[hn_throwaway_99]

I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.

[eadmund]

The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.

[roenxi]

Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.

If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.

Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.

[KingOfCoders]

One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.

At one level of money you are not impacted by a market downturn or crisis.

Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.

[bushbaba]

And many very rich people in Germany got very very rich in ww2 by stealing Jewish assets and businesses.

[KingOfCoders]

  A. Yes. Plus selling to the Wehrmacht ("war is a racket"), often with forced labour - or both, first stealing from Jews then selling to the Wehrmacht (like the current owners of BMW, ancestors sold to the Wehrmacht, profited from forced laber and additionally stole from Jews [1]). In communist East Germany Jews even couldn't get back their assets after the war, because Jews where "capitalists".

  B. The vast majority of Germans profited from stealing from Jews (see book "Hitlers Volksstaat"), e.g. Germany was out of money before Kristallnacht and Jews had to pay 1 billion Reichsmark after the progroms, which helped the German state. Also jewish furniture etc. was auctioned off to all Germans - people too often only talk about arts and houses.

[1] The Quandts already were rich selling to the Prussian army, then during hyper-inflation of the economic crisis bought struggling companies, then "bought" companies from Jews who were forced to sell, then used forced labour in their companies, sold to the Wehrmacht, after WW2 got everything back and the debt they accumulated to buy all of that had evaporated because of the war. Today they own large chunks of BMW for example.

[Dracophoenix]

You don't need to be rich to do that, just wise enough to keep savings and live below your means.

[from-nibly]

No you need to be really long term liquid and thats what poor people really don't have ( liquid assets to throw at buying stock)

[Jensson]

Most people are between poor and rich, he said not rich not that the poor could do it.

[KingOfCoders]

You can't buy cheap houses when everyone wants to sell and there are loans. But if you are rich, you buy when everyone sells.

[vintermann]

Piketty's point in a nutshell, wasn't it? Only he talked about it in terms of insurance.

[caeril]

> One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.

Generally untrue, since most rich people hold their assets in what's being sold. There are a handful value investors left, who bother holding cash equivalents when PE ratios get absurd, but they are few and far between. Tech billionaires, in particular, are very unlikely to be sitting on much cash.

[KingOfCoders]

"Generally untrue"

I know several people who bought vast amount of real estate during the financial crisis.

You don't need to "sit on cash" to buy things.

[hackernewds]

transfer the basis to whom? better not inherit anything

[Shaanie]

If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.

It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.

In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).

[koolba]

> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.

There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.

Taxing capital gains at all is not “obvious”.

Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.

> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.

The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.

[NotYourLawyer]

Getting rid of the stepped up basis doesn’t require that we realize the gain at death. Just transfer the basis to the heirs, and if/when they sell, then realize the gain.

[impossiblefork]

Yes. As a Swede, I don't even think of individual ownership of assets.

I see a line of descent as the unit which holds property, rather than individuals from that line, and from that PoV inheritance tax of course makes no sense, but similarly, disinheriting somebody, and some other notions, don't make sense either, so it's a different perspective.

I think the Swedish state actually takes my perspective on this, because in Swedish inheritance law you can't disinherit somebody, and we don't have inheritance tax.

[8note]

I think you've misunderstood what they're suggesting - they're considering the transfer from parent to child to not be a realization, so there's no taxes, and no change in basis.

The child who sells the house, then has to pay gains from when the house was first purchase, rather than against the value when they inherited it

[mschuster91]

> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.

Well, "homestead" exemptions are usually already a thing in most countries' inheritance laws. There is no need to draw stocks into the mix.

> Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.

It actually is obvious, at least if you want to prevent a return of feudalist eras.

[mcculley]

Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.

[echoangle]

> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.

So make an exception for a single home the inheritor personally lives in and tax everything else.

[Scoundreller]

We have this in Canada, but it also means the richer you are, the bigger the subsidy you get.

Also means people over-invest in their homes and remain in homes that are larger than necessary for themselves instead of downsizing.

And renters get squat.

[Hikikomori]

Is it obvious that we should have roads, running water, someone that builds up the basics of society?

[carlosjobim]

> It's utterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.

Who do you think writes the laws and the tax code?

[presentation]

Yup, here in Japan inheritors have to pay 10-55% (progressive based on the amount) of the value of all inherited property globally within 10 months.

As an American, knowing that I could have gotten away without this tax had I decided not to live in Japan long-term, and knowing that I will have considerable inheritance when my parents pass is a bit of a downer; but logically speaking, the step-up basis loophole is BS and it probably ought to be this way, or some variant of it, everywhere.

[mackman]

If you exceed the inheritance tax exemption then you are taxed on the $10k so LTCG would be double taxing. You could argue that the inheritance tax should have a much lower exemption but double taxation is harder to justify.

[vel0city]

> double taxation is harder to justify

Bullshit. "Double taxation" is such a weak argument to me.

When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there.

My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes.

When I pay for a hotel there's often a bevy of different taxes on that. When I pay my phone bill there's a bunch of different taxes on that. Even getting a drink at a bar there's a sales tax and a liquor tax.

And all of that is on money I've already paid all those several income taxes on, so it's really all just stacking there.

Oh but boo hoo ultra wealthy get their massive inheritance "double taxed". Get bent crying over your "double taxed", I'm quadruple taxed and more all the damn time. Weak argument.

[commandlinefan]

> Quadruple tax on me there.

We have a problem with that, too.

[cool_dude85]

What is "double taxing" and why is it bad?

[vel0city]

So much stuff has several layers of taxes on it but "double taxation" is really only used when discussing inheritance taxes.

It's a term wealthy people made up to trick poor people into feeling sorry for ultra wealthy actually paying taxes on things.

[nobodywillobsrv]

Why should you be taxed on it at all?tax is policy. You tax things you want people to consume less of.

Inflation makes nominal values to up.

More inflation more capital gains. Gov is now incengltivized to inflate to pull tax out of realized assets that have not even gained real value

[scotty79]

What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!

[vel0city]

> If it was up to me I'd tax spending not income. Regardless of what you are spending on

Under this system the poor who spend the majority of their income just to survive pay the highest effective tax rate while the wealthier who save most of their income have the smallest effective tax rate. That sounds like a fair and equitable system to you?

[zeroonetwothree]

You still need income to pay the interest.

Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since (a) you will be dead anyway, (b) tax laws change all the time, and (c) it would have to be discounted appropriately so it may not even be a win.

Personally I think we shouldn’t have capital gains taxes at all so this avoidance method doesn’t bother me.

[gambiting]

>>Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since

It's the other way around. This strategy allows you to not pay any taxes during your lifetime, so you have more money to play with and enjoy. Your inheritors might not have to pay tax on this money, but that's not your concern because like you said - you're dead at this point.

[creer]

> avoid paying taxes altogether

At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.

[deepsun]

Not postpone -- avoid. The base price of the asset is adjusted at the time of your death, so if bank sells the asset immediately, they pay no taxes.

https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...

[creer]

There is confusion between capital gains tax and estate tax (and estate planning devices like trust law). And that matters.

Is the problem capital gains tax as some people claim or is it elsewhere?

In the process described, capital gains tax is not even postponed (and that write up does not provide for Peter's major expenses during life). That write up works (when it does) because of bypassing estate tax.

The need for realizing capital gains is eliminated through trust, estate planning and other estate tax law (seems to me). The whole of the procedure is in that side of the equation. Not in capital gains tax law.

So the question: Does this all call for a change in capital gains tax law or changes in estate planning (trusts) and estate tax law?

When you use margin loan or pledged assets lines of credit, you are postponing. Which you can potentially kick all the way into estate tax (which your estate may pay if it's large enough). That write up is different still and describes working around even that estate tax. And then the question does matter of which law you are asking to change. (Besides the traditional method of making a law, any random law, thereby solving all problems for eternity - or at least gaining some voter satisfaction.)

[deepsun]

Yep. The link above says:

> The conventional wisdom is that you can avoid income tax (via the basis adjustment at death) or you can avoid estate tax (via lifetime gifting and estate freezing strategies) but you can’t do both. This conventional wisdom is wrong, and I’ll explain why below.

[scoofy]

No.

[refurb]

This sounds like a great idea but really fails the sniff test:

- you’d need to borrow for decades, where, even at low interest rates were burn through significant capital (more than taxes would)

- you’d need low interest rates to exists for decades which we know doesn’t happen

- finally, all these Uber rich (Bezos, Musk) have all sold significant portions of their equity and paid taxes on it

This seems like nothing more than a hypothetical idea.

[SuchAnonMuchWow]

The article goes into great detail and gives several example of several CEOs borrowing for actual decades, so it passes the sniff test because it does actually happen.

[silotis]

The article gives examples of CEOs borrowing against their shares. The article provides no examples of CEOs rolling those loans over until their death.

[technothrasher]

> Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.

That's federal estate tax. State tax can be different. Massachusetts, for example, has estate taxes on over $2M ($4M for a couple who manages their estate plan wisely).

[potato3732842]

State estate tax is just a tax on people who are ignorant of it, unwilling to plan for it or who's relationship with their heir(s) is too dysfunctional to dodge it. The rich almost always avoid it. The poor are never subject to it.

It's like greasing a couple rungs in the middle of the economic ladder IMO. I'm not a fan.

[vel0city]

Massachusetts requires estates worth $1M+ to report for estate taxes. There's something like a $60k exemption and then it's a progressive rate system.

Based on what I'm seeing, a $2M Massachusetts estate would have $50k of estate taxes to pay, a 2.5% effective tax rate.

In the end though only 12 states have an estate tax, and Massachusetts has the lowest threshold and highest rates.

[atmavatar]

Borrowing against the current value of your stocks should automatically cause any gains to become realized for tax purposes.

[valval]

Funny that you’d take this route. I’d just lower capital gains tax rates.

[Zenzero]

At the time the estate tax is being considered isn't that usually down to a single surviving individual? I imagine it's uncommon for a couple to die at once to qualify for the 27m exemption.

[NotYourLawyer]

You don’t have to die at the same time. If you leave everything to your surviving spouse, it’s also possible to transfer the benefit of your remaining estate tax exclusion.

[hn_throwaway_99]

Search for "estate tax exemption portability".

[nobodywillobsrv]

Yes but that is because taxes are incoherent and abhorrent

Why do we tax realized capital gains at all and why based on the ruler of fiat which is controlled by those who tax (they keep making the ruler shorter)

If the goal is to creat drag on multiplicative dynamics then do so coherently

Tax should make sense at least in core targets. Yet there are no core targets.

[CPLX]

Because realized capital gains are income and we tax income.