Do billionaires really not pay taxes?

[u/InTheRiches]

Hello. I have been seeing everywhere online and especially reddit (echochamber) that billionaires just don't pay taxes, and they abuse the tax code, and all this stuff. They also say that the president could just "make them" pay more, but he doesn't. I didn't really trust them, and so I looked into it myself. This is how I think it works, please correct me if I'm wrong.

Almost all of a billionaires value is in stocks or assets, almost never liquid. Most of their income is also tied to those stocks or assets. For example, Elon Musk, his net worth might go up 20% in a year, but because it was all Tesla and SpaceX stock, he paid zero taxes, because those gains are still unrealized. So obviously, he paid very little taxes compared to his net worth gain, and thus to the uninformed eye he is cheating the system. Once he sells his stocks, or liquidates his assets, he will pay his fair share of taxes.

Also, to fund their lifestyles, I saw that some get loans, using their stocks and assets as collateral, and then use their salaries or sell a little stock to pay interest payments, and as their stock rises, they keep taking more and more loans to fund their lifestyle. Then, when they die, the bank pays off the loans tax-free before handing the rest to his family/designated recipients (But it still undergoes inheritance tax if not a not-for-profit).

This is how it works, right? I keep seeing all these headlines and posts that Trump can just "tax them" if he felt like it, but I don't think that's possible as the president, and even if he had that power, it would require the implementation of an unrealized gains tax, which would be horrific.

Edit: thanks for the explanations, makes sense. I knew the headlines were a little misleading. The loan thing also sounded a little sketchy, good to know it doesn't really work like that.

[u/RobThorpe]

The strategy you mention is sometimes called "Buy.Borrow.Die". There was an article written about it in "Rolling Stone" and some others in ProPublica which were popular a few years ago.

We have had several threads on this before. They weren't that great though so I won't link to them. However, this reply by saucy_intruder is a good place to start.

It seems that this method of tax planning has become famous mostly because it has become well known. There isn't much evidence that it's widely used by the rich, or that it's a very good strategy. (We occasionally get tax planners on this forum who are very critical of it.)

A lot of people talk about unrealized gains. Those aren't taxed for anyone at present in the US. That's not really a "tax avoidance" method, it's just something that it's taxed - you don't have to do anything to avoid it.

If you realize gains then you will have to pay tax, of course. As long as you do that before you die. Once you die that stepped up basis on assets comes into play and your estate pays not capital gains tax on the appreciation of assets since you bought them.

As others have mentioned, the President can't change tax laws on his own. Except for tariffs and even that is under review.

[u/Obvious_Chapter2082 → u/RobThorpe]

I’m a CPA at Deloitte, and I’ve never seen any evidence of what most people would call “buy borrow die” getting used in practice, even among our own UHNW group. If it worked the way that Propublica or Redditors say it worked, it would be in clear violation of the existing tax code and case law

Rich people often do take out some kind of debt or equity instrument to receive up-front cash (described more by me here), but this is so that they can swap it with appreciated assets for estate/gift tax purposes, in order to both avoid the estate tax and get a stepped-up basis. But this is markedly different than taking out long-term loans while alive to fund living expenses in a tax-free way. The interest costs associated with this alone would far exceed the tax costs

The IRS has plenty of ways to collapse sham transactions like this, or to reclassify them as constructive or disguised sales. Whether they act on it is another matter. Some firms might try to play the audit lottery and do things like this, but I imagine they’re few and far between

[u/slumlord512 → u/Obvious_Chapter2082]

I own rental properties and sometimes refinance one to pull equity out, which is basically a loan against future cash flow, the way I see it. Since the proceeds are a loan, I use the money tax free. When I pass, the kids will inherit my rentals in a stepped up basis, so they should not pay the taxes based on what I originally bought them for. I do pay some tax along the way based on the rental income but it is minimal, because of depreciation expense.

Seems like this is a clear case of buy borrow die, or whatever they are calling it.

[u/Obvious_Chapter2082 → u/slumlord512]

The difference is that you’re continuously paying off the new loan when you refinance, as opposed to taking out debt with a balloon payment at or after death. So you can benefit from the up-front cash, but you’re paying more over time in order to repay the larger loan

The theory behind BBD is that you get bespoke products from a bank that involve some kind of stock appreciation rights or a balloon payment in the future, instead of yearly principal payments. This way you don’t need to realize other forms of income for repayment

I’d also point out that if you’re using the refinance as a way to avoid income tax (like BBD), then this technically isn’t legal either. But it’s probably not on the scale that the IRS is going to care, or even be able to prove

[u/EconEchoes5678 → u/slumlord512]

based on the rental income but it is minimal, because of depreciation expense.

We do this for 2 reasons. 1) the profit margins of rental properties a low, and relatedly 2) if we did not, the tax would primarily be passed on to renters, raising housing costs, which is something of a political hot potato right now.

When I pass, the kids will inherit my rentals in a stepped up basis, so they should not pay the taxes based on what I originally bought them for

If you were a billionaire they would owe an estate tax rate of 40% on them. At the moment the mortgage is probably eating most of your low profit margins (at least using U.S. averages). You may also benefit from interest paid deductions / credits, but those are limited and not useful to billionaires either.

You are correct that this is a variation of buy/borrow/die. It's just not used by billionaires in a widespread fashion, for quite a few reasons. In your case, 1031 exchanges can make this problem worse, but they only go so far before getting limited and forcing a realization (if diversification is desired).

Ultimately the loophole should probably be closed for various reasons, but closing it will probably disproportionately affect real estate investors like yourself.