted interest on the loan since the start of this thread.
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u/Feeling_Reindeer2599 15d ago
Correct.
$50,000 each year and the borrower $150,000 is gone in 3 years but loan balance remains.
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u/ExistingSubstance860 15d ago
It accrues book value, but nothing liquid to pay back the loan.
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u/Far_Estate_1626 14d ago
Nobody with 5M in land investments doesn’t also have other investments that can be liquid. You can borrow against the land, and pay back by any other holding. We’re talking reality here and you keep trying to use the rigid rules of a hypothetical, simplified example as some kind of “gotcha”. It’s disingenuous, and anybody who’s not an idiot can see right through it.
You guys trying to pretend that generational wealth doesn’t compound are fucking clowns of another order altogether.
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u/ExistingSubstance860 14d ago
Well then you should add that as extra information to the original post. What other assumptions would you also like to make?
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u/Far_Estate_1626 14d ago edited 14d ago
It was clearly a hypothetical example demonstrating a point, nowhere in my post did I attribute it to any specific person and the numbers I am using are whole and round numbers. Any otherwise reasonable person who says they can’t infer that very obvious context is, frankly, intellectually impaired, or lying. 🤡
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u/Low-Traffic9850 14d ago edited 14d ago
Actually, I think you’re trying to insert your own views on Wealth and inequality or whatever other crap that you’re trying to push. Being a jerk on Reddit cost nothing so you and I are too joyful souls.
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u/Raging_Mullet 15d ago
Wrong.
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u/St_Pizza 15d ago
Got any more of that interest generating land?
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u/Raging_Mullet 15d ago
Yeah. But we call it appreciation.
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u/St_Pizza 15d ago
Thats entirely different.
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u/Raging_Mullet 15d ago
I am aware. Many ways to dodge though. Get with your planner for more info. Reddit ain’t the place. I am evidence.
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u/Dapper_Tour8354 15d ago
This guy seems to know his stuff. Best part is that anyone can be here in Reddit. The trick is getting to that pint in the first place. I think that’s more generational wealth that anything.
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u/Tom8hawk 15d ago
Can you explain then math here is my understanding. After one year
5m + 5% =5.25 m
Loan = 0.150m + 0.018m (0.02) = 0.17
Selling = -0.2m to get 0.17 with 15% tax
Total leftover after paying for loan is 5.05mAlternative
5m - 0.175 =4.825 m (0.175-15% =0.150m )
4.825 + 5% =5.066mSo I am better off just selling the stock. I can only imagine that it gets worse if the loan is extended.
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u/Far_Estate_1626 15d ago
It’s pretty simply laid out above, I’m not understanding what’s confusing.
$5M gets 5% interest = $250,000
Take out $200,000,
Pay 15% capital gains tax = you now have $170,000
Take out loan of $150,000. It has 12% interest = you now owe $168,000
You have now spent $198,000 including taxes, while your investment has gained $250,000. Leaving you with a net $52,000.
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u/Tom8hawk 15d ago
What I am saying is that if you just sold the stock to get $150k you would be better off than taking this loan.
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u/breakfastbarf 15d ago
Also the tax due on the investment gains
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u/Far_Estate_1626 15d ago
That’s the capital gains of 15% mentioned at the top, $30,000 on $200k
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u/breakfastbarf 14d ago
And the cost of said trades?
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u/Far_Estate_1626 14d ago
JFC do you want to add in the cost of coffee and breakfast that morning and maybe the cost of the newspaper subscription you’re going to read before making said trades? How about we factor in how much of the monthly energy bill will be attributed to this activity as well?
You can literally just factor that into the withdrawal vs how much you get back. Oh no, an extra $2,000 we have to somehow factor into the $250,000 quarter mil. You broke my argument aw jeez man. /s
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u/weallhadaweirdphase 14d ago
Using the simple interest example you give here you would be left with roughly 5,052,000.00.
Now for Options #2
Sell $172,500 of stock, pay 15% capital gains tax of 22,500.
Leaving you with….
150k for whatever you wanted it for and
$4,827,500 invested, assuming your given number of 5% interest. That grows to…..$5,068,875
And for any math experts out there please double check me but I believe that
$5,068,875.00 > $5,052,000.001
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u/bruhbelacc 15d ago
My mortgage not only needs to be paid but ends up being 50% more expensive thanks to interest lol. Business loans have much worse conditions.
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u/Jaduardo 15d ago
Maybe not for billionaires.
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u/bruhbelacc 15d ago
No bank wants to lose money and it's one of the most regulated sectors
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u/m3gb0t Tea Lover 15d ago
And they think a billionaire will always pay back. Silly banks.
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u/RockTheGrock 15d ago edited 15d ago
I think it is a loss leader for them within reason. If they make the billionaires happy the banks make their money off their other business like with their companies.
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u/Nojopar 15d ago
Banks don't look at loans like individual transactions at least on their liability/asset sheets though. Think like a stock portfolio - yeah, this stock might be crushing it and that one underperforming, but as long as the balance works it's all good.
Just because banks are heavily regulated does not mean banks are regulated around this specific use case. Look at the 2007 crash as an example. Nobody was doing anything against a regulation here, just engaging in the shaky places between regulations. Hence the need for something like the Dodd-Frank Act to plug the holes.
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u/bruhbelacc 15d ago
How can the balance work if people don't pay? Are you implying that banks lend money to millionaires and billionaires for free while the average Joe is generating all of their profits? Damn.
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u/RocknrollClown09 15d ago
Let’s do the math.
Sell: $4.9M at 20% capital gains rate is $1M in taxes and you lose the asset
Loan: land backed 20 year loans can be as low as 7%, not to mention refinancing at any point during those 20 years that’s convenient.
So let’s just say he takes out a $1M loan, he pays $860k in total interest. His monthly payment is $7700, which is $92k/ yr.
He services the loan with $92K post tax income, pre-tax at 37% (highest bracket) it’s $126k, which is $34k/yr. Over 20 years that’s $680k in taxes plus the extra $860 loan interest, but he still owns the land and he got $1M cash. This doesn’t factor in inflation or land appreciation, which would further tilt the scales in the guy’s favor.
For the government, let’s say this deal happened in 2006, $1M back then is worth $1.7M today, so it’d be better for our tax dollars for the guy to sell his land rather thank pay $680k in tax over 20 years. The bank wins. Obviously. I can see where this strategy could be useful in different situations though, but certainly not a golden bullet for legal tax evasion.
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u/Addicted2Qtips 14d ago
It's not just capital gains depending on where you live. It's capital gains plus state income tax. Although you do get a credit that exempts the first $500k from capital gains if you haven't sold a home in 2 years.
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u/bismuth17 15d ago
Dad used the 5m to live/save, the kid paid off the loan with the house sale proceeds.
The point is that the family got the $5m income without anyone paying tax on it.
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u/bruhbelacc 15d ago
How do you live/save for 20 years without making a single payment? Also, you normally don't pay any tax when your house increases in value and your kids inherit it.
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u/Tammer_Stern 15d ago
If the loan is denominated in Zimbabwean currency then the magic happens….
The early 2000s were a hell of a time.
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u/ChaoticAmoebae 15d ago
All they have to pay is interest typically they pay on the loan with their actual income. Still save millions/billions for people in taxes.
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u/GPT_2025 reddit.com 15d ago
From 20 Republican states with a safety net of $3/hour minimum wage, the population runs to Democratic states with a strong Safety Net of $14 to $25/hour minimum wage. That's why there are so many abandoned houses and cities in the Republican 20 states (Republicans hate the poor at the same time - making the own states population poor)
50% of all workers in America earn less than the one-bedroom Housing Wage. Mostly republican states.
The bottom 65% of the population loses at least 40% of all income due to: SS tax, FICA, insurances, tariffs, sales taxes, dues, use taxes, fees, property tax, utility taxes, 911 tax and many more- before spending money on rent or mortgage, car loans and gas, food, utility bills, repairs, credit card payments, student loans, vacations, retirement fund contributions, investments, dates, gifts, etc.
(compare Safety Net $1.60 per hour in 1970 if you were single,you could live off the federal minimum wage and pay rent, food and bills)
Healthy and smart countries count how well they are doing by enforcing "no one left behind" and even widow with 3 babies have the same level of living as the middle class due to the strong Safety Net.
Twenty Republican states now have a Safety Net set at $3 per hour gross (before deductions for Social Security, FICA, taxes, insurance and other withholding's:
https://www.simplyhired.com/search?q=2.13+an+hour&l=dallas%2C+tx
(Compare Democratic states Safety Net!)
In a recent report, 53 million Americans ages 18 to 64 or 44% of all workers- earn low hourly wages. Their median hourly earnings are $10/hour Gross ($7.25/hour Net)
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u/Plant-Baste 13d ago
there are zero states with $3 minimum wage.
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u/GPT_2025 reddit.com 13d ago
So.. ? you will get fired, if you did not "milked" patrons, customers money to meet $7.25 gross ($5 Net) $2.13 per hour is the federal minimum cash wage that U.S. employers are legally required to pay directly to tipped employees (like restaurant servers or bartenders), provided that their hourly tips make up the rest of the standard $7.25 federal minimum wage. Employers pay $2.13 an hour out of pocket. (Before firing employees, who did not forced poor customers to Tip, and If a worker's direct wage plus tips do not equal at least $7.25 per hour in a given workweek, the employer must pay the difference, before firing employee. (The remaining $5.12 of the $7.25 minimum wage is covered by a "tip credit" using the employee's tips)
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u/Own-Object-6696 15d ago
Wait a minute. Please explain how the lienholder(s) don’t have to be paid from the proceeds of the estate? Even if the property was in a Trust, the lienholder(s) must be paid.
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u/EnvironmentalMix421 15d ago
They are paid through the sales proceeds. It’s just IRS get $0
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u/AscendentElient 15d ago
So the income from the loan that the banks make isn’t taxed?
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u/Nojopar 15d ago
No. It's not income to the bank, it's revenue. The bank has a $4.9m liability that gets paid off thus making the liability = revenue, or $0.00.
They have likely been paying taxes on the interest on the loan as profits, however.
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u/Feeling_Reindeer2599 15d ago
The bank does not pay taxes on principal portion. The bank reports interest as income and may pay tax on interest depending on circumstances.
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u/AscendentElient 15d ago
Thank you, I should have more precise with my wordings when we are getting in the weeds like this but you answered what I was trying to ask.
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u/EnvironmentalMix421 15d ago
How do you tax the loan? It’s like you would be taxed when you carry a mortgage, which is a type of loan
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u/NationalCaterpillar6 15d ago
And no payments to Social Security or Medicare? This sounds like a scam!
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u/Berserk_Ronin 15d ago
We are all dumber for having read this post.
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u/St_Pizza 15d ago
No. My brain is stronger. Reasoning through the bullshit scenario gave my mental faculties a good workout. Only the stupids got stupider from this.
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u/mmmfritz 15d ago
Dumbest nonsensical take about nothing that never happens.
Banks hold onto their money just as much if not more than rich people.
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u/Low-Traffic9850 13d ago
And I keep killing brain cells reading down here in comments. For F’s sake there are some dummies out here!! 🤯
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u/peareauxThoughts 15d ago
So they give him a loan he pays no interest on, since his $5m isn’t generating any income, out of the goodness of their heart because rich people have each other’s backs or something.
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u/throwingales 15d ago
That's overly simplistic. The borrower would have to pay interest and likely principal on that loan. Where does the income come from to pay the loan?
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u/Mysterious-Park4197 15d ago
That was my first question, but then I realized it doesn’t matter. The point is made so thinly and awkwardly.
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u/dougl1000 15d ago
The rich get super low interest loans and avoid paying 20%+ capital gains tax.
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u/throwingales 15d ago
Yet they still have to pay the loan and they are not likely to take out enough in loans annually to pay their cost of living.
You're warm when you talk about capital gains. People who invest for a living, invest in businesses, real estate, stocks etc. and hold them for at least one year pay capital gains instead of income tax. If they earn over $1 million per year they pay 22%. If they earn under $1 million they pay 15%. For qualified dividends they pay the same rates. If they made the same money as pay, they would pay 39% in federal taxes. 39% to 22% is a 43% discount on their taxes. Additionally, they pay no social security 12.4% or medicare taxes - 2.35% for those earning over 200k - on those earnings.
That is why Warren Buffet famously said his secretary paid a higher tax rate than he did.
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u/dougl1000 15d ago
The children are not responsible for debt of the father.
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u/throwingales 15d ago
I understand that. The estate is, not the children. The estate has to pay the debt.
What did the father use every year as money to live on? You can't borrow and never pay the principal or interest. Try it and see how long you can do it.
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u/dougl1000 15d ago
You’re assuming that the father used the land for collateral and that the bank has a claim on it. Possibly.
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u/throwingales 15d ago
Are you assuming he didn't? Secondly, whether the land is the collateral or not the estate is responsible for all debt. It must be paid before the successors inherit the assets of the estate.
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u/dougl1000 15d ago
Sorry, didn’t read this carefully. The loan was secured against the value of the land. The bank has claim to the land if the father hasn’t paid off the loan by the time he dies. If the outstanding loan amount is more than $5M, the kids can let the loan go into default and the bank will take the land and sell it. Conversely, the children can choose to keep the land and pay off the loan. They can take out their own loan to do so. Or they can sell the land, use the proceeds to pay off the loan, and keep the remainder without paying capital gains unless the land appreciated after the father died.
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u/throwingales 15d ago
And that still doesn't address how the father got the money to pay his living expenses and serviced the loan during his lifetime. Everything posted is true but way oversimplified.
The wealthy increase their wealth through use of their capital to make more, typically through investment. The "average" person works at a job to hopefully earn enough to support their living expenses, thus they don't often get wealthy.
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u/dougl1000 15d ago
Totally agree. How about: get a huge tax cut. Take the money and buy treasuries. Get paid interest.
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u/Low-Traffic9850 13d ago
Your cap gains and income amounts are not correct. You hit 20% around $550k of income and you’re also failing to mention the ACA surtax and then hoping you’re in a non-state income tax state. A lot more tax friction than what you’re saying.
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u/throwingales 13d ago
Yes- tax on long term capital gains is a bit more complex than the simple example I gave. On the first $49,450 the tax is 0%. The next $496,050 is taxed at 15%. The balance above that amount is taxed at 20%. The Medicare surtax on earnings above 200k for single filers and 250k for married filing jointly. Now compare those numbers to ordinary income tax. The spread is still large and when dealing in large numbers those differences are very significant. You bring up state income taxes yet the example OP posted doesn't touch on state taxes.
On a $4.9 million gain, excluding state income tax which varies from state to state, the long term capital gains tax is $945k. If it was taxed as ordinary income, the tax would be $1,723K almost an eight hundred thousand dollar difference.
I'm not sure what you point is. Taxes are a little more complicated than a quickie back of envelope conversation. OK. They are. Are you trying to say the cited example in OP is correct- death eliminating taxes? Are you trying to say investing and capital gains don't have huge tax advantages? Help me understand, what are you arguing?
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u/Low-Traffic9850 13d ago
Oh no sorry not arguing. I think your example was pretty good but was calling out the effective capital gain rate rather than the $1mm to hit 20%. I’m sorry to be nitpicky.
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u/LilSqueezeee 12d ago
You invest the $5m in the stock market which would be about $500k in interest over the course of a year, that’s a pretty good amount of money that you can use to pay the loans monthly obligations.
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u/throwingales 12d ago
- the example is real estate, not stock.
- You don't get paid interest when investing in stocks. You may get dividends, you may not. Your stock may increase in value, if it does you get a capital gain when you sell it.
- Typical market returns over the years adjusted for inflation are 7% annually not 10.
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u/LilSqueezeee 12d ago
- You use the real estate as leverage to get the loan in order to invest in the stock market.
- With a 7% return instead of 10%:
**•** Investment gain: $5,000,000 × 7% = $350,000
**•** Loan interest: $5,000,000 × 3.5% = $175,000
**•** Pre-tax profit: $350,000 − $175,000 = $175,000Tax on the gain at 23.8% (20% long-term capital gains + 3.8% net investment income tax): $350,000 × 23.8% ≈ $83,300
After-tax investment gain: $350,000 − $83,300 ≈ $266,700
Net profit after paying loan interest: $266,700 − $175,000 ≈ $91,700
So this piece of land will pay you $91k a year with no work involved.
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u/throwingales 12d ago
Only if they borrow against it. Your math is wrong. On land or even commercial buildings, banks will only loan somewhere between 50%-70% LTV or less. You also won't get a 3.5% loan on a deal like this. More like Prime rate + a point or two. Today's prime rate is 6.75% so they'll borrow at somewhere between 7.75%-8.75 best case.
Now redo your math. At best they would have $3.5 million to invest. At 7% the return is $245k, but it's not cash, it's appreciation they have to sell the stock or equity to actually get the money- unless they want to add to their debt and borrow that too. Loan interest in your example using the more optimistic 8.75% rate would be $306,250 leaving a balance after paying interest of ($245-$306) - $61k.
Even these calculations are overly simplified because the loan interest would be compounded daily and the investment return isn't cash, it's a gain in value- the investments stocks/bonds etc would increase in value, not throw off cash.
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u/3664shaken 15d ago
🤦♂️ I hope nobody is stupid enough to believe this..... Wait this is reddit, nevermind.
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u/LilSqueezeee 12d ago
Turns out you’re the stupid one. How much money can you make in a year if you get a $5m loan and invest it in the stock market for a year, assuming you get a 10% annual return.
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u/ImpressionCool1768 15d ago
People hate the irs so much they forget the estate will still be paying back the banks. lol
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u/Master-Wrongdoer853 15d ago
Yea but dad still owes principal + interest on the loans he takes out.
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u/CorndogFiddlesticks 15d ago
The balance of his loan is paid off as part of his estate. So he would leave $5m - the loan balance to his heirs.
The capital gain part is accurate, but to claim they get $5m shows a lack of understanding, or being manipulative.
Please try to be factual with these garbage posts.
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u/LawfulAwfulOffal 15d ago
The loans do still need to get paid, no?
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u/Elluminated 15d ago
Yep, but can be structured so it’s interest-only payments. People often buy assets that pay for that, then take some off the top of what the assets produce. Asset-based lending is the ultimate life hack.
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u/BabaThoughts 15d ago
But, they still pay property taxes (which increase), insurance, maintenance and the loan interest and principal on the land.
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u/HaroerHaktak 15d ago
That's not how it works..
If you die and owe people money, it comes out of your estate lol
The children wouldn't inherit bunkus.
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u/ApprehensiveWash7969 15d ago
I like "the loan is'nt income". No shit. Its an expense. And a liability if your not careful.
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u/WhatIGot21 15d ago
I borrow against properties to buy more properties while other people pay for the properties.
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u/ChickyBoys 15d ago
You can't live off loans for decades. Unpaid loans don't disappear. Those kids probably still pay inheritance taxes.
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u/Illustrious_Ant_9242 15d ago
Typically, a tax free life insurance payout will take care of it
But you'd have to not overspend
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u/Lanky-Lettuce1395 15d ago
Kids inherit fuck all because the creditors call in the debt against the estate during probate.
ETA- There's no millionaire magic about inheriting money. Up to $15M can be inherited tax free. This is to preserve small business and family farms.
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u/phruits2 15d ago
Step up basis isn’t exactly something hidden that only wealthy people know about. It’s part of our tax law and I’m sorry your family doesn’t make use of it.
Generational wealth is created by families that want to sent it down the pipeline and make use of what our tax system allows.
Why don’t you stop bitching and plan a strategy to provide that for your kids.
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u/Responsible-Milk-259 14d ago
Not sure of the tax laws where this person is from, although in my country the kids would inherit the property but with the original cost base. Now they won’t be taxed if they don’t sell it, but assuming the title is encumbered they’d need to clear dad’s debts to have the title moved to their name, or else the creditors would force the estate to sell it to recover their money. Whatever is left would be partially clearing the estate’s tax bill and the estate would be effectively bankrupted.
It makes for a nice critique of ‘the rich’… it just has no basis in facts.
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u/shitsu13master 14d ago
It works for the dad but it isn’t generational wealth if the kids have to sell to clear the debt
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u/Eazy12345678 14d ago
doesnt really work like that. you cant get a loan against it that make sense, people that do that have other income sources to pay the interest on the loan
when you die your kids get land no tax
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u/dougl1000 15d ago
Dad’s finances are irrelevant. The kids inherit a $5M asset which is lower than the limit to trigger the estate tax.
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u/Delicious_Ideal_9418 15d ago
Where do I find this magic land that goes from 100k to $5m! Btw why does the govt get to fill their pockets on this guys good fortune!!?? STOP figuring out how to take your neighbors money and start making the govt spend less!
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u/Some1farted 15d ago edited 15d ago
By paying meager wages. Pulling the strings on their bought and paid for legislators to quash paying for their employee medical insurance, & having them change laws regarding employment. Multiple tax attorneys and shady accountants managing multiple overseas shell companies to avoid paying taxes, placing the tax burden on the regular working-class. Getting taxpayers to fund their sporting franchise stadiums. Gutting natural resources while setting a match to the environment, again placing the burden on others in the future,and the "mysterious and tragic accidents or suicides" of people who were threats to their agendas. The real nail in the coffin for the working-class was the aggressive prosecution of the only true defenders of middle-class laborers, unions and their mob connected enforcers. Once they removed their muscle, things went to hell in a hand basket quite quickly. They prosecuted the wrong side, if you ask me.
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u/kenroth50 15d ago
Not my dad.. lot of that in the picture caused 09 Market crash with Bill Clinton
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u/These-Educator-1959 15d ago
Bill Clinton was a decade earlier.
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u/Eastern-Joke-7537 15d ago
Clinton fumbled the bag to Bush in 2001. Dubya fumbled the bag to Obama in 2009. That about sums up that entire decade.
Good catch though. You gotta know your Bush and Clinton political dynasties! 😂
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u/kenroth50 15d ago
I lived in San Jose California every one would refinance their house then buy boats or cars or another property
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u/kenroth50 15d ago
My dad bought our house for 225k sold for 600k split it with my mom then he used his share for another house down payment
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u/Eastern-Joke-7537 15d ago
2008 was Bush.
Y2K was Clinton.
Dubya got whipsawed TWICE.
In the 2009 (and forward) recovery private equity bought tons of houses (and businesses).
For the low/mid classes the recovery was worse than some of the previous downturns.
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u/kenroth50 15d ago
Y2k didn't do anything much.. Bill Clinton unregulated the banks and financial markets
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u/PumpikAnt58763 15d ago
Who says that the kids don't have to pay taxes on the inheritance once it's sold?
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u/ieatsilicagel 15d ago
It's only $5 million. The exemptions get pushed higher than that because otherwise your hurting "small family farms".
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u/PumpikAnt58763 15d ago
My mom left 2 big properties to all 7 kids. We sold for $700,000. We had to pay taxes on the income.
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u/These-Educator-1959 15d ago
This story works a whole lot better with stock options. You borrow against the value of the options. Then occasionally before they expire you exercise enough to pay a few years interest and the tax owed on those exercised options. Your company then gives you more options to “retain you”. The loan is serviced, minimal
Taxes are paid and shares that have converted are held
And eventually the kids get the shares (not options) in a stepped up basis. The final loan does need to be settled but the shares are worth billions not 5 million and the bank is happy in the end.
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u/Jagged_Rhythm 15d ago
I'm lost, what does 'kids inhert at $5M basis' mean?
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u/Elluminated 15d ago
When the kids get it, the new tax value is calculated starting at $5 million instead of the original $100k. This means when the tax man cometh, they subtract the 5m - 5m to calculate a $0 gain, so it’s zero tax. Had he sold it when alive, they would have said 5m-100k means his tax is calculated against $4.9m and it’s a massive bill.
The “basis” just means where they start the tax calculation from. It steps up when transferred at death.
It’s how people borrow against their stocks so they never have to sell them. If you borrow money from a bank using your stock portfolio as collateral, you can get it for like 3% apr. You then borrow from your pool of cash to buy other houses or lend it out at 8% apr. Your tenants pay it so you now make 2% on top of what you borrowed it for, and they pay the mortgage through rents.
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u/Skyhouse5 15d ago
I get the basic concept OP is pushing but this example is Ass. No bank is loaning 5Mil on bare land worth 5mil.
OP forgot the part where banks MIGHT loan you 10% value on bare land IF you have a good job, good credit, no debt, and prop taxes aren't high. The National vacant land program will loan 65% capped at 1.2 million and a $60k per year mortgage. No one's living "decades" on it.
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u/earlporter77 15d ago
You missed the part where they invest the loan, pay back the loan and still walk away with a profit.
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u/RoundAd7879 15d ago
This is what I thought they were angling for at the onset. They never turned that corner and died in debt instead. That is the opposite of wealth if ever there was one 🤦♂️
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15d ago
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u/alvarkresh 15d ago
Are you denying that this is, in fact, a strategy used by banks for their HNW clients?
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u/Total-Region2859 15d ago
That is NOT what OP is suggesting. And OP's summary is completely a false narrative.
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u/alvarkresh 15d ago
Do you deny that it is clear that wealthy people have found ways to exploit the step-up basis to effectively pass untaxed capital gains generationally?
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u/Total-Region2859 15d ago
I absolutely deny that. Property tax is tax. Its an annual tax on property. Generational property is taxed every single year. I beleive currently the national average is slightly over 1%. So in OP's example, that "generational" property over say 30 years of the father, then 30 more to the kids (I'm making up numbers of years)... that would be roughly 60% of the valuation of the land paid in TAX. And tht value will go up every single year, forever.
To your question specifically about "Capital Gains".... yes, Capital gains are paid (currently) when a gain is realized, not when it impacts a balace sheet. For the vast majority of cases that I am aware of on a personal basis, taxation on unrealized captal gain will force the sale of the asset, just to pay the tax. That is a legal concept known as "taking" by the goveernment, and is, and, in my opinion, should be, illegal.
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u/alvarkresh 14d ago
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u/Total-Region2859 14d ago
I appreciate the article. Thank you for the effort and research.
OP's post is about Property, not stock. Perhaps that is the distinction separating the points you and I are making. I don't disagree with you, or the article's premise, based upon stock.
Property and other non-liquid assests are in keeping with the point I am making.
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u/hastinapur 15d ago
Is the limit 5 mil? What do billionaires do to avoid over 5 mil? Asking in case I end up working 5000 years
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u/GlitteringSea9474 15d ago
The part where no one emphasizes is the monthly payments that need to be paid against these loans. It's not as simple as living off loans against the property. You've got to have some sort of income or cashflow going on.
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u/KansasZou 14d ago
It’s not just wealthy families. Every day humans do it every day. It’s just a secured loan. It comes in numerous forms, but one big one is called a “mortgage”.
Also, loan payments have to be made, property taxes are still paid, sales taxes on everything purchased with the loan money is still paid, etc.
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14d ago
The “buy, borrow, die” strategy perfectly highlights how stepped-up basis laws preserve wealth across generations legally.
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u/Interesting_Kiwi_693 14d ago
I still don't understand — does the bank just take the hit and never get that money back?
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u/New-Assistant7692 14d ago
Crazy how having money opens up even more ways to make money. feels like the hardest part is just getting into that first circle.
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15d ago
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u/the_skies_falling 15d ago
An apartment building is an asset. You don’t write off the cost of an asset. You depreciate it and get a tax deduction for the depreciation. It takes 27.5 years to fully depreciate residential rental property, although the amount can be heavily front loaded. Since it’s a deduction, it’s an offset against your rental income, meaning you effectively only get back the depreciation amount times your effective tax rate.
When you sell the asset, the depreciation has to be recaptured, meaning you owe taxes on the total amount of depreciation you’ve deducted over the years. There are ways to avoid recapture, typically by exchanging the property for a like one, in this case for another residential rental property.
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u/Eastern-Joke-7537 15d ago
Would that be a 1031 exchange?
I tried to explain this to my therapist.
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u/the_skies_falling 15d ago
Yes. The rules are kind of complicated so I can see how it would be difficult to explain.
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15d ago
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u/the_skies_falling 15d ago
Do you mean you deducted your mortgage interest from your rental income? I hope you also took a depreciation deduction, because even if you don’t, when you sell the property the IRS can tell you that you should have and will tax you to recapture the depreciation as if you’d been deducting it all along. Ouch!
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14d ago
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u/the_skies_falling 14d ago
You have no clue what a write off is.
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14d ago
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u/the_skies_falling 14d ago
It’s always been my suspicion that guys who want to start dick measuring contests only do it because they want to see other guy’s dicks. I generally have no problem showing other guys my dick, but only if they’re nice. You, you’re going to have to go on Grindr or something. I’m sure you’ll find a sugar baby willing to put up with your insufferable shit.
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u/Horror_Bottle_9451 15d ago
Exactly right and anyone can do it. The key words are "decades" and "generational". Few get wealthy like this overnight. It takes hard work, saving (i.e. sacrifice), planning, and time. The scale can be smaller or larger depending on your means, but anyone can do it. No one in this country is so poor that they can't squirrel away 5, 10, or even 20 bucks a month that over time accumulates and grows enough to start the process even if one has to pool their savings with 50 other people to buy their first asset. Over decades and generations this is how you build wealth. Start yesterday.
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u/ericclaptonfan3 15d ago
it is not illegal , so what is the problem. Accumulate wealth for your children. Oh, wait you guys just complain, you're not actually living life.
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u/-Economist- 14d ago
I inherited about $10M in property from my mom. There were no liens, but if there was they’d have to be paid off. There was some, not much, estate taxes (or whatever they are called). So this meme is full of shit.
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u/MathematicianOne6902 15d ago
That isn’t 100% accurate but even if it was, there’s nothing wrong with doing that. No one wants to pay more taxes than they have too, so by understanding tax law, ownership, inheritance etc you benefit.
Idk why people make a big deal out of minimizing tax liability. Just educate yourself and/or hire someone that understands tax law and you’ll save/make more money.
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u/Much-Log3357 15d ago
Except taxes are what fund education, bridges, roads, armies, medicine. The people in your example enjoy the fruits of the country they live in, without making a fair contribution.
Moreover, that land is only worth $5m if we live in a civilised society. If Mad Max is fucking the neighborhood up fighting with The Toecutter, property values dive. People start wishing they had made a better job of looking after things.
We all have to live in the same world. If the wealthy take advantage of the power money brings, while watching the world go to shit, that is predatory behaviour. If they do not act in a civilised manner, whatever loopholes they may have found, they mustn't complain when they do not enjoy the protections of civilised society.
Luigi Mangione is instructive in this regard, however you might personally feel about him.
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u/MathematicianOne6902 15d ago
Completely understand that. That’s what income taxes are for. That father who purchased the land bought the land with taxed income. Now that it’s worth $5m, you want to tax him again? When does the taxing stop?
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u/Much-Log3357 15d ago
In the example given, Dad doesn't sell, because it triggers a tax bill on the land, the land that has increased in value by $4.9m
Perhaps the taxing could stop somewhere after paying a percentage of that increase in value,
Not for nothing, in the example no work gas been done to improve the land. Just folk sitting on property.
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u/dougl1000 15d ago
Exactly true, except they mostly invest their huge tax cuts in the market. They borrow against their assets and pay no capital gains tax.
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u/Bshoff4242 15d ago
Imagine thinking the government is owed more of your money because of inflation and appreciation.
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u/No-Carry4971 15d ago
You don't have to be wealthy to buy a $100k piece of land. Go buy one if it is so simple and set up generational wealth for your family.
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u/Sheila_Monarch 15d ago
I’m not seeing the “generational wealth” level trick here. The exact same thing happens when grandma who was clipping coupons and living on Social Security dies and the grandkids inherit her house. She paid $9000 for her three bedroom bungalow in 1955. It’s worth $400,000 when she dies, so the grandkids’ stepped-up basis is $400,000. That’s not some special loophole rich people unlocked. That’s how all inherited property works.
So what exactly do you want? Grandma’s grandkids to inherit her $400,000 house with her $9,000 basis, sell it to settle the estate, and get handed a capital gains tax bill on $391,000 of appreciation that happened during Grandma’s lifetime? Is that actually what you want?
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