Solano Real Estate Scene: Here’s how billionaires avoid paying taxes
Yikes! Income tax is a huge expense for the upper middle class, and this is on top of the other taxes we pay like sales tax, property tax, gasoline tax, DMV fees and hotel taxes. In Solano County, let us call the upper middle class a family of four that makes $100,000 to $250,000.
You might have read the recent articles on how many super-wealthy people pay no federal or state taxes. This column is not about jealousy with billionaires getting away with murder. I am a believer in capitalism and most, not all, give enormous amounts of money to charity and many have created jobs for thousands of people while generating tons of sales taxes on the products they sell and GDP growth via their companies and investments.
Many billionaires, not all, have signed the charity pledge so when they kick the bucket, most of their wealth will go to charity, which will benefit the country and the world, but I bet you $5 this will not reduce our income tax.
Here is how they get away with it.
No, you are not allowed to borrow against your IRAs, but you can borrow against your after-tax stock portfolio.
For example, let us say you own $200 million worth of Amazon stock and another $280 million worth of Apple stock, like Bezos and Forrest Gump, and you are 60 years old. You could, starting today, borrow $1 million per month secured against this stock tax free until you are 100 years old and probably still have $100 million left on your 100th birthday.
If the stock value rises substantially over the 40 years, you could have $300 million or $400 million left in your account.
This is exactly why the reverse home equity conversion mortgage, or HECM, is becoming accepted by upper middle class seniors and financial advisers around the country as part of retirement plans. Most successful upper middle class people retire with a ton of equity in their home and income based on a combination of Social Security, IRA contributions and, if lucky, a government pension.
Let us assume for this scenario, the homeowner is a healthy 70 years old and has no government pension. This person and her husband have $1.2 million in their IRAs, a home free and clear worth $800,000 and Social Security of $3,000 per month.
This couple happens to be those type of people that hike, swim, jog and ride their matching Peloton bikes every morning after eating their super healthy, gluten-free, low-carb breakfast and certainly never smoked or drank heavily like most of us over their 50 years of marriage. They could live to 100.
Will that $1.2 million last a lifetime? They could set up a HECM line of credit right now for approximately $350,000 and not borrow any of the funds until they need it or want it, and this HUD-insured unused line of credit amount will grow at approximately 5% per year, meaning that when they turn 80, they will have a credit line available of approximately $525,000 to use for monthly tax-free cash flow of $3,000 per month until their 101st birthday.
When they die, their kids and grandkids will get the house and all the equity along with whatever is left in the IRAs.