Billionaires generally do not pay back large asset-backed loans the way a homeowner pays off a mortgage. They use passive income from dividends, bond coupons, and rental properties to cover the interest, refinance the principal when the facility matures, and often carry the debt for the rest of their lives. What remains gets settled by the estate after death, under rules that erase most of the built-in capital gains tax in the process. The whole approach works only as long as the borrowed money stays cheaper than the returns on the collateral behind it.
Covering the Interest With Investment Income
The first job for any borrower in this position is staying current on interest. A $200 million credit line priced at the Secured Overnight Financing Rate plus a spread of roughly 50 to 150 basis points might cost somewhere around 5% to 6% a year, depending on rates. SOFR hovered near 4.3% through mid-2025. That translates to roughly $10 to $12 million in annual cash flow needed just to service the interest on a $200 million facility, before touching the principal.
Qualified dividends are the most tax-efficient source for those payments. Under federal tax law, qualified dividends are taxed at the same preferential rates as long-term capital gains, topping out at 20% for high-income taxpayers instead of the 37% top ordinary rate.1Office of the Law Revision Counsel. 26 USC 1 Tax Imposed – Section: Maximum Capital Gains Rate Private banks routinely sweep dividend and coupon payments from a brokerage account straight into the loan balance, so interest is covered the moment cash arrives.
Bond portfolios add a predictable second layer. Interest income from corporate or government bonds is reported on Form 1099-INT, and its regular schedule lines up neatly with monthly or quarterly loan servicing.2Internal Revenue Service. About Form 1099-INT, Interest Income Municipal bonds are even better suited to the job: interest on state and local bonds is excluded from federal gross income entirely, so the cash can be routed to loan payments without producing any extra tax liability.3Office of the Law Revision Counsel. 26 USC 103 Interest on State and Local Bonds
Commercial real estate rounds out the picture. Net rental income, reported on Schedule E, provides another recurring stream that can go toward either interest or principal reduction.4Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss Across all these sources, the idea is the same: the income the investments throw off pays the loan, while the investments themselves stay intact and keep compounding.
Deducting the Interest
Interest paid on investment-backed debt can often be deducted, which lowers the real cost of the loan. Under federal law, interest on debt allocable to property held for investment counts as “investment interest,” and non-corporate taxpayers can deduct it up to the amount of their net investment income for the year, with any excess carrying forward.5Office of the Law Revision Counsel. 26 USC 163 Interest – Section: Limitation on Investment Interest
A borrower who pays $8 million in interest on a securities-backed line and collects $12 million in dividends, interest, and short-term gains can deduct the full $8 million. Qualified dividends can also be elected into ordinary investment income for this calculation, though the election forfeits their 20% preferential rate, so it only makes sense in specific circumstances.5Office of the Law Revision Counsel. 26 USC 163 Interest – Section: Limitation on Investment Interest
There is a tracing requirement behind all of this. The IRS classifies the interest based on what the borrowed money was actually spent on, not what secures the loan.6eCFR. 26 CFR 1.163-8T Allocation of Interest Expense Among Expenditures (Temporary) Borrow against a stock portfolio and buy a yacht, and the interest is personal and not deductible at all. Sloppy record-keeping is where an otherwise sound strategy comes apart.
Rolling the Principal Forward
The principal on these loans often never gets paid in the traditional sense. The borrower and lender agree to replace an expiring facility with a new one. If the pledged assets have appreciated in the interim, the borrower can usually secure a larger facility, retire the old balance, and pull out additional liquidity. A portfolio worth $500 million at origination might be worth $800 million three years later, easily supporting a bigger refinanced line.
Many of these facilities carry a balloon structure: interest only during the term, principal due at the end of a three-to-five-year period. Rather than liquidating to cover the balloon, the borrower negotiates a replacement loan with the same lender or a competitor. Banks compete aggressively for this business because the loans generate steady interest income against well-secured collateral. The result is a cycle of perpetual debt where the principal rolls forward indefinitely.
Most billionaire borrowing takes the form of non-purpose loans, commonly called securities-backed lines of credit. Because the proceeds are not used to trade securities, these facilities can allow borrowing of 50% to 95% of the account’s value, depending on the portfolio’s composition and diversification.7FINRA. Securities-Backed Lines of Credit Explained As long as the collateral value stays comfortably above the loan balance and the interest keeps getting paid, both sides are content to keep the arrangement running.
When Assets Actually Have to Be Sold
Sometimes selling is unavoidable. A maturing facility no lender will refinance, a jump in interest rates, or a major life event can force a borrower to liquidate. The tax bill in that case is real: long-term capital gains are taxed at up to 20% federally, and a 3.8% Net Investment Income Tax applies once modified adjusted gross income exceeds $250,000 for a married couple filing jointly.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax Selling $50 million in highly appreciated stock can easily trigger $11.9 million in combined federal tax before any state tax.
Borrowers soften the hit by pairing profitable sales with tax-loss harvesting. Losses from underperforming positions offset gains dollar for dollar.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses The wash sale rule disallows the loss if substantially identical securities are bought within 30 days before or after the sale, which is why advisors often swap into similar but not identical positions.10Office of the Law Revision Counsel. 26 USC 1091 Loss From Wash Sales of Stock or Securities
Corporate insiders face further constraints when they sell company stock. SEC Rule 144 caps how much an affiliate can sell in any three-month period at the greater of 1% of outstanding shares or the average weekly trading volume over the prior four weeks.11U.S. Securities and Exchange Commission. Rule 144 Selling Restricted and Control Securities To work around that, insiders adopt Rule 10b5-1 trading plans that schedule sales in advance. Recent amendments require a cooling-off period of at least 90 days for directors and officers before trading can begin under a new plan.12U.S. Securities and Exchange Commission. Rule 10b5-1 Insider Trading Arrangements and Related Disclosure A billionaire CEO cannot decide today to sell shares next week to cover a margin call.
Private equity distributions can also produce large, unpredictable payoffs. When a portfolio company goes public or gets acquired, the cash windfall is frequently used to retire outstanding credit facilities in one stroke, resetting the balance sheet for a fresh cycle of borrowing.
What Happens When the Collateral Drops
The entire structure assumes the pledged assets hold their value. When markets fall, the loan-to-value ratio rises, and the lender issues a collateral call demanding additional securities or a paydown. For securities-backed lines, brokers typically set maintenance requirements at 25% to 30% of the portfolio’s market value, though concentrated positions in a single stock can trigger 50% or higher.7FINRA. Securities-Backed Lines of Credit Explained A portfolio heavily weighted in one company’s shares is especially exposed, since a single bad earnings report can push the account below the threshold overnight.
If the borrower fails to meet a call, the lender can sell the pledged assets without waiting for permission. Under commercial law, a secured party can dispose of collateral after default in a commercially reasonable manner.13Legal Information Institute. Uniform Commercial Code 9-610 Disposition of Collateral After Default Unlike a home foreclosure, which drags out for months, a securities liquidation can happen in hours. Billionaires manage that risk by borrowing well below the maximum available, diversifying the pledged collateral, and keeping liquid reserves on hand.
How the Debt Gets Cleared After Death
For borrowers who successfully roll their debt forward for decades, the final settlement comes through the estate, and this is where the strategy delivers its biggest tax advantage. Under federal law, inherited assets receive a stepped-up cost basis equal to their fair market value on the date of the owner’s death.14Office of the Law Revision Counsel. 26 USC 1014 Basis of Property Acquired From a Decedent Stock bought for $10 million and worth $2 billion at death passes to the heirs with a $2 billion basis. They can sell the entire position to clear every outstanding loan and owe zero capital gains tax on the appreciation that occurred during the decedent’s lifetime.
The estate still owes federal estate tax, but the math continues to favor the approach. The top federal estate tax rate is 40%, and for 2026 the basic exclusion amount is $15 million per person, so the first $15 million passes tax-free.15Internal Revenue Service. Whats New Estate and Gift Tax Outstanding debts, including unpaid loan balances, reduce the taxable value of the estate before the tax is computed.16Internal Revenue Service. Estate Tax A decedent with $3 billion in assets and $500 million in loans has a taxable estate that starts at $2.5 billion, not $3 billion.
Many ultra-high-net-worth individuals also carry private placement life insurance so the estate has immediate cash to pay off lenders without a forced sale. These are customized whole life policies with death benefits that can reach into the hundreds of millions, and the proceeds are generally income-tax-free when paid to a trust or the estate. That liquidity settles the lenders directly, so family businesses and real estate do not have to be dumped under pressure during probate.
Executors and trustees are legally obligated to pay creditor claims, including loan balances, before distributing remaining assets to beneficiaries. Secured lenders with perfected interests in specific accounts sit near the front of the line. When stepped-up basis sales, life insurance liquidity, and estate planning all work together, the debt clears in a single generation and the heirs receive unencumbered assets with a fresh cost basis.