Billionaires often avoid taxes using legal frameworks, advanced planning, and strategic investments. While their strategies can be complex, some of the same tactics are available—and legal—for everyday taxpayers, just on a smaller scale. From investing in real estate to borrowing against their assets, these methods may offer insight into effective tax management. Here’s a closer look at some of the common ways billionaires often reduce their tax burden and how you might apply similar techniques to your own finances.
From managing capital gains to optimizing retirement withdrawals, a financial advisor may be able to tailor a plan that meets your broader financial needs.
1. Buying Real Estate
The real estate market has proven a powerful vehicle for both wealth creation and tax reduction. Billionaires frequently buy and sell real estate to deduct significant expenses including mortgage interest, property insurance, maintenance costs, and property taxes. They also benefit from depreciation deductions, which allow property owners to write off the building’s cost over time, even as the actual property often appreciates in value.
Beyond deductions, many billionaires store substantial wealth in real estate assets specifically for tax-efficient liquidity. Rather than selling properties and triggering capital gains taxes, they establish credit lines against this collateral. Since loan proceeds aren’t considered income, they access cash without creating taxable events.
Average homeowners can apply similar strategies by maximizing mortgage interest deductions, claiming home office deductions when eligible, and using home equity lines of credit for major expenses rather than liquidating investments and triggering capital gains taxes.
2. Investing in Businesses With Tax Breaks
Oil, gas and clean energy are essential to America’s growth as a country and a world power. Billionaires invest heavily in these commodities and in clean energy and technology to keep America competitive. To promote investment, the government offers major tax breaks for these vital commodities.
Billionaires who invest in oil and gas can claim large deductions for many expenses, including drilling costs—sometimes up to 100% of what they spend. These tax breaks can significantly reduce or even eliminate taxes on their investment. The government provides these incentives to attract private capital into vital industries, making it possible for wealthy investors to benefit from major perks while supporting national growth.
An average person can use some of the same tax strategies available to large investors in oil and gas, though typically on a much smaller scale. For example, individuals can invest in energy-focused limited partnerships, mutual funds or exchange-traded funds (ETFs) that pass along certain tax advantages. In some cases, direct investment in oil and gas partnerships (known as direct participation programs) may allow individuals to deduct a portion of intangible drilling costs or depletion—just like large investors.
3. Buy, Borrow, Die Strategy
Billionaires often employ the “buy, borrow, die” strategy to avoid income and capital gains taxes. First, they acquire appreciating assets like stocks or real estate. Instead of selling these assets when they need cash (which would trigger capital gains tax), they borrow against them at favorable interest rates. Since loans aren’t considered income, no tax is owed.
For example, Larry Ellison, founder of Oracle, has used his shares as collateral for personal loans, including a $10 billion credit line. This allowed him to fund major purchases—including his $300 million Hawaiian island—without selling shares or triggering taxes.
The final component—”die”—provides perhaps the biggest tax advantage. When heirs inherit assets, they receive a stepped-up cost basis, resetting the value to the current market price. This erases past capital gains, so heirs can sell immediately without paying capital gains tax or keep the assets and repeat the process.
4. Donate Large Sums to Charity
Philanthropy is a significant part of billionaire society. Some billionaires enjoy giving their money away to charity, and enjoy the thrill of helping others. But giving to charity is an excellent way for billionaires to save on taxes. The IRS encourages charitable giving by allowing deductions for donations.
Charities and private foundations also serve as tax shelters. Billionaires can fund a foundation, claim an immediate tax deduction, and decide later how to distribute the money. This approach provides flexibility, control, and helps avoid some gift and estate taxes.
5. Converting Personal Assets into Business Expenses
Billionaires transform personal luxury possessions into legitimate business assets to generate tax advantages. By placing yachts, private jets and vacation properties into corporate ownership structures, they convert personal expenses into business deductions.
For example, Elon Musk, CEO of Tesla and SpaceX, has used corporate structures to own aircraft through his companies. By designating these jets for business travel and executive transport, Musk can deduct operational costs, depreciation, and maintenance as business expenses, while still making occasional use for personal travel within IRS guidelines.
To use this strategy, IRS rules require business assets to be used for business purposes at least 14 days annually or 10% of the total days rented, making depreciation deductions possible. Even maintenance, fuel and staff become deductible business expenses.
Average taxpayers can also use this approach. Renting out your vacation home on Airbnb or your boat on peer-to-peer sites lets you deduct related expenses, as long as you document the rentals and keep proper records. By formalizing the rental arrangement and maintaining proper records, you can potentially deduct associated expenses while offsetting ownership costs through rental income.
Bottom Line
There are many reasons why being a billionaire is fun, but the ability to find different ways not to pay taxes would be near the top of the list. To be fair to the billionaires, they conduct business for the government that benefits taxpayers as a whole. Otherwise, the government wouldn’t give them substantial tax breaks. It’s important to always work with a tax consultant before moving forward with any potential tax move.
Tax Planning Tips
- A financial advisor with tax expertise can help you develop a strategy that aligns your investment and income decisions with tax efficiency. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Planning ahead starts with understanding what you may owe. SmartAsset’s income tax calculator can help you estimate your federal and state tax burden based on your income, filing status and deductions. SmartAsset’s tax return calculator can also give you an idea of your expected refund or payment, helping you avoid surprises and better time deductions or contributions.
Photo credit: ©iStock.com/pixelfit, ©iStock.com/golubovy, ©iStock.com/nathaphat
Read the full article here