Buy, Borrow, Die: How the Ultra-Rich Avoid Capital Gains Tax Forever
Buy, Borrow, Die: How the Ultra-Rich Avoid Capital Gains Tax Forever
COACHING POINTS
- The Trap: Selling assets to pay for living expenses triggers Capital Gains Tax (up to 23.8% + State Tax). This reduces the principal working for you, killing compound interest.
- The Hack: Borrowing money is not a taxable event. By taking a low-interest loan against your portfolio (SBLOC), you get liquidity without triggering a tax bill. Your assets stay invested and continue to grow.
- The Endgame: The “Step-Up in Basis” rule at death wipes out the capital gains tax liability entirely. Your heirs sell a portion of the tax-free assets to pay off the loan and keep the rest.
The wealthy do not sell assets; they leverage them.
If you need $100,000 for a luxury car or a wedding, selling stock might cost you $130,000 (including tax). Borrowing against the stock might cost you 6% interest.
“Buy, Borrow, Die” is the mathematical arbitrage of interest rates vs. tax rates.
Source: Edward McCaffery, USC Law School
Comparing Selling vs. Borrowing for a $1 Million cash need.
- Scenario: You own $2M in low-basis stock (Cost Basis ~$0).
- Option A (Sell): To get $1M cash, you must sell ~$1.33M of stock to cover the 25% total tax ($333k tax).
Cost: $333,000 immediate loss of capital. - Option B (Borrow): You borrow $1M at 6% interest.
Cost: $60,000/year interest. - Breakeven: You can pay interest for 5.5 years before it equals the tax cost. Meanwhile, your $1.33M of stock stays invested, likely growing at >6%.
What-If Scenario: 20-Year Wealth Accumulation
Assumption: Portfolio grows at 7%, Loan interest is 5%. Need $100k/year.
| Strategy | Total Taxes Paid | Portfolio Value (Year 20) | Net Estate to Heirs |
|---|---|---|---|
| Sell to Spend | ~$500,000 (Capital Gains) | $2,100,000 | $2,100,000 |
| Borrow to Spend | $0 (No Sales) | $3,800,000 (Gross) | $3.8M – $2M Loan = $1,800,000* |
*Note: In this specific high-interest scenario, deleveraging might be safer. However, the tax savings are absolute. The “Borrow” strategy leaves heirs with tax-free assets via the Step-Up in Basis.
Visualizing the Immediate Cost of Cash
| Strategy | Cost to Access $1M ($) |
|---|---|
| Sell Assets (Tax Bill) | 333000 |
| Borrow Assets (1 Yr Interest) | 60000 |
*Selling triggers an immediate 33% capital loss due to taxes. Borrowing allows you to defer that cost and pay only interest.
Execution Protocol
Contact your broker (Schwab, Fidelity, IBKR) to set up a “Pledged Asset Line” or “Margin Loan.” Interactive Brokers (IBKR) typically offers the lowest rates (Benchmark + Spread).
Never borrow more than 30-40% of your portfolio value. If the market crashes, a “Margin Call” will force you to sell at the bottom, triggering taxes and locking in losses. Safety buffer is key.
This is a lifetime commitment. You pay interest annually (or capitalize it). Upon passing, your estate executor sells enough assets (now tax-free due to Step-Up) to pay off the loan principal.
COACHING DIRECTIVE
- Do This: If you have a large taxable brokerage account (> $2M) with significant unrealized gains and need liquidity for major purchases.
- Avoid This: If you are in a high-interest rate environment (Rates > Portfolio Expected Return) or if you have high anxiety about debt. Margin calls are destructive.
Frequently Asked Questions
What is the ‘Buy, Borrow, Die’ strategy?
It is a three-step wealth management strategy: 1) BUY appreciating assets. 2) BORROW against them using SBLOCs to fund lifestyle expenses without triggering capital gains tax. 3) DIE, allowing heirs to inherit assets with a ‘Step-Up in Basis,’ permanently eliminating the tax liability.
What is a Securities-Backed Line of Credit (SBLOC)?
An SBLOC allows you to borrow cash using your taxable brokerage portfolio as collateral. Rates are typically variable and often lower than credit cards. You pay interest only, and there is no fixed repayment schedule.
What is the ‘Step-Up in Basis’?
Under current IRS rules (Section 1014), when you die, the cost basis of your assets is adjusted to the market value at the date of death. This effectively eliminates the capital gains tax liability on all appreciation that occurred during your lifetime.