Millionaires avoid taxes largely by keeping their income out of the wage system. Salaries face a top federal rate of 37%, but long-term investment gains cap out at 23.8%, real estate throws off deductions without cash outlays, borrowed money isn’t income at all, and assets passed to heirs shed their built-in gains entirely.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 None of it is hidden. The strategies below are written into the Internal Revenue Code, and wealthy taxpayers stack them together until the effective rate looks nothing like the top bracket.
Investment Income Is Taxed at Lower Rates Than Wages
The starting point for everything else is the gap between how the code treats a paycheck and how it treats a portfolio. Earn $500,000 from a job, and the top slice is taxed at 37%. Earn $500,000 by selling stock held more than a year, and the maximum federal rate on that gain is 20%.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Wealthy investors organize their financial lives around this gap, drawing most of their spending money from investments rather than paychecks.
The holding period is what triggers the lower rate. Sell inside a year and the profit is ordinary income at rates up to 37%. Hold for a year and a day, and the rate drops to 0%, 15%, or 20% depending on total taxable income. For 2025, the 20% rate begins around $533,400 for single filers and $600,050 for joint filers, with slight upward adjustments for 2026.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Qualified dividends get the same treatment, so dividend income from a stock held long enough is taxed at capital gains rates rather than ordinary rates.
High earners also owe the 3.8% Net Investment Income Tax once modified adjusted gross income clears $200,000 single or $250,000 joint.3Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax That pushes the true ceiling on long-term gains to 23.8%. Still well below 37%.
Losses do work too. Selling losers to offset winners — tax-loss harvesting — can wipe out gains, and up to $3,000 of net losses can offset ordinary income each year, with the rest carrying forward indefinitely. The wash sale rule blocks the crude version of this (selling a stock at a loss and buying it right back), so investors swap into a similar-but-not-identical fund to hold their market exposure while locking in the loss.
Borrowing Against a Portfolio Instead of Selling It
This is the move that changes the whole picture. Rather than sell appreciated stock and pay capital gains tax to raise cash, wealthy investors borrow against their portfolios. A securities-backed line of credit pledges the investments as collateral and delivers a loan for a large percentage of the portfolio’s value.4U.S. Securities and Exchange Commission. Investor Alert: Securities-Backed Lines of Credit The IRS doesn’t treat loan proceeds as income, so the money arrives tax-free.5Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
The interest rate on large balances is usually below the 23.8% tax that selling would trigger. Meanwhile, the pledged stocks keep compounding in the market, and as the portfolio grows the borrower can take out larger loans against it. Wealth accumulates untaxed. Borrowed money funds the lifestyle.
Whether the interest is deductible depends on what the borrowed money is used for, not what was pledged. Proceeds used to buy more investments generate deductible investment interest; proceeds used for personal spending produce nondeductible personal interest.6eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary) Advisors track the use of every dollar.
The strategy carries real risk. If the portfolio drops, the lender can demand more collateral or force sales at bad prices with an unwanted tax bill attached.4U.S. Securities and Exchange Commission. Investor Alert: Securities-Backed Lines of Credit High interest rates raise the carrying cost. The approach works best in rising markets, which is where it took hold among ultra-high-net-worth families.
Real Estate Offers Deductions Without Cash Outlays
No other common asset class combines paper losses, deferred sales, and preferential income treatment the way real estate does.
Depreciation
Buying a rental or commercial building lets the owner deduct part of its cost each year, on the theory that the structure is wearing out.7Office of the Law Revision Counsel. 26 U.S. Code 167 – Depreciation Residential rental is spread over 27.5 years and commercial over 39 years. The deduction runs regardless of whether the building is actually losing value, and in most markets the property is appreciating while the owner books paper losses that offset rental income and sometimes other income.
The One, Big, Beautiful Bill signed in July 2025 restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, and made it permanent.8Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill This mostly covers equipment, fixtures, and certain improvements rather than the building itself, but it lets investors front-load large deductions the year they buy or renovate.
The bill arrives on sale. All the depreciation gets recaptured at a federal rate of up to 25%, on top of capital gains tax on the appreciation.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Even so, deferral has value: a tax dollar paid ten years from now is worth less than one paid today.
1031 Like-Kind Exchanges
Wealthy real estate investors rarely pay that recapture, because they roll the sale proceeds into a new property under Section 1031. Sell an investment or business property, reinvest the full proceeds in another qualifying property, and no tax is owed at the time of sale. The replacement must be identified within 45 days and closed within 180.9Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
Repeated over a career, this is the core playbook: depreciate, exchange, depreciate, exchange. A portfolio that started with one duplex can grow into hundreds of millions with minimal tax paid along the way, and the accumulated gain eventually disappears at death through the stepped-up basis.
Real Estate Professional Status
Rental losses are normally passive and can only offset passive income. But a taxpayer who qualifies as a real estate professional can apply those losses against any income, including wages. Qualifying requires more than 750 hours a year materially participating in real estate, and that time must exceed half of all working hours for the year.10Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
This is how some couples with high W-2 incomes still report little taxable income. One spouse qualifies through active property management and generates depreciation-driven losses that offset the other spouse’s salary on the joint return. The IRS scrutinizes the hours closely, so documentation matters.
Charitable Giving Removes Gains Instead of Reducing Rates
Donating appreciated assets is one of the few moves that erases income rather than just taxing it more gently. Give appreciated stock directly to a charity, and two things happen at once: the capital gains tax on selling it is avoided, and the deduction is the full current market value.11Office of the Law Revision Counsel. 26 USC 170 – Charitable, etc., Contributions and Gifts Stock bought for $100,000 and worth $1 million produces no tax on the $900,000 gain and a $1 million deduction against other income.
Annual limits apply. Cash gifts to public charities can offset up to 60% of adjusted gross income; appreciated property is capped at 30%. Excess deductions carry forward for five years.
Donor-Advised Funds
A donor-advised fund separates the timing of the deduction from the timing of the giving. You contribute cash, stock, or real estate to the fund and claim the full deduction in the year of the contribution.12Internal Revenue Service. Donor-Advised Funds Grants to specific charities come later, on whatever schedule you choose, while the balance grows tax-free inside the fund. That lets a donor front-load deductions into a single high-income year and spread the actual giving over a decade.
Charitable Remainder Trusts
A charitable remainder trust blends giving with income planning. Appreciated assets go into an irrevocable trust, which sells them without triggering immediate capital gains tax. The trust pays the donor or a chosen beneficiary an income stream for a term of years or for life, and whatever remains at the end goes to charity.13eCFR. 26 CFR 1.664-1 – Charitable Remainder Trusts The donor gets a partial deduction upfront based on the projected charitable remainder. For someone holding a concentrated position with low cost basis, it converts that position into diversified income with far less tax than an outright sale.
Estate Transfer Erases the Lifetime Gain
Everything above compounds at death because of one provision.
Stepped-Up Basis
When someone dies, the cost basis of the assets left to heirs resets to the market value on the date of death.14Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Every dollar of appreciation during the decedent’s lifetime is permanently erased. Stock bought for $50,000 and worth $5 million at death passes with a $5 million basis; the heir can sell the next day and owe no capital gains tax.
This is why the borrow-against-your-portfolio strategy works so completely over a lifetime. The investor never sells, never realizes gains, and borrows for spending. At death the gains vanish through the stepped-up basis, the loans get repaid from the estate, and the heirs start fresh. It is a way to enjoy the economic benefit of appreciation without ever paying income tax on it.
The Federal Estate Tax Exemption
For 2026, each individual can pass up to $15 million to heirs free of federal estate tax under the One, Big, Beautiful Bill, and a married couple up to $30 million combined. The same exemption covers lifetime gifts. On top of that sits the annual gift tax exclusion of $19,000 per recipient in 2026, which moves money out of the estate every year without touching the lifetime figure.15Internal Revenue Service. What’s New – Estate and Gift Tax Families with wealth well above these thresholds use more specialized vehicles, such as grantor retained annuity trusts (which push future appreciation to heirs tax-free if it exceeds the IRS’s assumed rate) and spousal lifetime access trusts.
Opportunity Zones and the Pass-Through Deduction
Two more layers get stacked on top when they apply.
Qualified Opportunity Zones let an investor defer capital gains by reinvesting them in a Qualified Opportunity Fund within 180 days. The deferred tax comes due when the fund interest is sold or on December 31, 2026, whichever is first.16Internal Revenue Service. Opportunity Zones Frequently Asked Questions The bigger benefit lands at the ten-year mark: hold the fund investment that long, and any appreciation inside the fund gets a basis adjustment to fair market value on sale, so the new growth is never taxed. The December 31, 2026 deadline means the originally deferred gain is coming due soon for existing investors, but the ten-year exclusion on new appreciation remains available.
Business owners who operate through S corporations, partnerships, and LLCs pass income directly through to their personal returns rather than paying corporate tax. The One, Big, Beautiful Bill made the Section 199A deduction permanent, letting these owners deduct up to 20% of qualified business income before applying tax rates.17Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income On $2 million of pass-through income, that removes $400,000 from taxable income before the first bracket kicks in. The deduction phases out for certain service businesses like law, medicine, and consulting once income clears set thresholds, and it’s capped based on either wages paid or the value of depreciable property the business owns. Those caps push wealthy owners toward capital-intensive businesses and real estate, which is where depreciation and 1031 exchanges already live. The strategies reinforce each other, and by the time they’ve all been applied, the effective rate on a millionaire’s income can bear little resemblance to the 37% at the top of the schedule.