Item — HN Reader

Pretty good overview of how/why these deductions reduce your taxable income. Couple of things to note.

Depreciation is recaptured if you sell an asset for more than its depreciated basis. People sometimes get into trouble with this if they rapidly depreciate real estate and then sell it. Even if you sell for less than your purchase price it is possible to owe taxes.

You also aren't going to be able to pay no taxes since you do need to realize some income to pay for mortgage/rent, food, transportation, etc. I guess if you had assets you could borrow against it would be possible to pay for these using the loan proceeds (which are not taxable).

3 comments

>People sometimes get into trouble with this if they rapidly depreciate real estate and then sell it. Even if you sell for less than your purchase price it is possible to owe taxes.

But in the U.S. you can't rapidly depreciate real estate, it is generally straight-line over 27.5 or 39 years (residential vs. non-residential). The gain on real estate due to depreciation is technically referred to as Section 1250 gain, and if there is no gain (which is calculated against your adjusted basis, not purchase price), then it follows that there is no Sec. 1250 gain (often mistakenly called "depreciation recapture").

No, you can do cost segregation to classify some of the real property as Section 1245 (which is accelerated vs Section 1250). People doing this and then selling is how they get unexpected tax bills.

The “unexpected tax bill” usually comes from people not realizing they pulled those deductions forward earlier.

Also worth noting, if you don’t sell (or you 1031), that recapture can be deferred, which is why a lot of investors still use cost segregation aggressively.

This is a pretty clear breakdown of how 1245 vs 1250 recapture actually works on sale if anyone wants the full picture:

https://notaxcompromise.com/cost-segregation/depreciation-re...

Most of the time 1245 property is not real property, it is personal property, which is why I didn't mention it in this context.

Cost seg

The thing I don't understand with these loan arguments is: don't you eventually need to pay taxes in the income you use to repay the loan? It seems to me that folks who take out such loans are just kicking the can down the road.

There are a bunch of strategies here, but one people oft repeat is the "buy, borrow, die" approach. Where, they are kicking the can down the road, but the magic happens at the die step. When the borrower dies:

Your heirs inherit your stocks, with their cost basis reset to the current price. This means that they have zero appreciation of your purchase of $RIVN at $67, despite it being at $420. They can then sell the shares, to pay the loans, and not owe capital gains, because there are no gains. Additionally, at this step cash can be extracted for no gains as well if desired.

So you avoid taxes while alive by taking loans (not income), avoiding capital gains (never selling), and then gains evaporate through a stepped up basis. There are some exceptions here - estate taxes, etc with ways around them like trusts, but this is the general mechanism.

Its worth noting though, that its not ironclad. In a significant downturn you can be forced to liquidate and it will hurt (see the news on Musk right after X purchase). Additionally, while people talk about this as being super popular, realize that in practice people who take advantage of these strategies also still have millions in cash flow, so its not a true borrow only $0 tax lifestyle, they will use already taxed money to manage them as well.

Minor nitpick. The step up in basis actually happens when you die (not when your heirs receive the assets), and your estate has to pay off creditors before distributing assets. So the debt is paid off first, then your heirs get whatever is left over. Net result is the same though.

I'm familiar with this strategy but there's one thing about it that I don't understand: After death, the loans are an estate liability, right? Doesn't the estate need to be settled before heirs get their inheritance? If i had an outstanding $1MM loan, wouldn't the estate need to liquidate some of that $RIVN at the $67 basis in order to pay the loan? and then whatever $RIVN was left over would go to the heirs at a stepped-up basis?

The step up in basis happens when you die, so the estate has no capital gain. Then the debts are paid, then the heirs get whatever they're supposed to get.

Ok thank you. That was the key to my misunderstanding.

I conflated the two, since it all happens pretty quickly, but the estate is actually the recipient of the updated basis. So the estate sells @ current price, pays the negligible difference on gains from appreciation while the estate settles, if any happened, and then passes out the rest.

When the cash flow from the assets exceeds interest expense, you've cashed out the assets without incurring tax on your appreciated position and you can afford to pay the interest. As for principal, debt is largely not paid back these days, especially large bespoke debt secured by liquid and well-defined assets. The debt holders (lenders) get paid back after death of the borrower or they continue rolling the position and collecting their return (interest income). The only question in the lender's mind is how much leverage to grant on the underlying assets, e.g. blue chip stocks, and what to do in a liquidity crunch when rolling.

The strategy is called "Buy, Borrow, Die"

https://www.theatlantic.com/economy/archive/2025/03/tax-loop... (viewable by disabling JS)

What if I live for, say, decades before dying. Surely the lender expects some some amount of repayment before then.

Lenders have an amount of capital that they need to invest and earn returns -- they're generally not in the business temporarily so they don't want their capital back. And when the loans are secured by hard assets, e.g. publicly traded stocks, there's little risk of default so long as the price stays up. In times of rising stock prices, there's little to no reason for a debt holder (lender) to exit their positions at maturity. Rather roll and continue taking the return (interest).

I don't know how these specific loans are structured but in real estate it's relatively common for a loan to be interest only with a balloon payment (the principal) due some number of years in the future. So in theory you could just pay off the balloon payment with a new loan and repeat the process.

Lines of credit against assets are typically interest only, interest rate pegged to however many basis points above the current fed fund rate.

There is no balloon payment ever due if you simply pay off the interest indefinitely.

Of course there is always the possibility of a margin call against the loan where if you lose X% of value on the securing asset you may be liquidated of it and the proceeds used to pay off said line of credit.

There are a million caveats and different loan structures so I’m sure some finance bro will be along to correct me shortly. But overall for normalish folks this is more or less the correct mental model.

You do. I think these loans are generally used for short term liquidity. For example if you want to buy a new house before selling your old one. You'd get a loan against your assets, buy the home with the loan proceeds, sell your old home and pay off the loan.

If your assets are growing faster than the interest it would also be possible to payoff the loan with a new (larger) loan, so you are still kicking the can down the road but eventually you would die and never need to pay the taxes while you were alive. I doubt this is done that often in practice, but who knows.

A margin loan typically does not require any payments at all other than interest. Many loans are like this. Amortization for principal repayment is usually something you only find in personal or real estate loans

As mentioned in the article, death (and subsequent inheritance), solves this problem. Once you're dead, your tax situation changes significantly, and selling your assets to settle your debts is subject to estate taxes, not capital gains.

Sometimes its about the layers.

I.e. what kinds of loans can be tax deductible? To be clear theres decent effort into this, you can't just do a cash-out refi on a home, but loopholes exist for those who find it worth the effort.

Investment interest is deductible like mortgage interest

You repay with another loan. Repeat multiple times. And then you die.

This is the strategy that people follow.

This is exactly why many people became landlords, but changed their mind and found that there is no way out. You might decide one day to buy some investment property, but after a few years when you lost interest in the pursuit, quitting would actually give you a huge tax headache in the form of unrecaptured section 1250 gain. This is unfair. You can quit a W-2 job or a hobby without tax consequences.

Hard to sympathize with the landlord class too much on this one. Everyone knows how depreciation schedule works and gets in to it in no small part because of that deduction benefit + the hopes that via 1031 exchanges etc they can delay it until death.

> Everyone knows how depreciation schedule works

Everyone is way too strong a word. Unlike a regular job, there is no course or qualification needed to become a landlord. In the Bay Area I know lots of people in tech who bought a house, couldn’t afford mortgage payments (perhaps after a layoff) and decided to rent out parts of their house. Or perhaps just a particularly smooth talking real estate convinced someone to sell their stocks and buy investment property.

You might say that not knowing about all housing related costs upfront is evidence of financial illiteracy. You might also say not knowing about depreciation before buying a house is also evidence of financial illiteracy. You might even say committing to a mortgage payment while your own job prospects disappear is evidence of bad risk management. But in real life many people make bad financial decisions, landlords included. Landlords do not inherently have more financial aptitude.

I'll agree that "everyone" is probably an unfair characterization. But the tax benefits of depreciation are wildly touted among real estate investors.

If they didn't claim depreciation in prior years they can still get it via Form 3115. Yes this is complicated/annoying to do (almost certainly need a CPA), which you can argue is unfair, but I'm still going to have limited sympathy for anyone DIYing in this space without talking to a professional.

If I understand this correctly, the pain is because you depreciated the assets in the first few years, offsetting other tax liabilities, and now you must pay those back even if exiting the properties at a wash?

If so, it seems like the unfairness is in the other direction: landlording allowed you to essentially pull forward a tax credit, which a W-2 job doesn't allow.

Buying an investment property isn't a job. It's an asset, that possibly generates income. That is not a job. That's an investment.

A W-2 job isn't an investment. It's a job.

A hobby isn't a job or investment, it's a hobby.

You absolutely do have tax consequences if quitting the hobby involves selling equipment, particularly if that equipment was something that has to be registered, like a boat, car, ATV, etc.

It is a job. You need to manage and select tenants and handle repairs and maintenance. Managing one rental property is like a part-time job. But W-2 jobs may be part time too. It’s not like an REIT.

There are no tax consequences for quitting a hobby because you can’t deduct any expenses for hobbies in the first place, let alone any depreciation for these equipment.