Not an expert and i might be wrong, but here is how i understand it with an example:
You are a billionaire that wants to buy a new mansion for 100 million dollar. Even being that rich you probably don’t just have that amount of cash sitting around in your regular bank account where it doesn’t earn you any more money. That would be stupid. Instead you likely have it tied up in stocks.
Now you could ofc just sell some of those, turn around and buy the mansion with cash. But then you would have to pay taxes on the gains you have made so far with these stocks. Because up until those are realized (by selling them), they are just on paper and there is no taxable event. You have all the money you’d need for thousands of lifetimes already, but you still don’t like paying taxes. So luckily there is a better way.
You go to a bank and ask them to borrow you the 100 million. You aren’t named Donald Trump, so the bank will gladly give you the money for a very low interest rate, because they know you are good for it. They gladly do so since it is basically risk free and they can in a way just create that money. For you the amout of interest also doesn’t matter because it is actually less than your stocks will on average give you in profits.
Now you haven’t realized any gains, but instead have a “loss” through the loan and bought your 10th mansion. Over time you will either pay back the loan slowly and use the cost fo your loan to balance out some profits (and avoid taxes that way). Or you might just pay the interest and roll over the loans indefinitely.
We don’t have immortality yet so eventually you will die having payed little to no taxes. However your heirs will have to pay inheritance taxes. But until then your wealth has enjoyed the compunding gains unhindered by taxes. And rather than directly passing on your wealth to the next generation you might have some foundation or other construct to keep taxes to a minimum.
Not an expert and i might be wrong, but here is how i understand it with an example:
You are a billionaire that wants to buy a new mansion for 100 million dollar. Even being that rich you probably don’t just have that amount of cash sitting around in your regular bank account where it doesn’t earn you any more money. That would be stupid. Instead you likely have it tied up in stocks.
Now you could ofc just sell some of those, turn around and buy the mansion with cash. But then you would have to pay taxes on the gains you have made so far with these stocks. Because up until those are realized (by selling them), they are just on paper and there is no taxable event. You have all the money you’d need for thousands of lifetimes already, but you still don’t like paying taxes. So luckily there is a better way.
You go to a bank and ask them to borrow you the 100 million. You aren’t named Donald Trump, so the bank will gladly give you the money for a very low interest rate, because they know you are good for it. They gladly do so since it is basically risk free and they can in a way just create that money. For you the amout of interest also doesn’t matter because it is actually less than your stocks will on average give you in profits.
Now you haven’t realized any gains, but instead have a “loss” through the loan and bought your 10th mansion. Over time you will either pay back the loan slowly and use the cost fo your loan to balance out some profits (and avoid taxes that way). Or you might just pay the interest and roll over the loans indefinitely.
We don’t have immortality yet so eventually you will die having payed little to no taxes. However your heirs will have to pay inheritance taxes. But until then your wealth has enjoyed the compunding gains unhindered by taxes. And rather than directly passing on your wealth to the next generation you might have some foundation or other construct to keep taxes to a minimum.