Billionaires and their “tiny” tax bills are acceptable political targets for the left and the right. Still, wouldn’t you like to avoid taxes if you could? This popular tax-avoidance strategy of the ultra-wealthy is available to regular folks just trying to get by—if you how to use it.
In my book, “Don’t Run Out of Money in Retirement: How to Increase Income, Avoid Taxes, and Keep More of What Is Yours,” I detail several tax avoidance strategies for investors. One such strategy—known as “buy, borrow, die”—has been in the crosshairs of Senate Democrats as of late. The Senate refers to their effort as “The Billionaires Income Tax.”
The United States Senate Committee on Finance describes the strategy as follows:
- Buy: A billionaire uses their wealth to buy assets that appreciate in value (real estate, stocks, artwork, collectibles).
- Borrow: The individual then borrows against that asset’s growing, untaxed value to fund their extravagant lifestyle (purchasing yachts, luxurious vacations, expensive art deals, and more). All the while, the assets continue to go up in value without paying a dime in tax.
- Die: When the individual dies, their assets are passed to their children or other beneficiaries, often entirely tax-free, and the cycle continues.
Excerpts below from “Don’t Run Out of Money in Retirement” discuss the broader use of these so-called billionaire strategies and how many of us can use them despite not yet achieving an ultra-rich status.
If you can avoid income, you can avoid taxes. That is how the wealthiest among us have sidestepped the tax system, perfectly legally, and you can use their strategies to do the same, particularly if you own a business.
Thousands of confidential tax returns were anonymously handed to the nonprofit news organization ProPublica in 2021. These tax records show how billionaires such as Jeff Bezos, Carl Icahn, Elon Musk, Michael Bloomberg, and George Soros have bypassed taxation. Bezos even claimed a $4,000 tax credit in 2011 when he claimed zero income.
The highest federal income tax rate in 2024 is 37 percent. According to ProPublica, the “true tax rate” of the richest 25 Americans was 3.4 percent between 2014 and 2018 when you consider not only income but also how much their wealth appreciated in those years.
Though I disagree with ProPublica’s math, the information still makes a strong point. The tax maneuvers of the ultrarich are highly effective. They have ways to pay only a fraction of what ordinary wage earners pay in taxes. One strategy is to borrow money instead of taking an income or selling investments.
How can the ordinary person reduce taxes by borrowing money? Here are two common ways: Homeowners can borrow against their homes with a mortgage and deduct the interest payments, and investors can buy stocks on margin.
The ultrarich borrow against their wealth. For example, Musk pledged Tesla shares as collateral to borrow billions of dollars. Icahn acknowledged that he is a “big borrower” and that his effective tax rate was low because his “interest was higher than [his] whole adjusted income.”
Small business owners and investors can access millions of dollars without producing income or selling stock, thus avoiding paying a tax. They could take out a bank loan at a single-digit interest rate and pay no tax while deducting the interest on the payments. Larry Ellison, the CEO of Oracle and one of the world’s richest people, used a technique like that to access a credit line secured by about $10 billion of his shares.
Borrowed money is a way to avoid taxable events such as selling an asset, taking a distribution or salary, or postponing those events until a better time. The cost of the loan is less than the taxes that otherwise would be paid.
By using the bank’s money to own your property, you also can own more things—cars, buildings, machines. And when you own more things, you can depreciate them on your tax return. You don’t spend any money, but you pay less in taxes.
You don’t need to be a billionaire—or even rich—to pay off tax-deductible interest as your investments continue to appreciate. The deductions bring down your effective tax rate while your wealth grows. Don’t be afraid of debt. Used properly, it can help to build wealth.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com. Adviser is not licensed to provide and does not provide legal, tax, or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
