“It is a simple fact that billionaires in America can live very extraordinarily well completely tax-free off their wealth,” law professor Edward J. McCaffery writes. They can do so by borrowing large sums against their unrealized capital gains, without generating taxable income.
Policymakers have adopted the principle that capital income should be taxed at lower rates than labor income. So if at all possible, top earners will find ways to disguise their labor income as “capital” income. And one way to do that is by changing the corporate form of the businesses they own and operate themselves.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
A stepped-up basis is a tax provision that allows heirs to reduce their capital gains taxes. When someone inherits property and investments, the IRS resets the market value of these assets to their value on the date of the original owner's death.
A capital gains rate of 0% applies if your taxable income is less than or equal to: $47,025 for single and married filing separately; $94,050 for married filing jointly and qualifying surviving spouse; and. $63,000 for head of household.
Who qualifies for 0% capital gains in 2025. Starting in 2025, single filers can qualify for the 0% long-term capital gains rate with taxable income of $48,350 or less, and married couples filing jointly are eligible with $96,700 or less. However, taxable income is significantly lower than your gross earnings.
You can assign a portion of your wealth to charitable trusts of two types: lead trusts and remainder trusts. Your estate, such as investments, hard assets, and even cash, can be allocated to a trust in the form of charitable donations. Most billionaires and ultra-rich individuals use this strategy for tax planning.
Current tax law does not allow you to take a capital gains tax break based on your age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales, though this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
In some years, billionaires such as Jeff Bezos, Elon Musk and George Soros paid no federal income taxes at all. Billionaires avoid these taxes by taking out special ultra-low-interest loans available only to them and using their assets as collateral.
Borrowing against assets like real estate and securities allows individuals to access funds without incurring capital gains taxes, using financial tools such as HELOCs and SBLOCs to leverage appreciating assets efficiently. In estate planning, loans can effectively minimize estate taxes.
In fact, many wealthy people can and do "live off the interest." That is, they put a chunk of their fortune in a relatively safe collection of income-generating assets and live off of that—allowing them to be more adventurous with the rest.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
But when gains are inherited, the loophole zeroes out the gain for tax purposes. As a result, an investment sale that would create a taxable gain for the original owner is tax-free for the inheritor. Example: an investor buys 100 shares of stock for $200. Ten years later, the stock is worth $500.
An easy and impactful way to reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
There are 2 primary methods of transferring wealth, either gifting during lifetime or leaving an inheritance at death. Individuals may transfer up to $13.99 million (as of 2025) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.
Ideally, you buy assets that will grow in value on a tax-deferred basis and yield passive income. Passive income is money that you don't have to work to earn. Dividends earned from stocks, for example, are another form of passive income. Once you've bought appreciating assets, the next step is to borrow against them.
Stepped-up basis is a loophole exempting certain capital gains from the federal income tax. Wealthy investors are incentivized to hold assets until their deaths, even when switching to other investments might prove more productive. Capital gains are the increase in value of an asset that a person holds.
What is carried interest, and how is it taxed? Carried interest, income flowing to the general partner of a private investment fund, often is treated as capital gains for the purposes of taxation. Some view this tax preference as an unfair, market-distorting loophole.
Therefore, every single person might as well shoot for accumulating up to $13.61 million per person to help other people. But the reality is, anything above $10 million is a top 1% net worth and rich, not upper middle class. After a few million dollars in net worth is considered closer to upper middle class.