How Do the Rich Avoid Taxes? There’s a Multi-Part Strategy
How do the rich avoid taxes? Legally? If we knew the answer, we’d do it, too, right? Well, not necessarily. There is a multi-part strategy, but for it to work, you probably need to be, well, wealthy.
How Do the Rich Avoid Taxes? ‘Buy, Borrow, Die’
Buy: The wealthy buy assets like stocks and real estate that grow in value. But they hold onto them rather than selling. That’s because the IRS only taxes gains when you sell an asset; the wealth growing on paper stays tax-free.
Borrow: The rich usually don’t sell stock to get cash for living expenses. Instead, they take out low-interest, securities-backed lines of credit using their extensive assets as collateral. Loan proceeds do not count as taxable income.
Die: When the asset owner dies, the heirs receive a “stepped-up in basis.” That means the base tax value of the assets resets to current market price. That wipes out the accumulated capital gains tax debt entirely.
Real Estate and Business Deductions
Depreciation: Property owners use accounting write-offs like accelerated depreciation and cost segregation. These result in large “paper losses” on buildings that are actually increasing in market value. These paper losses offset their other taxable income.
1031 Exchanges: Real estate investors can sell a property and reinvest the proceeds into a new property of equal or greater value, legally deferring all capital gains taxes indefinitely.
Philanthropy and Wealth Transfer
Donor-Advised Funds: Donating appreciated stock to charity allows the rich to claim an immediate, large income tax deduction without ever paying the capital gains tax on the appreciation.
Trusts: Sophisticated trust mechanisms freeze or reduce asset values for gift and estate tax purposes. That puts wealth transfer to future generations outside the reach of standard taxation.
Links
The Financial Industry Regulatory Authority (FINRA) has an explanation of securities-backed lines of credit.
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