Episode 10: Buy, Borrow & Die


Hear the strategy anyone can use to begin successfully investing while paying less taxes. Ed McCaffery, a tax law professor at USC, joins Tom and together they discuss the strategy of “Buy, Borrow & Die.” Find out how you can apply this basic formula to build wealth and eliminate taxes.


03:36 – How Do Taxes Differ For Wage Earners Versus Asset Owners?

05:17 – What Is “Buy, Borrow & Die?”

16:11 – How Does The New Tax Code Affect Estate Taxes?

25:18 – Why Does Real Estate Investing Work So Well In “Buy, Borrow & Die”?

Learn more about Ed McCaffery and The Peoples Tax Page by visiting http://peoplestaxpage.org/


Speaker 1: This is The WealthAbility™ Show with Tom Wheelwright, way more money, way less taxes.

Tom Wheelwright: Welcome to The WealthAbility™ Show where we learn how to make way more money and pay way less taxes. This is Tom Wheelwright, I'm your host, and today we have such an exciting program. I have a very special guest, we're gonna talk about what if you could build massive amounts of wealth and never pay taxes, I mean truly tax-free wealth. What we're gonna do today is we're actually gonna, you're gonna want to listen to every single second of this program because my guest and I, who's a specialist in this area, we're gonna guide you through the steps to invest completely tax-free even when you're taking cash out of your investment, even when you've got cashflow we're going and investing tax-free.

This is very exciting and by the way even when you die you're gonna get it tax-free. This is very, very exciting so I have a very special guest with me, Ed McCaffery and I have met actually on the Rich Dad Radio Show, we've been on it together several times. Ed is, I like to call a fellow tax nerd, he's a professor at USC, teaches tax down there, and absolutely brilliant because he agrees with me on so many things but Ed is truly a tax expert, a tax policy expert. Ed just give us a one minute background of what you've been doing for the last couple of years.

Ed McCaffery: Okay well sure Tom. It's very exciting to be joining you and like you said we met on Robert Kiyosaki's Rich Dad Poor Dad, we had some good chats there, and I 100% agree with your lead in Tom, I think this is gonna be a very important show for anybody interested in wealth and building up wealth to listen to. We're really gonna try to explain to you in 10 or 15 minutes how to live a tax-free life, it's easy to do from a legal point of view, you know you're gonna take your discipline and hard work that life requires of people making money but if you're willing to put in that hard work there are certainly avenues in which you can basically pay nothing for your entire life.

In terms of that one minute of what I've been doing I'm trying to get the word out there that I've always been a fan of Robert Kiyosaki's work and Rich Dad Poor Dad because the central theme in Rich Dad Poor Dad is don't be a wage slave, don't get a W2, if you get a W2 you will be taxed, you will be taxed heavily, nothing in the currently law really changed that so get out of the wage side, get into the asset side, buy assets, and then you know for the rest of your show here today Tom you and I in kind of a two step way are gonna explain how if you're not getting a salary, you're not a wage slave, you're not getting a W2 you don't have to pay taxes at all anymore.

Tom Wheelwright: Exactly-

Ed McCaffery: It's exciting to be evangelists for that idea.

Tom Wheelwright: Awesome, exactly so thank you Ed, thank you so much for being on the show. It's like you say you're a wage slave and the new tax law is a really just makes that more so. You and I were talking before the show that the new tax law actually makes the wage slaves more taxable and the asset owners less taxable. Isn't that true?

Ed McCaffery: Absolutely right. Continuing to think if you think for a minute about the payroll tax which is that stinky little tax that a lot of W2 people don't notice but that's a big tax. Well that's a tax you pay on your wages, you don't have any deductions, it doesn't matter if you're married, it doesn't matter how many kids you have, well that's what the income tax is moving to. Every time they pass a law they're getting rid of deductions, it's looking more and more like wages and that's it, the forms are getting simpler which is good news but the noose is tightening around the neck of W2 labor.

Tom Wheelwright: No question, we saw a lot of deductions go away you know even so much that states are taking action to make sure that their residents get some deductions but the reality is is that when you're making your money through investments, in other words if what you're doing is building true wealth, building true wealth, not worried about okay selling my time for money. Right? Which is what Kiyosaki's always talking about, you know don't sell your time for money. That what you want to do, don't work for money rather work for assets and what we're gonna learn today is that the more assets you have actually the less tax you pay. The more assets you have the less tax you pay.

Now when Ed and I've been on the show with Robert what I heard from Ed was, “Okay the whole thing is buy, borrow, die,” so what I'm gonna ask you to do Ed is if you would kind of walk through buy, borrow, die 101 and then that applies to the stock investors and so forth and then what we'll do is we'll ramp it up a bit and we'll talk about how it applies particularly with the new law and you can really ramp that up with real estate. Go ahead Ed and just give us a few minutes on buy, borrow, die 101. What does that even mean?

Ed McCaffery: Okay great, well thank you Tom for that introduction. Anybody listening those are the three words and you're probably gonna hear them enough in the next few minutes from Tom and me that you will remember them but you can get out a piece of paper and write them, buy B-U-Y, borrow B-O double R O-W, and then die D-I-E. Now each of those steps buy, borrow, die each of those words relates to a feature of American income tax law, a feature of American income tax law that has been there for 100 years and it's the key to the really tax-free living of the very wealthy, people from Warren Buffet to President Trump are using these principles.

Let's go through it one at a time. Buy, this is actually Robert Kiyosaki's rule number on and heard Tom just talking about it, buy assets, buy an asset, buy something that will go up in value and in tax planning 101, buy, borrow, die 101 let's buy an asset that's not going to produce any cash, let's buy stock, Berkshire Hathaway stock, stock that doesn't pay a dividend, let's buy your house, which is going to go up in value without producing cash. That's the buy step and the buy step works because of the realization requirement which has been around in the American tax laws for over 100 years. You don't pay tax on an asset until and unless you sell it or it otherwise produces cash, if you're just buying and holding, you're just owning your house, you're just owning Berkshire Hathaway, your owning sports franchise and it's going and up and up and up in value you're not paying tax on that until you sell it and in buy, borrow, die there is no sell.

Tom Wheelwright: So Ed if I could-

Ed McCaffery: So step number one buy, buy something that will go up in value without producing cash. Yeah, Tom.

Tom Wheelwright: Ed let me just interrupt for a second here. We're not talking about your typical mutual fund, right, that actually you're taxed on them even if you didn't get the cash. Okay? Because they churned the stocks and so now you're getting this taxable gain even though you've just held it. You're talking about a very specialized, you're buying either individual stocks or a group of stocks or I understand you can do a certain type of ETF but you're not … let's just be clear with our listeners, we're not talking about mutual funds here.

Ed McCaffery: That's basically correct Tom. I mean you're like a good listener maybe pushing us a little bit above tax planning 101 so in the simple case you buy something buy gold bullion, buy your house, buy a stock and there're many, many stocks that don't pay dividends. Berkshire Hathaway itself, which in some ways is like a mutual fund because Warren Buffet leading Berkshire Hathaway has just bought a whole bunch of other companies. Berkshire Hathaway has only paid one dividend since 1965, if you have Berkshire Hathaway stocks you're playing this.

Now Tom you're exactly right, most mutual funds the owners, the managers of the mutual funds, the companies that run the mutual funds they are buying and selling and they're passing through the tax consequences of that. You can research and buy a tax efficient mutual fund, you can buy an index on where you pay relatively little tax, but Tom is exactly right.

What we're trying to do here really just in these few minutes kind of like we're in a classroom, we want every listener to this call to understand buy, borrow, die, at least get the basics down. If you have further questions you can follow up with Tom and Tom has a way to get in touch with me so we're available for answering but right now let's just say step one you buy and you do buy that Berkshire Hathaway stock or you buy a bunch of gold bullion or you buy your own house. It's going up in value so you're becoming wealthier, you're happier, you can sleep better at night, but you're not paying tax because Uncle Sam is not taxing that so called mere appreciation.

Now step number two, step number one has given us this rise in value without cash that's a lot fun, it helps us feel better about ourselves but you can't really eat it, you can't take unrealized appreciation around the world. How do you get cash? And the answer is step two, you borrow, and again ever since the history on the income tax borrowing is not income, you don't pay tax when you borrow. You bought that home, it went up in value, you need some money take out a home equity loan. You have stock, it's going up in value, take out a margin loan. You have gold bullion find a way to borrow against gold bullion. When you borrow, which President Trump does a great deal in his personal life, when you borrow you don't pay any tax on that. Okay so step two, borrow.

Tom Wheelwright: Let's talk about that just for a second on the borrowing. Think about why, okay I always want our listeners to understand why, the reason that you don't pay tax when you borrow is because you have to pay it back. Okay so it's not something that's yours without any obligation, you actually have an obligation at some point to pay that back which is an important distinction, that's why if you sell it you have to pay tax, it says you've realized it at that point, if you borrow against it or you use it to borrow you can even do this with life insurance by the way, you can borrow, use the life insurance as collateral, borrow that money, and that borrowing doesn't get taxed on top of that depending on what you use the money for you might even get an interest deduction but that's beyond 101. Ed, what happens after okay we've bought?

Ed McCaffery: That was a good intervention Tom and I think as we're sort of going through the very basics of buy, borrow, die we've talking about stock and how to grow stock and non-dividend paying stock is the perfect face and mutual funds a little more complicated. I've been throwing out houses and houses can come in terms of using the money in the borrow step, you can take out a home equity loan, you can do a reverse mortgage which is borrowing against the equity in your home, you don't pay it back until you die you pay it back by giving your house to the bank on your death and there's no tax involved in that step.

You just brought up another important example which is life insurance, not term insurance but whole life insurance that has a cash value. Life insurance is a beautiful buy, borrow, die product, you give money to the insurance company, they invest it, it rises in value but you don't pay tax on it, you can borrow against it when you need to eat or live or have some fun, and then you're not gonna pay that of until you die when the loan will be paid off out of the proceeds of the insurance policy.

Back on track we have the three steps, buy … and another time Tom said that was very important borrowing is not income because borrowing in and of itself doesn't change your net worth, you have to pay it back as Tom said but that's the beauty of the three steps. In step one we've made wealth without cash, we've made wealth without taxable income as our assets go up in value. In step two if you look at step two in isolation when you borrow money that's no big deal from the government’s point of view because you're supposed to pay it back but now we're borrowing money because we're wealthy and we're wealthy because our assets went up in value and no tax has been paid in this story.

Step one buy, step two borrow, and then we beautifully go to, Tom you really set up us for this, we go to where we all end up at death, we're all going to die and we can all rejoice at that prospect because we're going to get a stepped up basis which means that the assets we got in step one buy can now be sold tax-free by our children or our spouses, tax-free and our debts can be paid off tax-free. We've completed the loop so whether it's selling your house, it's giving your house back to the bank to pay off the home equity loan, selling the stocks to pay off the margin loans, or simply getting the life insurance proceeds and have some of them go back to pay off your debt we've closed off the loop. Buy, borrow, die, you've never paid any tax in your lifetime, you're heirs are not going to face any tax as they get started on their life they can sell your assets, pay off your debts, and with what's leftover do it again, buy, borrow, die.

Tom Wheelwright: Exactly, and you create generational wealth out that.

Ed McCaffery: Now all of that is really tax planning 101, buy, borrow, die, it works with gold bullion, it works with the house, it works with non-dividend paying stock. Tom you and I have talked many times and this is where I'm so grateful to be kind of part of this team with you because buy, borrow, die also works for real estate investors but for real estate people there is some cash so you need an additional step of making sure you don't pay tax on that cash and then when you look outside of your cash flow and your reported income you have the assets that are rising in value just like President Trump does you can borrow against your valuable assets so that's what we're calling tax planning 201 and Tom you would know more about that than I do.

Tom Wheelwright: Let's talk about that for a second Ed. First of all remember when you die you know one of the questions, well yeah but don't I pay an estate tax? One of the great things out of this new law is that yeah no you don't pay an estate tax because now we have a 22 million dollar estate tax exclusion.

Ed McCaffery: That's right for a married couple.

Tom Wheelwright: For a married couple and 11 million dollars for an individual.

Ed McCaffery: Yeah.

Tom Wheelwright: What we have is we have no income tax when we die, we get rid of the income tax, and for most people we're not gonna have an estate tax. The reality is with good estate planning nobody should ever be paying the estate tax anyways, Ed we sometimes refer to that in our office estate tax as the stupid tax because it's just a lack of planning if you're paying any estate tax.

Ed McCaffery: Well that's exactly right Tom. I think Gary Cohn, the former economic advisor to President Trump called it the moron tax, I called it the voluntary tax. Really to keep it on the focus of what we're talking about today in buy, borrow, die, buy, borrow, die is also an estate planning strategy. Because the death, that tax you're talking about, what Tom is talking about 22 million dollars for a couple, if you die 11 million for an individual, if you die and your net worth as a couple is under 22 million you're not paying any estate tax.

Well suppose you do what Tom's talking about, what Robert Kiyosaki was talking about, what I'm talking about you bought assets and the assets have gone up in value, they've gone up to 50 million dollars congratulations. Well guess what you borrowed 30 million dollars to live a good life and when you die you have 50 million dollars’ worth of assets, 50 million from step one buy, 30 million dollars’ worth of debt from step two borrow, your kids get the 50, sell it tax-free, pay off the 30, there's no estate tax in that situation because the estate tax is on your assets minus your liability. A very simple way to avoid the estate tax is borrow money and have fun.

Tom Wheelwright: Exactly. Now what I want to go to is now we're gonna step this up to 201, okay this is buy, borrow, die 201. I'm gonna walk you through, by the way this is in Tax-Free Wealth, my book. By the way the second edition of Tax-Free Wealth is now out which includes all of the updates for the new tax law, the Trump tax law.

Bonus depreciation is a big deal in the new tax law, bonus depreciation basically says this, if you buy a rental property then you get to deduct immediately everything you bought except for the land and the building. You're going what else did I buy? Well you bought the contents of the building and you bought the land improvements like the landscaping and the covered parking and the outdoor lighting, all of that you bought along with the building and the land and all of that gets deducted so on average we would expect an average purchase to be about 30% deductible. You go buy a million dollar building now you're talking about a 30% deduction.

Okay now let's say we go down the road and that property has gone from one million to two million and you go you know what, I don't even like this property anymore. Here's the advantage in real estate, the advantage real estate has that stocks for the most part don't have is I can still sell that real estate even through there's a gain on it and not pay tax and this is what's called a 1031 or like kind exchange. Let's say I started my investing, I bought a bunch of single family homes and duplexes and four-plexes and I'm tired of managing all of those properties and what I want to do is I want to sell them and I want to buy two big apartment buildings. Great, sell them, buy two big apartment buildings as long as you meet the rules for 1031 you're okay, you’re going, “Yeah but I need cash,” okay so Ed when you need cash what do you do?

Ed McCaffery: You borrow.

Tom Wheelwright: You borrow.

Ed McCaffery: Is step two.

Tom Wheelwright: That's it, you just borrow. Remember you bought, bought, bought now in this case you can actually sell, buy the new property, then you borrow again, you keep borrowing, borrowing, borrowing, that's just fine. Eventually let's say someday you go, I'm tired of the apartments, I just want what I call mailbox money. I'd like we call it a triple net lease where the tenant pays for everything except the mortgage, all you have to do is get the rent check every month. Now several big companies do this, Walgreens, all the Walgreens stores, they're all owned by investors. Okay? That's a triple net lease.

They're the best creditor in the world. Right? And some people think they're better than the US government they're such a good creditor. Or Walmart or Safeway, a lot of these big ones do these what we call a sale lease back. Now you own the Walgreens, you're getting mailbox money, great now you die. Now what happens when you die, Ed?

Ed McCaffery: Stepped up basis on debt.

Tom Wheelwright: Step up basis in debt. What do your kids do? They sell the Walgreens because they want to party and they're gonna party hardy or you put it into a trust so that they can't do that but it gets us stepped up basis in death anyway and now you eliminated the income tax, you probably if you've done good estate planning you have no estate tax, and that's why the new tax law really soups up … that's why I wanted to have on Ed because the new tax law with the bonus depreciation especially just kind of soups up your buy, borrow, die.

Ed McCaffery: Yeah no that's exactly right and what you've just done there Tom is you shown, I mean I think in general you asked me before what am I trying to do I'm trying to get across this idea of buy, borrow, die and that the basics of tax are actually in reality simple. That's something I don't think politicians want you to know, I'm not sure that that's something that accountants and lawyers and professionals always want you to know, H&R Block knows it.

For most Americans taxes are pretty simple, there's a big divide between wealth and wages, people with wages your facing a kind of onerous wage tax system with fewer and fewer exits. On the wealth side, on the assets side it really does come down to buy, borrow, die, that's the basics, that's why Warren Buffet pays almost no tax, that's why President Trump in many years pays no tax, they're playing buy, borrow, die and the basics of buy, borrow, die are very simple, buy assets, borrow against the unrealized appreciation, and die. Don't really have to plan to die, it just happens.

Now what Tom just did was show okay well that works, that works if you have gold bullion, that works with your own house, that works with cashed out life insurance policies, that works with growth stocks but sometimes that asset that you have is throwing money at you and that's a good thing because you like money but when the asset throws money at you the government sees that money. Now we're talking about investments, really you bought things, you're not working for wages, you're working for yourself, you're building up sweat equity but your assets are producing cash which the government could tax. What do you do? And the answer to that is you look for opportunities to get deductions against your cash, against your income.

The interest on your debt is a deduction and what Tom was just talking about and it's absolutely right it's a big souping up, it's a big steroid effect to buy, borrow, die for real estate. When you get to take depreciation deductions and bonus depreciation deductions are essentially immediate deductions so you buy a million dollar investment property you get a million deduction.

Tom Wheelwright: Exactly.

Ed McCaffery: You're gonna use those deductions to offset your cash flow to show as little income to the federal government as possible, meantime you still own your assets-

Tom Wheelwright: So Ed.

Ed McCaffery: -and it's in a triple net lease or you're directly leasing out, you still own your asset, your asset is still going up in value over time, and you can play buy, borrow, die by borrowing against your assets, buying with those assets and debt, and letting your heirs whether they're gonna party or not figure out the rest.

Tom Wheelwright: Ed let's think about this, here's what's great about what real estate does with the borrowing. Let's say you don't even borrow the money out, let's say what you're doing is borrowing to buy in the first place. You borrow to buy in the first place and you get the depreciation deduction for the bank’s money, you get the deprecation deduction for the bank's money. If you're doing good, if you're leveraging, if you're using other people’s money the reality is if you are a serious real estate investor you should never, ever be paying taxes on your cash flow because your deprecation will be so high and you're continuing to buy more real estate that you're gonna end up with more and more assets, this is why we say the more assets you have the less taxes you pay.

It doesn't matter you can just keep doing this, you decide okay the market's changed, okay apartment building are really hot right now. Right? We're gonna sell the apartment buildings and we're gonna go buy a healthcare facility or something completely different. That's okay in real estate, it is something about real estate that is unique to real estate in a lot of ways is that you can actually sell it, realize the gain, and buy another piece of real estate and it doesn't have to be the same type of real estate just has to be in the country, right, just has to be in the same … you gotta sell a US real estate and buy US real estate or buy foreign real estate and sell foreign real estate, you can do that too but you just can't buy US real estate and then sell it and then buy foreign real estate.

It's actually fairly simple, you do need to walk through this stuff with a good tax advisor. Okay don't ever do this stuff on your own but I really appreciate Ed, you know our time's up now but it's been great having you on the show to really walk through very simply you can make massive amounts of wealth, never pay any taxes, like you say Warren Buffet does it, Donald Trump's done it, and on top of that you can even have frankly if let's say one of you, your spouse, you or your spouse is a wage slave with the bonus depreciation you could end up still not paying any taxes on the wages. There's so much, there's so many advantages here to being a professional investor, so many advantages to the buy, borrow, die. Ed just final words.

Ed McCaffery: Well yeah I think my final word is thank you and thank all your listeners. At the time you're doing great work and this is the key move for all there. If there is a chance in your life for yourself or your spouse or your children to get out just being a W2 employee and make your own wealth and invest that's the ticket to the future, wealth is winning, wages are losing. Thank you Tom, it's always my pleasure and hopefully all the listeners learned as much as I learned just from being on the phone with you.

Tom Wheelwright: Thank you Ed and thanks everybody else. Remember when it's totally possible go to wealthability.com, we're always showing you how to make way more money, pay way less taxes.

Speaker 1: You've been listening to The WealthAbility™ Show with Tom Wheelwright, way more money, way less taxes. To learn more go to wealthability.com.