Capital gains are only taxed when they’re realized. They don’t pay taxes when the value of their portfolios go up, just when they cash out. So instead they borrow against those portfolios and pay zero taxes.
Estate taxes are supposed to close this loop.
edit: Pokemon Cards are my go to analogy for capital gains. You can’t tax someone on how much their pokemon card collection is potentially worth on ebay. You can only tax the money they made from the sale.
But how do they pay off the loan? They eventually need some sort of cash of their own right? Do they literally borrow to pay off a loan and do that infinitely?
You borrow $100 at 3% against a $125 asset and then invest it in an asset that appreciates 10%. After a year, your debt is $103 against a $137.50 asset, and your asset you bought with the loan is worth $110.
You take a second loan of $88 against your new asset (80%). Your first asset is now worth $151 with a $106 loan against it. Your second asset is now worth $121 with a $91 loan against it. And you have an extra $88 to spend on top of it.
So after 2 years, you started with $125 in assets and now have $272 in assets with $194 in debt, for a net gain of $78, and have pulled out $88 in cash tax-free. Whereas if you’d just left the money in the market you’d have only gained $26, and would have to sell and pay taxes on it to actually access that money.
This is the essence of the “borrow, repeat, die” strategy. It gets more complex as you’re typically making minimum payments on loans and working with large sums of money, but this is the basic strategy. It works as long as your investment profile keeps generating interest, which is why the rich use hedge strategies and other tricks to keep the money flowing during recessions. But an unexpected downturn can have the bank suddenly margin call you when you’re underwater on your loan, and then you might be facing bankruptcy if you didn’t do it right.
They can always hurt you more. The market turns right before you retire? Lol there goes your 401k. Meanwhile, their hedge funds have made enough shorting the market to keep them afloat until it bounces back.
New loans pay off the old loans. The cycle repeats. Seriously, if you zoomed out and looked, the billionaires and some upper 9 figure millionaires are in debt against their assets which clears on death. But the debt itself is low interest, and the assets are appreciating faster. Its one reason they say “hit a million and never worry about money”, though I think that number is like 5mil now.
Often by selling the asset they bought with the loan - aka cashing out. They borrow to buy a property/business, make the loan payments with the rent/revenue, and then sell it for a profit without spending a dime of their own money. NOTE: They will pay taxes on the capital gains of the sale of that asset. But they won’t have paid income tax on the money they used to purchase the asset in the first place.
They eventually need some sort of cash of their own right?
They’ll open a line of credit against their portfolio… which is a loan where the minimum payment is just the interest. They can use that like cash for their daily expenses and they can pay it off whenever and it will be there when they need it like a credit card.
Do they literally borrow to pay off a loan and do that infinitely?
Yes. It’s called Return on Investment (ROI). You just need to borrow at a lower interest rate than the expected return plus expenses.
Billionares don’t own things directly. They own stakes in corporations/trusts/etc that own things. They often have a salary that they pay income tax on, but that salary is only a fraction of their true income.
Capital gains are only taxed when they’re realized. They don’t pay taxes when the value of their portfolios go up, just when they cash out. So instead they borrow against those portfolios and pay zero taxes.
Estate taxes are supposed to close this loop.
edit: Pokemon Cards are my go to analogy for capital gains. You can’t tax someone on how much their pokemon card collection is potentially worth on ebay. You can only tax the money they made from the sale.
But how do they pay off the loan? They eventually need some sort of cash of their own right? Do they literally borrow to pay off a loan and do that infinitely?
As long as the market’s doing well, yes.
You borrow $100 at 3% against a $125 asset and then invest it in an asset that appreciates 10%. After a year, your debt is $103 against a $137.50 asset, and your asset you bought with the loan is worth $110.
You take a second loan of $88 against your new asset (80%). Your first asset is now worth $151 with a $106 loan against it. Your second asset is now worth $121 with a $91 loan against it. And you have an extra $88 to spend on top of it.
So after 2 years, you started with $125 in assets and now have $272 in assets with $194 in debt, for a net gain of $78, and have pulled out $88 in cash tax-free. Whereas if you’d just left the money in the market you’d have only gained $26, and would have to sell and pay taxes on it to actually access that money.
This is the essence of the “borrow, repeat, die” strategy. It gets more complex as you’re typically making minimum payments on loans and working with large sums of money, but this is the basic strategy. It works as long as your investment profile keeps generating interest, which is why the rich use hedge strategies and other tricks to keep the money flowing during recessions. But an unexpected downturn can have the bank suddenly margin call you when you’re underwater on your loan, and then you might be facing bankruptcy if you didn’t do it right.
Thanks for the explanation!
If only we could have a nice unexpected downturn that wouldn’t affect “us” right about now lol
They can always hurt you more. The market turns right before you retire? Lol there goes your 401k. Meanwhile, their hedge funds have made enough shorting the market to keep them afloat until it bounces back.
Yeah, THEY cause the downturns. When I buy a stock nobody notices. When Warren Buffett buys a stock, he moves the market.
New loans pay off the old loans. The cycle repeats. Seriously, if you zoomed out and looked, the billionaires and some upper 9 figure millionaires are in debt against their assets which clears on death. But the debt itself is low interest, and the assets are appreciating faster. Its one reason they say “hit a million and never worry about money”, though I think that number is like 5mil now.
You never actually spend your money…
Buy, Borrow, Die!
Often by selling the asset they bought with the loan - aka cashing out. They borrow to buy a property/business, make the loan payments with the rent/revenue, and then sell it for a profit without spending a dime of their own money. NOTE: They will pay taxes on the capital gains of the sale of that asset. But they won’t have paid income tax on the money they used to purchase the asset in the first place.
They’ll open a line of credit against their portfolio… which is a loan where the minimum payment is just the interest. They can use that like cash for their daily expenses and they can pay it off whenever and it will be there when they need it like a credit card.
Yes. It’s called Return on Investment (ROI). You just need to borrow at a lower interest rate than the expected return plus expenses.
Billionares don’t own things directly. They own stakes in corporations/trusts/etc that own things. They often have a salary that they pay income tax on, but that salary is only a fraction of their true income.