How the Rich Avoid Taxes: Buy Borrow Die, Trusts, and QSBS

Wealthy Americans reduce their federal tax bills by routing income through parts of the Internal Revenue Code that tax investment gains, inherited assets, and business ownership more lightly than wages. The top rate on a paycheck reaches 37%, but the top rate on a long-held stock sale is 20%, and several provisions push the effective rate lower still or defer it indefinitely. Understanding how the rich avoid taxes is mostly a matter of understanding which category of income the code is looking at, because the category determines almost everything.

Investment Income Is Taxed at Lower Rates Than Wages

The starting point is the rate gap. Ordinary income climbs to 37% for taxable income above $640,600 for single filers or $768,700 for married couples in 2026. Long-term capital gains and qualified dividends, by contrast, are taxed at 0% up to $49,450 of taxable income for single filers ($98,900 joint), 15% above that, and 20% only once taxable income exceeds $545,500 single or $613,700 joint.¹ An asset must be held longer than one year to qualify.²

High-income investors also owe a 3.8% Net Investment Income Tax once modified adjusted gross income crosses $250,000 joint or $200,000 single.³ Add it in, and the top combined rate on investment income tops out at 23.8%. That is why a founder who takes a $1 salary and holds company stock pays far less than an executive earning the same amount in cash. Same dollars, different chapter of the code.

Buy, Borrow, Die

The most consequential strategy is not selling appreciated assets at all. Instead, the owner pledges a stock portfolio or other liquid holdings as collateral for a line of credit. Loan proceeds are not income, so nothing is taxed. The pledged assets keep compounding in the market, and if the return exceeds the interest rate, the borrower gains on both sides. Interest may be deductible in certain circumstances.

The strategy is designed to run until death. Outstanding loan balances reduce the taxable value of the estate because debts are deductible against the gross estate.⁴ And when heirs inherit the underlying assets, the cost basis resets to the fair market value at the date of death.⁵ A parent who bought stock for $100,000 that is worth $10 million at death passes that stock to an heir whose basis is $10 million. Sold the next day, the taxable gain is zero. Decades of appreciation are never taxed to anyone. The step-up in basis is arguably the single largest wealth-preservation mechanism in the code, and it is the anchor of the entire buy-borrow-die cycle.

Real Estate: Defer the Sale, Deduct the Building

Real estate carries two provisions that no other asset class combines as cleanly: gains can be deferred indefinitely on sale, and rental income can be sheltered by depreciation deductions while cash flow is positive.

Section 1031 Like-Kind Exchanges

When an investment or business property is sold, a like-kind exchange under Section 1031 lets the owner roll the gain into a replacement property of equal or greater value without paying tax at the time of sale. The replacement property must be identified within 45 days and acquired within 180 days, and a qualified intermediary must hold the proceeds during the transition.⁶ Some investors chain these exchanges across decades. Hold the final property until death, and the step-up wipes the deferred gain out entirely.

Depreciation and Bonus Depreciation

Owners deduct the cost of a building over 27.5 years for residential rental property or 39 years for commercial property.⁷ That deduction is a non-cash expense, so a property throwing off positive cash can still show a paper loss for tax purposes. Cost segregation studies accelerate the write-off by identifying appliances, certain flooring, landscaping, and other components that qualify for shorter five-, seven-, or fifteen-year schedules. The One Big Beautiful Bill restored permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025, letting investors deduct the full cost of eligible personal property and land improvements in the year of purchase.⁸ Front-loaded deductions in an acquisition year often generate losses large enough to offset other income.

Moving Assets Out of the Taxable Estate

The federal estate tax rate is 40% on assets transferred at death beyond the exemption.⁹ For 2026 the exemption is $15,000,000 per person, made permanent by the One Big Beautiful Bill and indexed for inflation.¹⁰ A married couple can shelter up to $30 million with no planning at all. Beyond that, several tools shift additional wealth outside the taxable estate.

Grantor Retained Annuity Trusts

A GRAT lets the owner of rapidly appreciating assets, such as pre-IPO stock, place them in a trust for a fixed term and take back a scheduled annuity calculated using the IRS Section 7520 interest rate, which is 120% of the federal midterm rate.¹¹ Anything the trust earns above that rate passes to the beneficiaries at the end of the term without using any of the owner’s lifetime gift tax exemption. Founders expecting a near-term stock spike use GRATs because the technique effectively freezes the asset’s value for transfer tax purposes on the day the trust is created.

Annual Exclusion Gifts and Portability

Separately from the lifetime exemption, gifts of up to $19,000 per recipient in 2026 carry no gift tax consequence and do not reduce the lifetime exemption.¹ A married couple can give $38,000 per recipient annually. Across four grandchildren over 20 years, that alone can move more than $3 million.

If one spouse dies without using their full $15 million exemption, the survivor can claim the unused portion through a portability election filed on a timely estate tax return, due nine months after death.¹² Miss the deadline and the election is forfeited. A combined $30 million exemption becomes $15 million if nobody files.

The Qualified Small Business Stock Exclusion

Founders and early investors in small C corporations can exclude a large share of their gain under Section 1202. For stock acquired after July 4, 2025, the One Big Beautiful Bill introduced a tiered exclusion: 50% for stock held at least three years, 75% at four, and 100% at five or more.¹³ The maximum excludable gain is the greater of $15 million or ten times the taxpayer’s adjusted basis, with inflation indexing starting in 2027.

To qualify, the company must be a domestic C corporation with aggregate gross assets of $75 million or less when the stock is issued. The stock must be acquired at original issue for cash, property, or services. The corporation must use at least 80% of its assets in an active qualified business for substantially all of the holding period. Health, law, accounting, financial services, and certain other service industries are excluded.¹³ A founder who invested $500,000 in a qualifying startup and sells five years later for $20 million can exclude the entire $15 million gain from federal income tax. Zero percent, on what would otherwise be a multimillion-dollar bill.

Pass-Through Entities and the QBI Deduction

Many wealthy business owners run their operations through S corporations or LLCs rather than C corporations. Income flows through to the personal return, where it can qualify for the Qualified Business Income deduction under Section 199A: up to 20% of qualified business income excluded from federal tax.¹⁴ The deduction was originally set to expire after 2025; the One Big Beautiful Bill extended it.

For 2026, the deduction begins to phase out for joint filers at $394,600 of taxable income, with a complete phase-out at $544,600 for specified service businesses like consulting, law, and accounting firms. Non-service businesses face the same range but can preserve part of the deduction based on wages paid or the value of depreciable property. Owners further reduce taxable income by deducting ordinary and necessary business expenses under Section 162.¹⁵ A business generating $2 million in revenue can report substantially less in taxable income than a W-2 employee earning the same amount.

Charitable Giving as a Tax Tool

Charitable contributions produce immediate deductions while letting donors direct where the money goes. The most efficient donations are appreciated assets held longer than a year. The donor deducts the full fair market value and avoids the capital gains tax that a sale would trigger.¹⁶ Donating stock worth $1 million with a $100,000 basis avoids tax on both the deduction and $900,000 of appreciation.

Donor-advised funds let a taxpayer contribute a large amount in a single high-income year, take the full deduction immediately, and distribute the money to charities over time. Cash contributions are deductible up to 60% of adjusted gross income; appreciated property, up to 30%. Any excess carries forward for up to five additional years.¹⁶ Front-loading is especially useful in a business-sale year or when a large block of stock vests.

A charitable remainder trust lets the donor transfer appreciated assets into a trust that sells them without immediate capital gains tax, pays the donor an income stream for life or a fixed term, and passes the remainder to charity. The donor takes a partial charitable deduction upfront based on the present value of the charity’s future interest.¹⁷ Income distributions to the donor are taxable, but overall the burden is often far less than an outright sale.

Private foundations give the most control. They must distribute at least 5% of net investment assets annually and pay a 1.39% excise tax on net investment income.¹⁸ What would have gone to the Treasury becomes a family-directed pool of capital across generations.

Roth Conversions for High Earners

Income limits bar high earners from contributing directly to a Roth IRA. The workaround is contributing to a traditional IRA, which has no income limit, and then converting that balance to a Roth. The conversion is taxable in the year it happens, but future growth is tax-free and qualified withdrawals after age 59½ owe nothing. There is no cap on how much can be converted in a given year.

The play is to convert during years of temporarily lower income: between selling one business and starting another, or in early retirement before Social Security and required minimum distributions kick in. Converting $500,000 at a 24% rate locks in $120,000 of tax now and shelters all future growth permanently. Roth accounts also carry no required minimum distributions during the owner’s lifetime, and heirs receive distributions income-tax-free.

Avoidance Versus Evasion

Every strategy above operates inside the code. Avoidance is legal; evasion is a felony. Underreporting income, hiding assets, or falsifying records can result in up to five years in prison and fines up to $100,000 for individuals or $500,000 for corporations.¹⁹ Some of these techniques, particularly portfolio lending and aggressive depreciation, draw public scrutiny that conflates planning with concealment. They are not the same. Congress wrote these provisions on purpose, often to encourage investment, business formation, or charitable giving. Whether the results are good policy is a separate question from whether they are legal, and on the legal question the answer is not in doubt.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
3
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
4
Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
6
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
7
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
8
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
9
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
10
Internal Revenue Service. Whats New – Estate and Gift Tax
11
Office of the Law Revision Counsel. 26 US Code 7520 – Valuation Tables
12
eCFR. 26 CFR 20.2010-2 – Portability Provisions Applicable to Estate of a Decedent Survived by a Spouse
13
Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
14
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
15
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
16
Office of the Law Revision Counsel. 26 USC 170 – Charitable Contributions and Gifts
17
Internal Revenue Service. Charitable Remainder Trusts
18
Office of the Law Revision Counsel. 26 USC 4940 – Excise Tax Based on Investment Income
19
Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax