Buy, Borrow, Die: How to Build Wealth and Pay (Almost) Zero Taxes
Have you ever wondered how billionaires like Elon Musk manage to grow their fortunes while paying minimal taxes? The answer lies in a powerful wealth-building strategy known as “buy, borrow, die.”
This approach is not just for the ultra-rich—anyone can use it to optimize their investments, minimize taxes, and secure their financial future.
In this comprehensive guide, we’ll break down the buy, borrow, die strategy step by step, explain how it works with different types of assets, and show you how to implement it in your own financial planning.
Plus, we’ll share real-world examples and actionable tips to help you get started.
Step 1: Buy Appreciating Assets
The first step in the buy, borrow, die strategy is to purchase assets that increase in value over time. These can include:
- Stocks and Index Funds: Shares in publicly traded companies or broad market index funds.
- Real Estate: Residential or commercial properties, including rental units.
- Art and Collectibles: Rare paintings, sculptures, or other valuable items.
- Cash Value Life Insurance: Certain types of life insurance policies that build cash value over time.
The key is to select assets that are not only likely to appreciate but also can be used as collateral for loans. This is what makes them “lendable.”
Why Appreciating Assets Matter
When you buy an asset and hold it, any increase in value is called an “unrealized capital gain.” As long as you don’t sell the asset, you don’t owe taxes on this gain.
For example, if you buy a building for $1 million and it appreciates to $2 million over a decade, you don’t pay tax on the $1 million in appreciation until you sell the property.
Similarly, if you buy stocks or collectibles and their value rises, you only owe taxes if you sell them. This makes holding onto appreciating assets a tax-efficient way to build wealth.
Choosing the Right Assets
Not all assets are created equal. To maximize the effectiveness of the buy, borrow, die strategy, focus on assets that:
- Appreciate in value over time.
- Can be used as collateral for loans (e.g., stocks, real estate, cash value life insurance).
- Offer additional tax benefits (e.g., depreciation on real estate, tax-deferred growth in certain accounts).
Step 2: Borrow Against Your Assets
Once you’ve built a portfolio of appreciating assets, the next step is to borrow against them. This is where the magic happens.
How Borrowing Works
When you take out a loan using your assets as collateral, the loan proceeds are not considered taxable income. This means you can access cash without triggering a tax bill.
Types of Loans You Can Use
- Securities-Backed Lines of Credit (SBLOC): Available from many brokerage firms, these allow you to borrow against your stock portfolio.
- Home Equity Lines of Credit (HELOC): Allow you to borrow against the equity in your home.
- Cash Value Life Insurance Loans: If you have a whole life or universal life policy with cash value, you can borrow against it at low interest rates.
- Art and Collectible Loans: Specialty lenders offer loans secured by valuable art or collectibles.
Living Off Borrowed Money
The wealthy often use this strategy to fund their lifestyles. Instead of selling assets and paying capital gains taxes, they borrow against their investments. This allows them to:
- Access cash without selling assets.
- Avoid capital gains taxes.
- Potentially deduct the interest on the loan (depending on how the borrowed funds are used).
Example: If you need $100,000 for a big expense, you could sell $150,000 worth of stock (after paying capital gains taxes) or simply borrow $100,000 against your portfolio and pay only a small amount of interest.
Interest Rates and Repayment
Interest rates on these loans can vary. For securities-backed lines of credit, rates are often tied to the federal AFR (Applicable Federal Rate) and can be as low as 1.5%–2% or higher depending on market conditions. HELOC rates also fluctuate with the market.
Repayment terms depend on the type of loan. Some loans, like those against life insurance, may not require repayment during your lifetime. Instead, the loan is paid off from the death benefit when you pass away.
Step 3: Die and Pass the Wealth to Heirs
The final step in the buy, borrow, die strategy is the transfer of wealth to your heirs. This is where the tax benefits become even more significant.
Step-Up in Basis
When you die, the cost basis of your assets is “stepped up” to their current market value. This means that if your heirs sell the assets, they only owe capital gains taxes on any appreciation that occurs after your death—not on the gains that occurred during your lifetime.
Life Insurance and Loan Repayment
If you have a life insurance policy with a death benefit, the proceeds can be used to pay off any outstanding loans. Life insurance death benefits are generally tax-free, so your heirs receive the full amount without owing taxes.
Estate Taxes
While the buy, borrow, die strategy minimizes capital gains taxes, it’s important to note that estate taxes may still apply if your estate exceeds the federal exemption amount.
However, with proper planning, you can minimize or even eliminate estate taxes as well. Consider trusts, wills and other tools to protect your wealth.
Real-World Examples
Let’s look at a few examples of how the buy, borrow, die strategy works in practice.
Example 1: Real Estate
- Buy: You purchase four rental properties for $500,000 total ($125,000 each).
- Appreciate: Over time, each property doubles in value to $250,000, so your portfolio is now worth $1 million.
- Borrow: You take out a loan against the properties to access cash.
- Exchange: You use a 1031 exchange to sell the properties and buy more real estate, deferring taxes.
- Die: When you pass away, the properties are worth $4 million. Your heirs inherit them at a stepped-up basis and can sell them tax-free.
Example 2: Stocks
- Buy: You invest $500,000 in Tesla stock.
- Appreciate: The stock grows to $2 million.
- Borrow: You take out a $1 million loan against your portfolio.
- Die: When you pass away, your heirs inherit the stock at a $2 million basis. They sell it, pay off the loan, and keep the remaining $1 million tax-free.
Example 3: Art
- Buy: You purchase a Picasso painting for $100,000.
- Appreciate: The painting is now worth $1 million.
- Borrow: You take out a loan against the painting to access cash.
- Die: Your heirs inherit the painting at a $1 million basis. They can sell it tax-free.
Example 4: Life Insurance
- Buy: You purchase a properly structured life insurance that is accumulation focused from licensed professional.
- Appreciate: The cash value grows tax free without market risks, assuming it has zero floor protection.
- Borrow: You take out a loan against the cash value to access cash to buy other assets or use it for other expenses.
- Die: Your heirs will receive death benefit amount tax free after deduction loan balance.
Additional Tax Strategies
The buy, borrow, die strategy can be enhanced with other tax planning techniques.
1031 Exchanges
A 1031 exchange allows you to sell investment real estate and reinvest the proceeds in a like-kind property, deferring capital gains taxes indefinitely. This is a powerful tool for real estate investors using the buy, borrow, die strategy.
Life Insurance Planning
Cash value life insurance can be used as a tax-efficient way to build wealth and provide liquidity for loan repayment. The death benefit is tax-free, and you can borrow against the cash value during your lifetime.
Retirement Accounts
While you generally can’t borrow against an IRA, you may be able to borrow from a 401(k) plan. However, the buy, borrow, die strategy is most effective with taxable accounts and non-retirement assets.
Common Questions and Misconceptions
Do I Have to Be a Billionaire to Use This Strategy?
No. The buy, borrow, die strategy is available to anyone with appreciating assets that can be used as collateral for loans. While it’s most commonly used by high-net-worth individuals, even moderate investors can benefit from it.
What About Repaying the Loans?
You don’t necessarily have to repay the loans during your lifetime. With certain types of loans (e.g., life insurance loans), the loan is repaid from the death benefit when you pass away. For other loans, your heirs can use the stepped-up basis to sell assets and pay off the debt tax-free.
Are There Risks?
Like any financial strategy, there are risks:
- Market Risk: If the value of your collateral drops significantly, you may face a margin call or be required to repay the loan.
- Interest Rate Risk: Rising interest rates can increase the cost of borrowing.
- Longevity Risk: If you live longer than expected, you may need to manage loan balances over a longer period.
However, with proper planning and asset selection, these risks can be managed.
How to Get Started with Buy, Borrow, Die
Ready to implement the buy, borrow, die strategy? Here’s a step-by-step guide:
- Build a Portfolio of Appreciating Assets: Invest in stocks, real estate, or other lendable assets.
- Monitor and Grow Your Investments: Let your assets appreciate over time.
- Establish Lines of Credit: Work with your bank, broker, or other lender to set up securities-backed lines of credit, HELOCs, or other collateralized loans.
- Borrow Strategically: Use loan proceeds to fund your lifestyle or invest further, rather than selling assets and triggering taxes.
- Plan for the Future: Consider estate planning strategies to maximize the step-up in basis and minimize estate taxes.
- Review and Adjust: Regularly review your portfolio, monitor interest rates and loan balances to ensure you’re on track.
Why the Buy, Borrow, Die Strategy Works?
The buy, borrow, die strategy works because it leverages the tax code to your advantage. Here’s why it’s so effective:
- No Tax on Unrealized Gains: You only owe taxes when you sell an asset. By holding onto your investments, you defer taxes indefinitely.
- Loan Proceeds Are Tax-Free: Borrowing against your assets gives you access to cash without triggering a tax bill.
- Step-Up in Basis at Death: When you pass away, your heirs inherit your assets at their current market value, potentially eliminating capital gains taxes.
- Interest May Be Deductible: Depending on how you use the borrowed funds, the interest may be tax-deductible.
Comparing Buy, Borrow, Die to Traditional Investing
Let’s compare the buy, borrow, die strategy to traditional investing.
Feature | Buy, Borrow, Die | Traditional Investing |
|---|---|---|
Tax on Gain | Deferred or eliminated | Paid when assets are sold |
Access to Cash | Borrow against assets | Sell assets |
Heirs’ Tax Liability | Stepped-up basis, often tax-free | Inherit original basis |
Interest Expense | May be deductible | N/A |
Risk | Market, interest rate, longevity | Market risk only |
As you can see, the buy, borrow, die strategy offers significant tax advantages and flexibility compared to traditional investing.
Common Mistakes to Avoid
While the buy, borrow, die strategy is powerful, it’s important to avoid these common pitfalls:
- Overleveraging: Borrowing too much against your assets can put you at risk if the market declines.
- Ignoring Estate Planning: Failing to plan for the step-up in basis or estate taxes can reduce the benefits of the strategy.
- Choosing the Wrong Assets: Not all assets are lendable or appreciate in value. Choose wisely.
Risks and Downsides
- Asset depreciation: If your assets lose value, you may face margin calls or be forced to sell at a loss.
- Interest rate risk: Rising interest rates can increase the cost of borrowing.
- Estate liquidity: Heirs may need to sell assets to pay off loans or estate taxes.
- Regulatory risk: Tax laws can change, potentially eliminating the stepped-up basis or taxing loan proceeds.
- Margin calls: If you borrow against stocks and the market drops, you may be forced to add cash or sell assets
How to Mitigate Risks?
To protect yourself, consider these strategies:
- Diversify your assets: Don’t put all your wealth into a single asset class.
- Monitor loan-to-value ratios: Keep your borrowing below conservative limits.
- Stay informed about tax law changes: Work with a financial advisor to adapt your strategy as needed.
- Have a backup plan: Know how you’ll access cash if the strategy becomes less effective.
How to Maximize the Benefits?
To get the most out of the buy, borrow, die strategy, consider these tips:
- Diversify Your Portfolio: Invest in a mix of stocks, real estate, and other lendable assets like properly structured life insurance.
- Work with Professionals: Consult with a tax attorney, financial planner, and estate planner to ensure your strategy is optimized.
- Stay Informed: Keep up with changes in tax laws and interest rates that could affect your strategy.
- Monitor Your Loans: Regularly review your loan balances and collateral values to avoid margin calls or other issues.
Frequently Asked Questions
Is the Buy, Borrow, Die Strategy Legal?
Yes. The buy, borrow, die strategy is a legal and widely used method for building wealth and minimizing taxes. It leverages existing tax laws and regulations to your advantage.
Can I Use This Strategy with Retirement Accounts?
Generally, no. You can’t borrow against an IRA, and 401(k) loans are limited. The strategy is most effective with taxable accounts and non-retirement assets.
What Happens If I Live a Long Time?
If you live longer than expected, you may need to manage loan balances over a longer period. Proper planning and asset selection can help mitigate this risk.
Are There Any Tax Deductions for Loan Interest?
Depending on how you use the borrowed funds, the interest may be tax-deductible. For example, interest on a HELOC used to buy, build, or improve a home is generally deductible.
What if tax laws change?
The strategy relies on current tax rules. If laws change, you may need to adjust your plan. Work with a professional to stay informed.
The Bottom Line
The Buy, Borrow, Die strategy is one of the most powerful tools for growing and preserving wealth while minimizing taxes. By buying appreciating assets, borrowing against them instead of selling, and passing them on to heirs with a stepped-up basis, you can enjoy your wealth and leave a lasting legacy.
While this strategy is most commonly used by high-net-worth individuals, anyone with investments can benefit from it. With proper planning and professional guidance, you can optimize your financial future and keep more of your hard-earned money.
Don’t let taxes erode your hard-earned wealth. Take control of your financial future today.
Ready to learn more or see if Buy, Borrow, Die is right for you? Contact us now to schedule a consultation and start building your own tax-efficient wealth strategy.
Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be construed as legal, tax, or financial advice. Please consult with a qualified professional before implementing any strategy.
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