Hey guys, Toby Mathis here.
And today we're going to go over the buy borrow die strategy for building
wealth and paying zero taxes and also do it as a how to in three steps.
It's actually pretty straightforward.
And then I'll give you some examples of how people use it.
So you can understand exactly how powerful it is.
Now. It is one of those concepts.
If you've ever googled buy, borrow die, have you heard about Elon
Musk or all these wealthy billionaires who pay almost nothing in taxes?
Here is why.
Because if you have assets
that appreciate and value, there's something called unrealized capital gains
or taxable income that is oftentimes derived from those items
where they never pay tax, like depreciation on a building.
For example, I buy a building for $1 million over the years, rent come in
and I maintain it, and normal appreciation occurs, which is around 4 or 5%.
Lately it's been like super like even higher because of inflation.
But let's just say inflation makes that building worth,
let's say in ten years it's now worth to 2 million.
Well, I didn't pay tax on the $2 million of appreciation.
So the same
is true is like if I buy stocks I buy some Microsoft stock
and I buy it for $1,000, and now it's worth $10,000,
or, you know, fill in the blank of maybe I just buy SPY,
or maybe I buy an index, maybe I buy some bonds, whatever.
I'm buying these things and they're just going up in value over time.
And hey, I'm chill with that.
And most of those other than the bonds, bonds would pay interest.
But let's just say that it's appreciating assets.
It could be art, it could be real estate, it could be stocks, it could be REIT.
And I'm just letting them become more valuable.
Even my house.
Hey, I just buy my house and over time it becomes more valuable.
I'm not paying tax on that appreciation.
And that's an important concept when you think about this.
So when we start talking about the three steps, keep in mind
that we are talking about buying those types of assets.
And that is step one.
Step one
is buy
and you're going to buy appreciating assets, things
that go up in value because of that going up in value
is tax free.
So I want to buy specific types of assets.
Now there are assets that you wouldn't consider something like art.
You might not consider.
That is something that I'd ever borrow against.
But it is.
It's lendable I want to buy assets that
I could borrow against, because that's going to be the next step.
So when I'm buying something, I need to make sure it's lendable.
When you buy securities, I buy a bunch of stocks.
If you're like Morgan Stanley,
Raymond James, Fidelity Schwab, you should be able to get a loan
against that called a security backed line of credit.
In other words, I can borrow against that
if I get cash value, life insurance,
indexed universal life, whole life.
If I'm doing something where it has cash value that under 7702 gross.
That's a section of the IRS, Internal Revenue Code, gross, tax free.
It just keeps getting bigger and bigger.
And you don't pay tax on it.
But I can borrow against it.
Even things like, hey, I have my IRA or my 401 came.
Actually, my IRA wouldn't work because I can't borrow against it.
But if I have a 401 K, I could borrow against that potentially up to $50,000.
Up to half my plan assets I can borrow. During Covid.
It went up to 100,000. Right.
And you pay that back over five years.
I can borrow against those things.
So that's step one buy assets and lendable assets
that I'm going to be able to borrow against in step two.
Is to borrow.
And this is where the secret is
because borrowing money loan proceeds
are not taxable to you.
I'm going to say that again borrowing money is not taxable too.
So if I use a home equity line
of credit against my house and it gives me my house, let's say
I bought my house for $500,000 over the years.
It's gone up in value.
Now it's worth a million and I borrow $200,000 out of it.
I don't pay tax on the 200,000.
What the wealthy are good at is buying things,
putting them in a crock pot, letting them cook
over a long period of time and get good and valuable.
Then they borrow against it and they live off of what they borrow.
And you're going to
say, that sounds crazy, Toby.
They have to pay back that loan.
Yeah, but they're not paying tax.
So even if I have to pay back that loan in some cases, I don't like
if I do life insurance, I'm not paying back that loan.
But I am eventually going to die and it's going to pay itself
off out of the death proceeds from the insurance.
So the insurance or that cash value, it's paying it off.
I am not paying it off.
You're going to say, well, wait a second, that that's got to be taxable.
Nope.
Because the death benefit from insurance proceeds also not taxable.
So the borrowing of the money
pass away pays it back.
Never pay tax. That's why it works well.
But but but my heirs will have to pay it back okay
okay then let me show you how that works.
Step three
something we all got to do
is you have to die.
Why is that important?
I bought an asset.
I let her depreciate, and in some cases I even got tax benefits out of it.
So, like, if I bought real estate as investment
real estate, I got to depreciate that sucker.
I borrow against it.
I never had to pay tax on that.
On those proceeds.
There are some things like if you own real estate,
you got to be at risk and things like that.
But if I'm borrowing against it,
it's my real estate in my LLC or something like that.
I'm not going to pay tax on those proceeds.
Eventually I'm going to pass away and what happens when I pass away?
There's something called a step up in basis.
And what that means
is that whatever, when the day you die,
whatever the fair market value of that asset is,
that's its new basis.
Why does that matter?
Because you only pay tax on the difference between the sale price
and your adjusted basis, or your basis.
So if the basis let's say I buy a house, I'm just going to use the example
of $500,000
over the years.
I borrow $1 million against that house
and then I die in that house is worth
$2 million.
Am I here? Sell it.
What's the tax bill?
The tax bill is zero because the basis is now $2 million.
If I sell it for 2 million, I pay back my million dollar
loan, and I still have $1 million in my pocket.
And I paid zero taxes.
Works with stocks too.
Same thing.
Let's say I buy half $1 million of Tesla.
I'll use Elon Musk because he likes to
use his stock to acquire things and buy things.
So let's just say that I have half $1 million of stock.
It goes up in value over the years.
I use it to get a line of credit, and I borrow $1 million against that stock.
And then when I pass away, those stocks are worth $2 million.
So I sell them and pay off the million dollar loan, which you might have to do.
Maybe not.
You might be able to just keep rolling it on, just keep carrying it on.
But worst case scenario, I'm left with $1 million tax free.
Remember I bought it for half a million,
I used a million, and now I have a million.
So I've literally used $2 million tax free.
That's why the wealthy do this.
Now I'm going to twist your mind a little bit further.
There are ways to trade assets
that you buy during your lifetime and not pay tax on them.
So for example, let's say that you bought half $1 million
and you bought four houses.
So I'm just going to put four houses.
So I bought $500,000 and it was four houses.
So each one has a basis of 125 K.
Over the years those go up in value.
So you sell them.
But you buy more real estate.
It's called a 1031 exchange.
You're going to see a 1031 exchange.
It's tax free.
So let's say that those houses each go up
to be worth 250,000.
So I bought them for 500,000 for houses, 125 each.
And now they're up to 250.
So now they're worth $2 million.
And I borrow the money off again.
I didn't pay any tax.
All you have to do is pass.
But let's say they go up further.
I could even 1031 of them again.
But let's just say that when I pass away, they're worth $4 million.
In the meantime, I could have been borrowing that out.
So again, wealthy people understand I have access to it
doesn't mean I have to take it, but I have access to it
now. You pass away.
Your basis is now $4 million.
So you sell the property for $4 million, or you keep it.
You could keep it.
You could pay off the loan.
Maybe there's life insurance proceeds and use it to pay off the million dollars
you took out of it.
Whatever the
case, I'm not paying tax on that growth.
I bought it for 500,000.
It's now worth $4 million.
Let's say 30, 40 years later, I have $3.5
million of growth that I'm not going to pay tax on.
And I could have been using the entire $4 million during my lifetime.
I'm zero tax again.
That's why the wealthy use the buy, borrow, die strategy.
That's it in a nutshell.
It's not more complicated than that.
It's a three step formula.
You could do this with art.
Hey, I buy some art. Maybe you're a collector.
You don't even realize that you could get a loan against it.
And you're sitting there and you're like, what happens?
You know, I get older, I'm worried about my housing.
I maybe I have some medical expenses and I'm like, shoot, what am I going to do?
I'll sell my Picasso or I'll sell my, my art collection.
And I have I know people that collect these things.
We get very valuable.
I have to pay tax on those types of things.
That's up to 28% plus net investment income tax plus your state tax.
You could be paying 35% on selling that art,
or you could borrow.
And pay zero tax on that.
And then all you have to do is die and it steps up in basis.
Let's do that again.
But with stocks this times hey I bought a bunch of stock.
I have a portfolio.
And your financial planner says hey whenever you need money,
like hey, you know, do you have any you want to do that around the world trip?
Why don't you sell some stock?
And you look at it and you go, shoot.
If I do that, I have to pay tax on that.
Maybe you're in a high tax state
like California, in New York or somewhere on the East Coast.
You're like, this is really going to suck.
I'm going to pay
20% long term capital gains plus my state plus net investment income tax.
When I'm all said and done, you might be paying 36%
and you're annoyed versus
you borrow the money, you go do your trip.
You pay a little bit of interest.
Like in some cases it's federal IFR rates, which could be 4 or 5%.
It just depends. You look it up.
At that time they went down to two and 3% and sometimes there they go up.
It just depends on what's published.
It's the federal IFR rates. They come out quarterly.
You could use that or you have terms that you're borrowing against.
And for example, if you're with Morgan Stanley.
That's right, I do I do some of my transactions.
They have fixed rates or they have, variable rates,
and they're a little different.
But the variable rates went down at one point.
They were 11.7, 1.8.
depending on where you're at
and what interest rates are doing, sometimes they're up to 6 or 7%.
Right. But it fluctuates and goes back down.
Let's just say, hey, you know what, I needed it.
I was going to do that way around the world.
Trip was going to cost me 100 grand.
I would have had to sell $150,000 of stock, pay the tax on it.
I would have had $100,000.
So I lost quite literally more than a third of my money.
That was a 33% tax versus
I borrowed $100,000 out.
I didn't pay any tax and I have to pay 5% interest.
How long is it going to take?
It's going to take many, many years before.
Oh well, I ended up paying more in interest.
And here's the funny part.
Depending on what you're borrowing against and what you're using the money for,
quite often it could be tax deductible.
Like if I use a headlock against my house and buy more investment property
and then borrow against that investment property,
I literally could deduct the cost of that interest.
Again, I can lever assets,
borrow money and go buy more.
I could literally go out and buy more of this
and keep doing it.
And that's what the wealthy do, is they compound it.
They use it over and over again with the same strategy in mind,
which is sell nothing, let things appreciate, borrow against that
and live off of those proceeds because they're tax free.
So it's like getting a 30% return depending on where you live.
It's going to be somewhere between probably 15 and 30% return
on all your money because you avoided the tax on it.
and because, well, you avoided the tax on it.
That's the biggest one. Right.
And then the other big benefit is when I pass away, all sins are forgiven, right?
I don't have to worry. My basis is now stepped up.
My family could sell those assets if they need to, to pay off
some of the loans that I used to live off of, and nobody pays tax.
And all we did is avoid completely
throughout our life paying the tax man.
If that appeals to you by borrow strata by borrow die, your strategy is for you.
If it doesn't, well, you can always leave a tip to the IRS too.
They do take donations.
All right, guys, if you like this type of information,
go ahead and like and subscribe.
Give me your comments down below.
If you've known anybody that's used this, or if you've seen it in practice,
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