How the rich borrow against assets to avoid taxes comes down to one rule in the tax code: loan proceeds are not taxable income. Selling an appreciated stock, building, or painting triggers capital gains tax. Borrowing against that same asset produces identical spending power at a zero percent effective tax rate on the cash received. The interest is the only cost, and for someone sitting on decades of appreciation, that cost is almost always smaller than the tax bill a sale would produce.
The Tax Math That Makes Borrowing Cheaper Than Selling
A top-bracket investor who sells appreciated stock owes up to 20 percent in federal capital gains tax plus a 3.8 percent net investment income tax, for a combined 23.8 percent rate on the profit. Borrowing against that same stock produces the same cash with none of that tax. If the loan carries a 6 percent interest rate and the position keeps growing, the interest is often the cheaper number, especially once you factor in the time value of not writing a check to the IRS.
There is a second benefit for borrowers who use loan proceeds to buy more taxable investments. Interest on money borrowed for investment purposes may be deductible if you itemize, capped at your net investment income for the year, with any unused amount carried forward.1Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest – Section (d) Interest on money borrowed for personal spending, like a home renovation, doesn’t qualify.
Buy, Borrow, Die
The lifetime version of this strategy is what tax policy researchers call buy, borrow, die. You buy appreciating assets, borrow against them as they grow, spend from the loan, and hold the assets until death. At death, your heirs inherit those assets with a stepped-up basis equal to fair market value on the date of death, which wipes out every dollar of unrealized appreciation that built up during your lifetime.2Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The heirs can then sell the assets to pay off the outstanding loans and owe little or no capital gains tax on the sale. The appreciation escapes federal income tax entirely.
Securities-Backed Lines of Credit
A securities-backed line of credit, or SBLOC, is the tool most wealthy borrowers reach for first. You pledge a taxable brokerage account as collateral and the lender opens a revolving credit line you can draw against. Private banks and large brokerage firms handle most of these, and many require a portfolio worth at least $100,000 to qualify.3FINRA. Securities-Backed Lines of Credit Explained
How much you can borrow depends on what’s in the account. Typical advance rates run 50 to 65 percent for equities, 65 to 80 percent for corporate bonds, and up to 95 percent for U.S. Treasuries.4Investor.gov. Investor Alert: Securities-Backed Lines of Credit A $2 million diversified stock account might support a credit line of $1 million to $1.3 million. Credit limits reset daily as prices move.
Rates are usually priced as a spread over the Secured Overnight Financing Rate, which sat around 3.7 percent through early 2026. At one major brokerage the spread ranges from 1.90 percent for lines above $3 million to 3.10 percent for lines under $500,000, putting the all-in cost roughly between 5.6 and 6.8 percent. Compared with 23.8 percent in capital gains and investment income tax on a sale, the reason wealthy investors borrow instead is straightforward.
The borrower pays interest monthly on the outstanding balance. There are no required principal payments as long as the account stays above the lender’s maintenance threshold. Securities stay in your account during the loan, so you keep receiving dividends and distributions. Funds are generally available within about a week of signing, without the documentation a mortgage requires, and some lenders don’t run a credit check at all.4Investor.gov. Investor Alert: Securities-Backed Lines of Credit
Where SBLOCs Get Dangerous
SBLOCs are frictionless in rising markets and punishing in falling ones. If your portfolio drops below the maintenance threshold, the firm issues a maintenance call demanding more collateral or partial repayment, often within days or hours. If you can’t meet it, the lender can sell your securities to cover the shortfall, and many firms reserve the right to do so without any advance notice.3FINRA. Securities-Backed Lines of Credit Explained You don’t choose what gets sold. The firm does.
Forced liquidation in a downturn locks in losses at the bottom and triggers the capital gains taxes you were trying to avoid in the first place. SBLOCs are also classified as demand loans, meaning the lender can call the entire balance due at any time for any reason, not just during a shortfall.3FINRA. Securities-Backed Lines of Credit Explained That makes them fundamentally different from a mortgage with a fixed repayment schedule.
Real Estate Equity
Real estate is the second most common collateral pool, partly because property values don’t fluctuate minute-to-minute the way a stock portfolio does. Two tools dominate: cash-out refinancing, which replaces your existing mortgage with a larger one and hands you the difference, and a home equity line of credit, which works as a revolving credit line where you only pay interest on what you draw.
Lenders order an appraisal to confirm current market value, with fees typically ranging from a few hundred dollars to around $2,000 for larger properties. For conforming cash-out refinances on a primary single-unit residence, most lenders cap the loan-to-value ratio at 80 percent, dropping to 75 percent for multi-unit or investment properties.5Fannie Mae. Eligibility Matrix Jumbo and private-bank loans use their own thresholds.
A more aggressive variation is cross-collateralization, where one loan is secured by multiple properties. It unlocks larger amounts than any single property could support. The tradeoff is that a default lets the lender foreclose on any property listed in the security agreement, not just the one that generated the cash. Federal law requires written disclosure of the total cost of credit and the annual percentage rate on these arrangements.6Federal Trade Commission. Truth in Lending Act
Life Insurance Cash Value
Permanent life insurance policies (whole life and universal life) accumulate a cash value component as premiums are paid. You can borrow against that cash value directly from the carrier, with the policy itself as collateral. Because the death benefit backs repayment, most insurers skip credit and income checks. Rates typically fall between 5 and 8 percent, and there is no fixed repayment schedule. Unpaid interest can compound onto the loan balance.
For policies that are not classified as modified endowment contracts, loans are generally not treated as taxable distributions.7Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section (e)(5)(C) That treatment reverses if a policy is classified as a modified endowment contract, which happens when it is funded too aggressively relative to a seven-year payment test.8Office of the Law Revision Counsel. 26 USC 7702A – Modified Endowment Contract Defined Under MEC rules, loans are taxable distributions with gains taxed first, plus a 10 percent penalty if you’re under 59½.
The Lapse Trap
Even on a non-MEC policy, letting interest compound unchecked creates a different tax problem. When the loan balance catches up to the cash value, the insurer forces the policy to lapse. The IRS then treats the full difference between the cash value and total premiums paid as taxable income, even though no cash actually reached you at that moment.
Consider a policy with $105,000 in cash value, $60,000 in premiums paid, and a $100,000 loan outstanding. The insurer applies the cash value to repay the loan, leaving you $5,000. Your taxable gain is $45,000, the cash value minus the basis, and the resulting tax bill can exceed the cash you actually received. Any loan balance still outstanding at your death reduces the payout to beneficiaries dollar for dollar.
Fine Art and Other Alternative Assets
Specialized lenders extend credit against fine art, classic car collections, private aircraft, and similar high-value items. The lending process looks nothing like a securities loan because the collateral doesn’t trade on an exchange.
Authentication comes first. For artwork, that means building a provenance chain of bills of sale, auction catalog appearances, exhibition records, and other documented ownership history back to the artist. Lenders may require pigment dating, canvas fiber analysis, and computerized brush-stroke analysis to rule out forgeries. Updated appraisals every twelve months are standard for keeping the credit facility active, with fees generally running $150 to $500 or more per hour.
Most art loans require the collateral to sit in a bonded warehouse or climate-controlled secure facility so the lender keeps physical control. Non-possession arrangements exist but carry higher rates because the lender has less recourse. The lender records its interest publicly by filing a UCC-1 financing statement with the state, which functions similarly to recording a deed on real estate.9Legal Information Institute. UCC Financing Statement Default lets the lender seize the asset to satisfy the debt.
Restricted Stock and Private Company Shares
Founders, executives, and pre-IPO investors often hold enormous paper wealth in shares they cannot freely sell because of lockup agreements, insider trading restrictions, or the fact that the company isn’t public yet. Borrowing against those positions is possible but more complicated than pledging a diversified account.
For publicly traded but restricted shares, lenders offer margin loans on concentrated positions at lower advance rates than a diversified portfolio would command. Lenders may require a special-purpose entity as the borrower to isolate bankruptcy risk, and they may negotiate directly with the issuing company for help removing transfer restrictions if foreclosure becomes necessary.
A more sophisticated option is the variable prepaid forward contract. The investor receives an upfront cash payment tied to a floor price on the shares while retaining some upside above a cap. Unlike a margin loan, the structure doesn’t expose the investor to margin calls if the stock drops. In exchange, gains above the cap are given up and settlement can carry unfavorable tax treatment. These deals require careful legal and tax planning and are generally only available through investment banks for positions worth several million dollars or more.
How the Strategy Fails
In practice, wealthy borrowers layer these tools together. An SBLOC covers day-to-day spending, a HELOC or cash-out refinance handles major purchases, and an insurance policy loan sits as a backup. Interest across the stack adds up, but for someone with a low cost basis in highly appreciated assets, it almost always beats what a sale would cost in tax.
The strategy works as long as the borrower can comfortably service the interest and the underlying assets appreciate faster than the debt grows. It breaks down in sharp, sustained market declines when multiple collateral pools drop at once and maintenance calls start cascading. The 2008 financial crisis and the 2020 pandemic sell-off produced exactly that scenario for overleveraged borrowers. Patience and conservative borrowing ratios are what make the math hold. Overconfidence is what forces the sale you spent years trying to avoid.