How to defer US taxes
Advice on “deferring” U.S. taxes through business expenses, depreciation, and strategies like “buy, borrow, die” prompts a clash between legal optimization, outright fraud, and moral questions about tax obligations. Commenters highlight technical constraints—such as hobby-loss rules, depreciation recapture, estate and inheritance treatment, and the limits of borrowing against assets—as well as how step‑up in basis and death can erase capital gains for heirs. Others argue over fairness, enforcement risk, and whether minimizing federal taxes is justified given how public services are funded.
Business “Reinvestment” and IRS Risk
- Many commenters warn that you cannot just “reinvest all revenue” to show zero profit.
- Capital expenditures are depreciated over time, not fully expensed; you can’t freely reclassify profit as reinvestment.
- If a business shows losses or no meaningful profit for years, IRS may treat it as a hobby, disallowing deductions.
- Rental real estate is a partial exception: decades of paper losses via depreciation are common and accepted.
- Several emphasize: consult a competent accountant; misuse of “expense everything” quickly turns into tax fraud.
Depreciation, Real Estate, and Recapture
- Depreciation lowers taxable income now, but can be “recaptured” on sale, sometimes causing tax even when selling below purchase price.
- Real estate rules are complex: straight‑line schedules, cost segregation, Sections 1245/1250, 1031 exchanges.
- Some landlords feel “trapped” because exiting can trigger large tax bills; others say this is well‑known and part of the trade.
Why Deferral Matters: Step-Up and “Buy, Borrow, Die”
- Deferring taxes acts like an interest‑free loan from the government; you invest the untaxed money.
- U.S. “step‑up in basis” at death can erase capital gains for heirs, enabling “buy, borrow, die”:
- Buy appreciating assets,
- Borrow against them for living expenses (loans aren’t income),
- Die, wiping out unrealized gains via step‑up; estate sells to pay loans.
- Some argue this is mainly for the ultra‑wealthy with bespoke low‑interest, asset‑backed loans, though similar mechanics exist at smaller scales.
Counterexamples and International Comparisons
- Critics note that in Canada death triggers a deemed disposition; capital gains are taxed in the estate instead of via inheritance tax.
- Debate over which system is “fairer,” especially regarding generational wealth and family homes/farms.
- Some suggest taxing gains when realized (sale or borrowing against increased value) and eliminating step‑up.
Ethics and Politics of Tax Minimization
- Some commenters see aggressive deferral as socially harmful and advocate “just pay your taxes.”
- Others argue governments misuse funds (wars, cuts to social programs) and morally justify minimizing taxes within the law.
- There is disagreement over how much tax money actually funds social goods vs. military or “waste.”
IRS Enforcement, Filing Behavior, and Penalties
- A few people see these strategies as audit magnets; others say they’re standard practice if done correctly.
- Some report people simply not filing and waiting for IRS bills; others call this risky and suboptimal versus using a tax professional.
- IRS letters are described as bureaucratic rather than “angry,” but experiences vary; resolving errors can be stressful.
- Tax penalties are likened to a high‑interest loan (e.g., ~7%+), not “cheap financing.”