People who talk about "buy, borrow, die" never seem to mention interest.
Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes if you realized it every year. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead? That's also assuming you're not already receiving some dividends/income or can't be selective about tax lots to sell.
You could say "well you can simply accumulate an interest balance without ever repaying the loan, and hope the assets appreciate faster than the interest compounds", but then shouldn't you have already levered up prior to ever considering taxes? So taking on additional loans pushes you outside of your risk tolerance? Do you borrow or pay taxes depending on your portfolio performance? How does this work?
I'd be interested in seeing what someone with an actual finance background has to say about this "strategy". The popular image is just "free money", but while I have enough assets to start buying things with margin loans myself, I'm failing to see how to get some of that free money.
It seems generally reasonable that using an asset to collateralize a loan should be a taxable event, but the narrative about how this gets used seems off to me when trying to figure out the details.
> Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead?
You're assuming that someone has a portfolio that has a cost basis that is very close to the current market value. Most ultra wealthy folks have holdings that have been held onto for a very long time, with cost basis' that might as well be $0 compared to the value of the assets. Even non-wealthy folks that saved in a traditional brokerage would have a cost basis that is very low compared to the value of the assets. During the 'accumulation' phase, there likely is not much being sold at all.
If you want to access this capital, then you're paying 20% on every dollar. You don't need a 2% interest rate to make out ahead in this situation, it can be substantially higher and still be a better deal than paying the cap gains taxes.
There isn’t much publicly-available information with hard numbers (probably on purpose), but it appears that you need a huge amount of unrealized gains for buy-borrow-die to make sense. This implies that it is a very expensive scheme to run.
If you pay 50 cents to a financial service provider to avoid paying 1 dollar to the government, you’ve definitely come out ahead and the government has definitely lost. But the real winner is probably the financial service provider that is mostly pushing paper around rather than figuring out how to create the multi-billion dollar business that is needed to start the whole process in the first place.
I suppose it depends on how spectacular your buying is (a common criticism of sales tax is that rich people don't buy much, relatively), but wouldn't you only need enough tax lots that are close to current market value? If you've been accumulating, you've probably got a blend of tax lots from "nearly 0 gain" to "nearly all gain". You're also going to be receiving some dividends or have some other income sources that you presumably re-invest to create recent tax lots. The only case where that wouldn't happen is if you got lucky on a concentrated bet you made. If you inherited your wealth, you got your step-up, so you're faced on day one with "okay I have tons of assets with cost-basis at market value, how do I do rich person tricks?" Is that group not a good fit for buy-borrow-die, and it only works for founders/early investors of companies that blew up?
Taking on loans also means you're adjusting how leveraged you are, so I feel like there's a missing risk analysis component here. Otherwise of course I'd just take out as many loans as I could right now to get that sweet 10% expected growth at only 6% interest or whatever. So I can't borrow to avoid the tax man because I already borrowed as much as people are willing to give me.
