Today’s money topic is how we can do like the rich and get ourselves tax-free income. I’m talking about the “buy, borrow, die” method—a powerful strategy used by the uber-wealthy to generate income, pay $0 in taxes on it, and pass it on to their kids.
A quick disclaimer: None of this is tax, legal, or financial advice. If you take action, speak with a licensed professional. This is for educational and entertainment purposes only.
With that said, let’s go ahead.
The Three Steps of the Buy, Borrow, Die Method
Step One: Buy Appreciating Assets
The first step is to buy assets that increase in value over time. For most of us, this means stocks or real estate. If you have serious money, it could also include assets like art or collectibles.
The goal is to hold these assets and let them grow without selling. Why? Because selling triggers a taxable event.
Example: Let’s say you invest $100,000 into an S&P 500 index fund and don’t touch it for 30 years. Assuming an average 8% annual return, your $100k could grow to $1 million. The key to reaching that million is never selling, which means you don’t trigger any capital gains taxes.
But if you never sell, how do you use the money? Great question. That brings us to step two.
Step Two: Borrow
Instead of selling your assets, you borrow against them. This is the core of the tax-free income strategy.
Example: Let’s go back to that $100,000 stock portfolio. After a few years, say it’s now worth $200,000. A normal person might sell $50,000 worth of stocks, pay taxes on the gains, and then spend the rest.
But who likes paying taxes? Instead, the wealthy go and get a $50,000 loan, using their entire stock portfolio as collateral. This is often called a Securities-Backed Line of Credit (SBLOC) or a Pledged Asset Line (PAL).
They pay $0 in taxes on that $50,000 because it’s a loan, not income. Just like the normal person, they now have $50,000 to spend.
“But isn’t there interest?”
Yes, absolutely. But for the wealthy, the interest rates on these loans are significantly lower than personal loan rates you might see (think ~5% vs. double-digit rates). Also, there’s no credit score check—your borrowing limit is based on your collateral.
“How do they pay the interest?”
Remember, these are appreciating assets. Let’s walk through an example:
- You have a $20 million stock portfolio.
- You take a $10 million loan (50% of the portfolio’s value) at a 5.11% interest rate.
- By the end of the year, the market does well and your portfolio grows 25% to $25 million.
- You now owe about $500,000 in interest.
- Here’s the move: you can refinance your loan. Since your portfolio is now worth $25 million, you can borrow 50% of that—$12.5 million. You take this new, larger loan, use $10 million of it to pay off the old loan, and use the remaining $2.5 million to cover the $500,000 interest. The rest is extra cash.
In essence, the appreciation of your portfolio can cover the interest. No money came directly out of your pocket, and you still paid $0 in taxes.
The Big Catch: This only works if your asset appreciates. If it depreciates, you could face a margin call, forcing you to add more money or have your collateral sold.
Why take a loan vs. selling? Let’s compare two people, John and Viv.
- Both have a $10 million portfolio.
- John sells his entire portfolio. He pays ~$4 million in taxes and has $6 million to spend. His portfolio is now $0.
- Viv takes a $6 million loan against her portfolio at 5% interest. She pays $0 in taxes upfront, has $6 million to spend, and her $10 million portfolio remains invested.
- After 5 years (assuming an 8% average return), Viv’s portfolio grows to ~$14.7 million. John has just spent his $6 million.
With larger sums, lower rates, and over a long time, borrowing leaves Viv vastly wealthier.
Step Three: Die
This is where you go six feet under. But with this method, it’s also where you can pass this tax-free wealth to your kids in a uniquely powerful way in the United States.
When you pass away, your assets (like stocks) can be passed to your heirs with a “stepped-up cost basis.” This resets the asset’s purchase price to its value on the day of your death.
Example:
- You bought a stock portfolio for $10 million. It’s now worth $50 million when you pass.
- If you gave it to your child, “Little Johnny,” while alive and he sold it, he’d pay capital gains tax on the $40 million gain ($50m – $10m).
- But if he inherits it after your death, the cost basis is stepped up to $50 million. If he sells it immediately for $50 million, he pays $0 in capital gains tax.
The clock resets. Generationally, this can continue. Of course, you taught Little Johnny well—he won’t sell. He’ll start the “buy, borrow, die” method all over again. This is a key to generational wealth.
Recap & Key Principles
This is the buy, borrow, die method:
- Buy appreciating assets.
- Borrow against those assets for spending money, avoiding taxes.
- Die and pass everything to your heirs at a stepped-up cost basis.
The strategy is best for specific, large purchases when you have significant wealth, not necessarily for funding daily life, which could be very risky. The core principles are appreciating assets and using them as collateral.
What Can You Do?
For most people, the most accessible asset to collateralize is your home. A Home Equity Line of Credit (HELOC) or a cash-out refinance works on a similar principle—you tap into your asset’s value without triggering a taxable event (though interest rates may not be as competitive as an SBLOC).
Think about what assets in your life you can leverage.
Final Thoughts
This has been an overview of a powerful strategy. If you want more information, especially on estate planning, I recommend working with a financial advisor. Crucially, find one that charges a fixed fee—you should know the price before you buy.
I’ve personally worked with a fixed-fee advisory called Facet. If you have assets and income over $150,000, it might make sense to reach out. I have a referral link you can use to get a discount.
As always, drop comments or questions below. Otherwise, I’ll catch you on the next one