The ‘Buy, Borrow, Die’ Strategy: How the Ultra-Wealthy Avoid Capital Gains Tax Forever
CORE INSIGHTS
- Buy: Acquire high-quality assets (stocks, real estate) that appreciate over time but generate minimal taxable income (dividends) in the short term.
- Borrow: Instead of selling assets to fund lifestyle (which triggers tax), borrow against them using an SBLOC (Securities-Based Line of Credit) at low rates.
- Die (Step-Up): Hold the assets until death. Heirs receive a Step-Up in Basis to current market value, permanently wiping out the deferred capital gains tax.
In the world of ultra-high-net-worth (UHNW) investing, taxes are optional. The “Buy, Borrow, Die” strategy is not a loophole but a systematic application of the tax code. By monetizing assets through debt rather than sales, Investors can maintain 100% of their Asset Allocation exposure while accessing liquidity tax-free, effectively deferring taxes until they are legally extinguished at death.
An Investor needs $100,000 in cash. They hold $1M in stock with a $100k cost basis.
• Sell: To net $100k, they must sell ~$130k of stock to cover the 23.8% Capital Gains tax + State Tax.
• Borrow: They borrow $100k at 6% interest. No tax event occurs. The assets remain invested and continue to compound.
Result: The Borrow strategy preserves $30,000 in capital that continues working for the investor.
Visualizing the Wealth Gap
Data illustrates the long-term wealth divergence between an Investor who sells assets to live versus one who borrows against them.
*Figure 1: Net Worth Projection over 20 Years: Selling Assets vs. Borrowing Strategy.*
Expert Insight:
The “Borrow” phase relies on Interest Rate Arbitrage. As long as the portfolio’s after-tax total return exceeds the after-tax cost of borrowing, the strategy adds to net worth. However, it introduces Leverage Risk.
| Action | Tax Consequence | Portfolio Impact | Risk |
|---|---|---|---|
| Sell Assets | Capital Gains Tax (Immediate) | Permanent Loss of compounding base | Opportunity Cost |
| Borrow (SBLOC) | None (Loan proceeds are tax-free) | Assets remain invested | Margin Call / Rate Hikes |
| Die (Inherit) | None (Step-Up in Basis) | Heirs sell tax-free to pay off loan | Estate Tax (if > exemption) |
Strategic Action Steps for Execution
Contact your brokerage to set up a Securities-Based Line of Credit. Unlike margin, SBLOCs cannot be used to buy more stock (non-purpose), which often allows for lower interest rates and more flexible terms.
Never borrow the maximum allowed. Keep your Loan-to-Value (LTV) ratio below 30-40% to withstand significant market corrections without triggering a forced liquidation (Margin Call).
Ensure your estate plan instructs the executor to sell the stepped-up assets immediately upon death to pay off the outstanding SBLOC balance, leaving the remaining clean equity to heirs.
The Bottom Line: Who Should Choose What?
- Execute Strategy: Investors with >$1M in taxable accounts who need liquidity but have high unrealized gains. Ideally suited for low-interest-rate environments.
- Avoid Strategy: Investors with low risk tolerance or those holding volatile, concentrated positions where a 20% drop could trigger a margin call.
Frequently Asked Questions
The strategy involves buying appreciating assets, borrowing against them (via SBLOC or margin) to fund lifestyle expenses instead of selling, and holding them until death to eliminate capital gains tax through the Step-Up in Basis rule.
It depends. If the loan proceeds are used to buy more taxable investments, the investment interest expense may be deductible. However, if used for personal expenses (lifestyle, cars), the interest is generally not tax-deductible.
The main risk is a ‘Maintenance Call’ (Margin Call). If the asset value drops significantly, the lender may force the sale of assets to cover the loan, triggering the very capital gains taxes you were trying to avoid.