Can someone explain the Buy, borrow die concept.

Question

Can someone explain something about the buy, borrow, die concept of avoiding income taxes?  I understand that you don't pay taxes on borrowed money.   What do you do with the profits from the company to avoid income taxes.

Scott Trench · Answer

The concept is that property is passed to heirs at a stepped up tax basis, that, if sold, will not result in depreciation recapture, or capital gains taxes for your heirs.

If you plan to own real estate for a lifetime, this can be a huge benefit to your heirs.

However, I also think that a lot of people who set out to pursue this strategy miss the fact that it is literally a lifetime commitment to deferring taxes, which by definition means not realizing the gains. It's hard to harvest equity on these plays, unless you commit, long-term, towards very light leverage, as the only practical ways to benefit from the equity in your portfolio, if you plan to never sell it, only exchange it, for a lifetime, are to spend the cash flow, or cash out refi. As rates go up, cashing out and refinancing is very unappealing. Might be a decade or two before that becomes fun again.

I love my daughter very much, and want to make sure she has every opportunity. But, I am not willing to commit to 50 years (if I am lucky) of never harvesting material equity from my rental properties at this time so that she can inherit potentially millions or tens of millions of 2074 dollars at stepped up basis.

I plan to pay the tax man and spend some of my money at some point. But, will probably also set things up so that one day, some part of my portfolio is passed to my heirs at a stepped up basis. I just won't overdo it. It will be a byproduct of investing, not the primary purpose.

Bill B. · Answer

Like your post title suggests, you die to avoid the taxes. When you die your heirs pay zero taxes. All the depreciation and the capital gains go away. It’s an incredible gift to real estate investors. It’s basically an unlimited contribution Roth, with tax free borrowing.

You can EASILY pass several million to your heirs tax free and avoid at least a $1M in taxes if you spend anywhere near 20 years investing in real estate.

Bill B. · Answer

Offset today’s income with depreciation. Once you run out of depreciation or your income becomes too large. You do a 1031 to a new, larger property with even more depreciation. (Imagine the entire value of your property being just the 20-25% downpayment on a 4-5x larger property and the resulting depreciation.) Just like monopoly. Turning your little green houses in to large red hotels. (Apartment buildings/retail centers/farm land/ etc etc…)

Michael Puwal · Answer

What does one do with the profits from the real estate business every year to defer the taxes for ever?

Carini Rochester · Answer

Real estate loans are taxed as you pay down the principle, not when you borrow the money. So the money does get taxed, but gradually. The stepped up value of the real estate doesn't get taxed as it remains unrealized gains to you and your heirs get the stepped up basis.

Can someone explain the Buy, borrow die concept.

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