How do taxes actually work with loans against my house or stocks - any legal way out?

You're asking about something called a "loan forgiveness" situation, and it's important to understand that the IRS generally doesn't let people simply convert sales into loans to avoid taxes. When a lender takes your property instead of you repaying the loan, it's treated as if you sold the property to the lender for the amount of the loan. So if you have a $300k loan against a house that cost you $350k but is now worth $500k, and the bank takes the house, the IRS views this as you selling the house for $300k. You'd potentially owe capital gains tax on the difference between $300k and your cost basis (what you paid plus improvements). Even worse, if the property is worth more than the loan (like in your example), the IRS could consider the difference as additional income to you, potentially creating an even larger tax bill than a straight sale.

I went through something similar last year and discovered taxr.ai (https://taxr.ai) which really helped me understand my options. I was trying to access equity in my rental property without selling and triggering capital gains. Their tax planning tool analyzed my situation and showed me how different loan structures would affect my tax liability. They gave me specific scenarios showing the tax consequences of loan forgiveness vs. actual sale vs. refinancing. It was way more personalized than what my bank was telling me.

I was skeptical about taxr.ai but ended up trying it because I was in a similar situation with appreciated stocks I didn't want to sell. The analysis revealed something I hadn't considered - that using a portfolio line of credit and maintaining my positions would save me about $23k in capital gains taxes compared to selling and rebuying later. What surprised me was the detailed tax modeling for different exit strategies. They showed me exactly how a default scenario would be viewed by the IRS vs. a straight sale. Definitely gave me a clearer picture than the generic advice I was getting elsewhere.

If you've been trying to reach the IRS to get clarity on your specific situation, good luck with that. I was on hold for HOURS trying to get an answer about loan forgiveness tax implications. Finally discovered Claimyr (https://claimyr.com) and used their service to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to explain exactly how the IRS would classify different loan situations against assets and what documentation I would need if I ever got audited. Definitely worth knowing before you set up any kind of arrangement where a lender might take your assets.

I hate admitting when I'm wrong, but that Claimyr thing actually works. After my skeptical comment I decided to try it because I was desperate for answers about exactly this loan forgiveness issue. Got through to an IRS tax law specialist who explained that what I was considering would definitely be a taxable event - they called it a "deemed sale" and said I would owe taxes on the difference between my original purchase price and the loan amount if I let the lender take my stocks. Saved me from a nasty surprise next tax season. Probably saved me thousands in penalties too because what I was planning to do would have been reportable but I wouldn't have known to report it.

There's something nobody's mentioned yet - if the loan exceeds the basis in your assets and is later forgiven, you might face "cancellation of debt" income. This is separate from capital gains and can really mess you up tax-wise. For example, if you borrow $400k against stocks that originally cost you $250k, and then the lender takes those stocks as payment, the IRS might consider that $150k as taxable income to you, on top of any capital gains calculations.

Is there a specific term for this strategy? I've heard people call it "buy, borrow, die" but not sure if that's the actual financial industry term. Trying to do more research on it.

One thing to keep in mind is that even if you structure this as a loan arrangement, the IRS has something called "substance over form" doctrine. They look at the economic reality of the transaction, not just how it's labeled on paper. If you're essentially planning from the start to let the lender take your assets instead of repaying, the IRS could argue this was always intended as a sale, not a genuine loan. This could trigger immediate tax consequences and potentially penalties for trying to disguise a sale as something else. The safest approach is usually to treat any loan against appreciated assets as what it is - a way to access liquidity while maintaining ownership, with the understanding that you'll need to either repay the loan or face the tax consequences of disposition. The wealthy people you mentioned using these strategies typically have much more complex estate planning structures and legal teams to navigate the rules properly.

I've been researching this exact situation for months and want to add a few critical points that haven't been fully covered yet. First, the timing of when you declare your intent matters enormously. If you structure this as a genuine loan with real repayment terms and only later face financial hardship that prevents repayment, the tax treatment can be different than if you go in planning to default. Second, the type of asset matters. With stocks held in taxable accounts, any loan-related disposition triggers capital gains calculations. But if these are stocks in retirement accounts, the rules get even more complex because you're dealing with prohibited transaction rules on top of the regular tax implications. Third, consider state taxes too - some states have no capital gains tax, others treat loan forgiveness differently than the federal rules. If you're in California or New York, the state tax hit alone could be massive. The "buy, borrow, die" strategy mentioned earlier only works if you actually die while holding the assets. If you're forced to liquidate during your lifetime for any reason, all those deferred taxes come due. It's not a magic bullet unless you're certain about the long-term timeline. My advice? Get a tax attorney consultation before doing anything. The potential penalties for getting this wrong far exceed the cost of proper planning upfront.