The “Buy, Borrow, Die” Strategy: How Billionaires Pay 0% Capital Gains Tax
The “Buy, Borrow, Die” Strategy: How Billionaires Pay 0% Capital Gains Tax
COACHING POINTS
- The Trap: Ordinary people work, earn money, pay income tax, invest, sell the investment, and pay capital gains tax. This double-taxation cycle erodes wealth generation significantly.
- The Loophole: The ultra-wealthy use the “Buy, Borrow, Die” method. They buy appreciating assets, never sell them (avoiding capital gains tax), and borrow against the assets to fund their lifestyle. Loan proceeds are not taxable income.
- The Escape: When they die, the “Step-Up in Basis“ rule resets the asset’s cost basis to the market value at the date of death. The heirs sell the asset tax-free, pay off the loan, and keep the massive difference.
Why did Elon Musk and Jeff Bezos sell so little stock for decades while living lavish lifestyles? Because selling stock triggers a 23.8% tax bill. Borrowing against stock triggers a 0% tax bill. Debt is not a liability for the wealthy; it is a tax shield. As long as the asset appreciates faster than the interest rate on the loan, this strategy mathematically beats selling. Source: USC Gould School of Law (Ed McCaffery) / IRC Section 1014
Scenario: You have $10 Million in Amazon stock (Cost Basis: $1M). You need $500k cash.
- Option A (Sell Shares):
To get $500k, you sell stock.
Tax Event: Capital Gains Tax (~25% State/Fed) is triggered.
Cost: You pay $125,000 in taxes instantly. - Option B (Borrow):
You take a $500k “Securities-Backed Line of Credit” (SBLOC) at 5% interest.
Tax Event: $0. (Debt is not income).
Cost: Interest is $25,000/year (often deductible).
Result: You keep the $125k tax money compounding in the market.
Effective Tax Rate Comparison (%)
| Cash Generation Method | Effective Tax Rate (%) |
|---|---|
| Selling Assets (Realizing Gains) | 23.8 |
| Borrowing Against Assets (Debt) | 0.0 |
*By substituting “Sale” with “Loan,” the effective tax rate drops to zero. The interest cost is the only friction.
What-If Scenario: The Final “Step-Up” Magic
Comparison: Selling before death vs. Heirs selling after death.
| Timing of Sale | Taxable Gain Amount ($M) | Tax Due ($M) |
|---|---|---|
| Day Before Death (You Sell) | 9.0 | 2.2 |
| Day After Death (Heirs Sell) | 0.0 | 0.0 |
Execution Protocol
This strategy does not work in IRAs or 401(k)s (they don’t get a step-up in basis). You must build a massive “Taxable Brokerage” account or hold Real Estate directly to leverage this rule.
Don’t use credit cards (20%). Use SBLOC (Securities-Backed Line of Credit) or PAL (Pledged Asset Line) from brokers like Schwab/Interactive Brokers. Rates are usually Benchmark + Spread (e.g., 6-7%). Margin loans are risky; keep LTV below 20%.
The math breaks if the Interest Rate > Asset Growth Rate. In high-interest environments (like 2023), borrowing becomes expensive. In low-interest environments (like 2010-2021), it is a no-brainer. Be ready to deleverage if rates spike.
COACHING DIRECTIVE
- Do This: Use this strategy for large one-time expenses (weddings, home renovations) to avoid breaking the compound interest curve of your portfolio.
- Avoid This: Borrowing more than 30% of your portfolio value. A market crash could trigger a “Margin Call,” forcing you to sell at the bottom and triggering the very taxes you tried to avoid.
Frequently Asked Questions
Is this loophole being closed?
There have been proposals (like the Biden administration’s plan) to eliminate the Step-Up in Basis for gains over $1M ($2M per couple). However, as of 2025, the rule remains intact and fully legal.
Can I deduct the interest?
Maybe. If you use the borrowed money to buy more investments, the interest is deductible as “Investment Interest Expense.” If you use it to buy a boat, it is personal interest (non-deductible).
What if I live too long?
If the loan balance grows too large (due to compound interest) and eats up the equity, you might die broke. This strategy requires the asset to outgrow the debt over the long term.