Wealthy people use debt as a tool for growing and preserving wealth rather than a burden to eliminate. Instead of selling appreciated assets and paying capital gains tax, they borrow against those assets, spend the loan proceeds tax-free, and let the investments keep compounding. When they die, their heirs inherit the assets at current market value under the stepped-up basis rule, wiping out a lifetime of unrealized gains for tax purposes. The playbook has a name: buy, borrow, die.
The Buy, Borrow, Die Cycle
The strategy runs in three stages.
First, buy assets that appreciate over time: stocks, real estate, private equity stakes. Net worth grows on paper, but nothing is sold, so nothing is taxed.
Second, when cash is needed for a house, a business venture, or ordinary spending, borrow against those assets through a securities-backed line of credit or similar lending product. Loan proceeds aren’t taxable income, so the money arrives without a tax bill attached. The underlying investments stay in place, continuing to earn dividends, interest, and appreciation while the loan is open.
Third, at death, heirs inherit the assets with a tax basis reset to fair market value on the date of death.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The heirs can sell a portion of the assets at the new, higher basis to pay off any outstanding loans and often owe nothing in capital gains tax. The gains that built up during the original owner’s lifetime were never taxed, and now they never will be.
How Borrowing Against a Portfolio Works
A securities-backed line of credit, or SBLOC, lets you borrow using an investment portfolio as collateral. It functions like a home equity line, except the collateral is a brokerage account rather than a house.2Investor.gov. Investor Alert: Securities-Backed Lines of Credit You draw against the line as needed, make interest-only payments, and repay the principal on your own schedule.
How much you can borrow depends on what’s in the portfolio. Most lenders offer between 50% and 95% of account value. A diversified stock portfolio might qualify for 50% to 70%, while portfolios heavy in government bonds can support closer to 90% because the collateral is less volatile. Interest rates are typically pegged to the Secured Overnight Financing Rate (SOFR) plus a spread, and the spread shrinks as loan sizes grow. Large private banking clients often see spreads between 0.75% and 2.5%.3FINRA. Securities-Backed Lines of Credit Explained
Access to these facilities generally comes through a private bank or wealth management firm, with annual advisory fees around 1% of assets under management being typical. That fee is part of the true cost of borrowing.
Why Borrowing Beats Selling on Taxes
Selling an appreciated investment triggers a taxable event. The gain between purchase price and sale price is taxed under federal law.4Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss For high earners, the top federal long-term capital gains rate is 20%, plus the 3.8% Net Investment Income Tax on investors above certain income thresholds.5Internal Revenue Service. Questions and Answers on the Net Investment Income Tax That’s 23.8% federal before any state tax, which in some states pushes the total past 37%.
Borrowing against the same assets produces a completely different outcome. The IRS does not treat loan proceeds as income, because there’s an offsetting obligation to repay. No gain is realized. No tax is owed.
The math is lopsided. A $10 million stock position costs roughly $2.38 million to liquidate after federal taxes alone. Borrowing $5 million against that same position at 5.5% costs about $275,000 a year in interest, and the full $10 million keeps compounding in the market. A portfolio growing at 8% annually doubles in roughly nine years. A portfolio that was sold, taxed, and reinvested starts from a smaller base and never catches up. That gap is why wealthy investors carry debt for decades rather than sell.
When the Interest Is Deductible, and When It Isn’t
Whether SBLOC interest is deductible depends on what the borrowed money is used for. The IRS traces loan proceeds to their use, not their source. Money reinvested into income-producing assets creates “investment interest,” deductible up to the amount of net investment income for the year, with any excess carried forward.6Office of the Law Revision Counsel. 26 USC 163 – Interest
Money used for personal expenses, such as a car, a vacation home renovation, or ordinary lifestyle spending, is classified as personal interest and is not deductible at all.7Internal Revenue Service. Topic No. 505, Interest Expense Many wealthy borrowers use SBLOCs precisely for personal spending, which means non-deductible interest. The strategy still works when the avoided capital gains bill dwarfs the interest cost, but the deduction most people assume is available often isn’t.
Borrowing Cheap and Investing for More
Debt also builds wealth through arbitrage: borrow at one rate, invest at a higher one, keep the spread. Someone with a 4.5% mortgage can deploy the cash that would have paid down the house into diversified index funds averaging 8% to 10% annually. The 3.5% to 5.5% spread compounds over decades.
Real estate is where this shows up most often. Investors who could afford to buy a property outright will still carry a mortgage to free capital for other investments. Many experienced investors target a minimum spread of 3% to 5% before taking on the debt.
The risk is real. Arbitrage depends on the investment outperforming the debt cost consistently, and markets don’t cooperate on any reliable schedule. During downturns, investments can lose value while interest payments continue. Investors with collateral constraints can be forced to liquidate at the worst possible time, when the spread has turned negative and losses are being locked in.
Debt as an Estate Planning Tool
Debt directly reduces the taxable value of an estate. For federal estate tax purposes, the estate’s value equals fair market value of assets minus debts, mortgages, and other liabilities.8Internal Revenue Service. Instructions for Form 706 (Rev. September 2025) The federal estate tax rate reaches 40% on amounts above the lifetime exemption, which for 2026 is $15 million per individual after the increase enacted by the One Big Beautiful Bill Act signed in July 2025.9Internal Revenue Service. What’s New – Estate and Gift Tax A married couple can shield up to $30 million combined. Maintaining large outstanding loans shrinks the net estate above the exemption and reduces the 40% tax.
The Step-Up in Basis Closes the Loop
The real power comes from the stepped-up basis. When someone dies holding appreciated assets, heirs receive those assets with a basis equal to fair market value on the date of death rather than the original purchase price.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Every dollar of lifetime appreciation is erased for tax purposes.
Consider stock bought for $2 million that grows to $20 million. It was never sold, so no capital gains tax was paid. The owner borrowed against it during life, so no income tax was triggered. At death, heirs inherit the stock at a $20 million basis. They sell $5 million of it to retire the outstanding loans and owe zero capital gains tax on that sale. The remaining $15 million continues growing in the family’s hands. The original $18 million in gains was never taxed by anyone.
The Risks: Margin Calls and Forced Sales
Borrowing against a portfolio is not a free lunch. If collateral value drops below the lender’s maintenance threshold, the borrower faces a margin call demanding additional cash, more pledged securities, or a sale of holdings to cover the shortfall.
Lenders are not required to give advance notice. In volatile markets, or when a concentrated position takes a sharp hit, a firm can sell securities immediately to bring the account back into compliance.10Fidelity. Avoiding and Managing Margin Calls The lender picks which securities to sell and has no obligation to consider the borrower’s tax situation. That can force capital gains to be realized at the worst moment, during a market crash, when prices are lowest and the tax bill compounds an already painful loss.
Concentration makes this worse. A collateral account heavily weighted in one stock can trigger a liquidation cascade on a single bad day. Even broad indexes can drop 30% or more in severe downturns. Anyone using this strategy needs enough liquid reserves outside the pledged account to meet a margin call without being forced into a fire sale.
Where the IRS Draws the Line
The tax code separates legitimate borrowing from transactions that effectively cash out a position without calling it a sale. Under the constructive sale rules, certain arrangements that eliminate the economic exposure to an appreciated position are treated as if the asset had been sold, triggering immediate capital gains tax.11Office of the Law Revision Counsel. 26 U.S. Code 1259 – Constructive Sales Treatment for Appreciated Financial Positions Short sales against identical positions, forward and futures contracts to deliver the same property, and offsetting swaps that pay away all appreciation in exchange for downside protection all qualify. So does any other arrangement with substantially the same effect.
A straightforward SBLOC pledging a diversified portfolio does not trigger these rules, because the borrower still bears the market risk and reaps any gains. The problem arises when investors try to hedge away all risk on a concentrated position while simultaneously borrowing against it. If both the upside and downside are gone, the IRS will treat the arrangement as a sale regardless of what the paperwork says.
Who This Actually Works For
The buy-borrow-die approach is powerful, but it requires a level of wealth that makes the costs and risks manageable. It takes a portfolio large enough to borrow meaningful amounts while keeping the loan-to-value ratio conservative enough to survive a major downturn. It takes income or liquid reserves to service interest payments without strain. And it takes access to private banking relationships where favorable lending terms exist, which typically means several million dollars in investable assets at minimum.
For a $500,000 portfolio, borrowing $250,000 at SOFR plus 2% and hoping the market cooperates is a bet that can go wrong quickly. For a $50 million portfolio, borrowing $10 million at SOFR plus 0.75% against diversified holdings is a manageable line item that keeps tens of millions compounding tax-free. The strategy scales with wealth, and so do the tax savings. That is why it remains a high-net-worth planning tool rather than a mainstream consumer strategy.