“Buy, Borrow, Die”: The Secret for Avoiding Taxes

Ever wondered how billionaires like Jeff Bezos and Elon Musk manage to pay almost zero taxes while their wealth skyrockets?

Spoiler alert: It’s not because they’ve got some magical accountant hiding their money in offshore accounts. It’s because they’re playing a different game altogether – one that’s perfectly legal and, frankly, brilliant.

Welcome to the world of “Buy, Borrow, Die” – the wealth-building strategy that’s been the secret sauce of the ultra-rich for decades. And guess what? You don’t need to be a billionaire to start using it.

What is “Buy, Borrow, Die”?

Let’s break it down in simple terms:

1. Buy: Acquire assets that appreciate in value over time. We’re talking stocks, real estate, and businesses – not that shiny new car that loses value the second you drive it off the lot.
2. Borrow: Instead of selling these assets (and triggering taxes), borrow against them. Use this borrowed money to fund your lifestyle or invest in more assets.
3. Die: Hold onto these assets until you kick the bucket. Thanks to a nifty little thing called “step-up basis,” your heirs can inherit your assets at their current market value, potentially avoiding a massive tax bill.

Now, I know what you’re thinking: “Joe, this sounds like some rich person’s game. How does this apply to me?”

Here’s the thing – understanding this strategy is crucial, even if you’re not flying private jets or buying islands. Why? Because it reveals how the financial system really works, and how you can start positioning yourself to build serious wealth over time.

Think about it. Every time you sell an appreciated asset, you’re potentially triggering a tax event. But what if you could grow your wealth without constantly paying taxes on your gains? That’s the power of “Buy, Borrow, Die.”

Let’s say you bought $10,000 worth of stocks five years ago, and now they’re worth $50,000. If you sell, you’re looking at capital gains tax on that $40,000 profit. But if you borrow against those stocks instead, you can access cash without selling – and without triggering a taxable event.

Now, I’m not saying you should never sell assets or that this strategy is without risks (we’ll get into that later). But understanding this concept can completely change how you think about building and preserving wealth.

Step 1: Buy Assets That Appreciate

Alright, let’s talk about the foundation of this whole strategy: buying assets that go up in value. This isn’t about collecting Pokemon cards or hoarding beanie babies (unless you’ve got a time machine to the 90s). We’re talking about serious, wealth-building assets.

What Assets Do the Wealthy Focus On?

1. Stocks: Not just any stocks, but typically broad market index funds or shares in solid, growing companies. Warren Buffett didn’t get rich by day trading meme stocks.
2. Real Estate: From rental properties to commercial real estate, land is a finite resource that tends to appreciate over time.
3. Businesses: Either starting their own or investing in others. A successful business can be a powerful wealth generator.

Now, I can already hear some of you saying, “But Joe, I’m not Scrooge McDuck swimming in money. How am I supposed to buy these assets?”

Here’s the secret: You start where you are.

How to Start Building Your Asset Portfolio (Even If You’re Not Rolling in Dough)

1. Invest in Index Funds: You can start with as little as $100 in some cases. Platforms like Vanguard or Fidelity offer low-cost index funds that give you exposure to a broad range of stocks.
2. Consider Real Estate Investment Trusts (REITs): Can’t afford a whole building? No problem. REITs allow you to invest in real estate without needing to buy property directly.
3. Start a Side Business: Got a skill? Maybe it’s time to freelance or start that online business you’ve been dreaming about.

Remember, the goal here isn’t to get rich overnight. It’s to consistently acquire assets that have the potential to grow in value over time.

Why Appreciation is Key

Here’s where the magic happens. When you buy assets that appreciate, your net worth can grow without you having to work harder or earn more income. It’s like having a little army of dollar bills working for you 24/7.

Let’s say you invest $10,000 in a broad market index fund. If it grows at an average of 7% per year (which is conservative by historical standards), in 10 years, you’d have about $19,672 without adding another penny. That’s nearly doubling your money!

But here’s the kicker: You haven’t sold anything, so you haven’t triggered any taxable events. Your wealth is growing, but Uncle Sam isn’t taking a cut… yet.

This is why the ultra-wealthy are obsessed with acquiring appreciating assets. They know that over time, these assets can grow exponentially, creating massive wealth that can be passed down through generations.

We’ll talk about how to use these appreciating assets to fund your lifestyle without selling them and triggering a tax bomb. But for now, your homework is simple: Start identifying and acquiring assets that have the potential to appreciate. Whether it’s setting up an automatic investment into an index fund or researching potential rental properties in your area, take that first step.

Remember, building wealth isn’t about getting lucky with a hot stock tip or winning the lottery. It’s about making smart, consistent decisions over time. And it all starts with buying assets that appreciate.

Step 2: Borrow Against Your Assets

Alright, you’ve started accumulating assets that appreciate. Good job! But now you’re probably wondering, “What’s the point of having all this wealth if I can’t use it?”

This is where things get interesting. Welcome to the “Borrow” part of our strategy.

The Power of Leveraging Assets

Here’s a mind-bender for you: The ultra-wealthy often have a lot of wealth but little income. How do they fund their lavish lifestyles? They borrow against their assets.

Let’s break down why this is so powerful:

1. You Don’t Trigger Taxes: When you sell an appreciated asset, you owe capital gains tax. But when you borrow against it? No taxes. It’s not income, it’s debt. And the IRS doesn’t tax debt.
2. Your Assets Keep Growing: While you’re using borrowed money, your original assets can continue to appreciate. It’s like having your cake and eating it too.
3. Interest Rates Are Often Low: Especially when you’re borrowing against stable assets like stocks or real estate, interest rates can be surprisingly low – often lower than the expected return on your assets.

How Borrowing Can Be Cheaper Than Selling

Imagine you need $100,000 and you have a stock portfolio worth $1 million that’s grown significantly since you bought it. Let’s compare two options: selling stock vs. borrowing against your portfolio.

Aspect	Option A: Sell $100,000 of Stock	Option B: Borrow $100,000 Against Portfolio
Taxes	Long-term capital gains tax (e.g., 20%)	No immediate tax implications
Portfolio Size	Reduced to $900,000	Remains at $1 million
Growth Potential	Decreased due to smaller portfolio	Maintained with full portfolio
Costs	Tax on capital gains	Interest on loan (e.g., 3-5% annually)
Tax Deductions	None	Potential to deduct loan interest
Portfolio Management	May need rebalancing	No change in holdings

Option A: Selling Stock

• Immediate Tax Impact: You’ll owe long-term capital gains tax, which could be substantial depending on your cost basis and holding period.
• Reduced Growth Potential: Your portfolio is now smaller, which means less compound growth over time.
• Simplicity: This option is straightforward with no ongoing obligations.

Option B: Borrowing Against Portfolio

• Tax Efficiency: No immediate tax event, allowing your investments to continue growing tax-deferred.
• Maintained Growth Potential: Your full $1 million portfolio continues to work for you.
• Flexibility: You can potentially pay back the loan at your own pace or when your investments have grown further.
• Cost Consideration: While you pay interest, it may be less than the combination of taxes and opportunity cost from selling.
• Risk: The loan is secured by your portfolio, so there’s a risk if the market declines significantly.

Let’s Break Down The Numbers

Let’s assume:

• Long-term capital gains tax rate: 20%
• Loan interest rate: 4% annually
• Annual portfolio growth rate: 7%

After 5 years:

1. Selling $100,000 of stock:
   • Immediate tax cost: $20,000 (assuming all gains)
   • Remaining portfolio after 5 years: $900,000 * (1.07^5) = $1,262,476
2. Borrowing $100,000:
   • Total interest paid over 5 years: $21,665 (simple interest for simplicity)
   • Portfolio value after 5 years: $1,000,000 * (1.07^5) = $1,402,552

The borrowing strategy results in a portfolio value that’s $140,076 higher, even after accounting for interest payments.

Real-life Examples of Billionaires Using This Tactic

You think I’m making this up? Let’s look at some big names:

1. Elon Musk: In 2020, he had $548 million in loans from Morgan Stanley secured by his Tesla shares.
2. Larry Ellison: The Oracle founder had a $10 billion credit line backed by his company stock as of 2014.
3. Jeff Bezos: Before he sold a chunk of Amazon stock, Bezos was known for borrowing against his shares to fund Blue Origin and other ventures.

These guys aren’t doing this because they can’t afford to sell their stock. They’re doing it because it’s financially savvy.

How You Can Apply This (Even If You’re Not a Billionaire)

Now, I know you’re not sitting on billions in company stock. But you can still use this strategy on a smaller scale:

1. Margin Loans: If you have a brokerage account, you might be able to borrow against your portfolio.
2. Home Equity Line of Credit (HELOC): If you own a home, you can borrow against its value.
3. Portfolio Line of Credit: Some brokers offer this as a more flexible alternative to margin loans.

Remember, borrowing always comes with risks. You need to be confident you can repay the loan, and be aware that if your assets drop in value, you might need to put up additional collateral.

In our next section, we’ll tackle the final piece of this strategy – the “Die” part. Don’t worry, it’s not as morbid as it sounds. In fact, it’s where this whole strategy really pays off for your loved ones.

But for now, start thinking about how you might be able to use your growing assets more strategically. Could borrowing, rather than selling, help you reach your financial goals faster?

Step 3: Die with Your Assets

Okay, I know what you’re thinking. “Joe, this got dark real quick.” But stick with me, because this is where the “Buy, Borrow, Die” strategy really shines – and it’s all thanks to a little thing called “step-up basis.”

What is Step-Up Basis?

Here’s the deal: When you die, the cost basis of your assets “steps up” to their current market value for your heirs. In plain English? Your kids (or whoever inherits your stuff) get to pretend like they bought your assets at whatever price they were worth when you kicked the bucket.

Let’s break this down with an example:

1. You buy $100,000 worth of stock.
2. Over your lifetime, it grows to $1,000,000.
3. If you sold it while alive, you’d owe capital gains tax on $900,000.
4. But if you die and leave it to your kids, they inherit it at a stepped-up basis of $1,000,000.
5. If they sell immediately, they owe zero capital gains tax.

Mind. Blown. Right?

How This Strategy Minimizes Estate Taxes

Now, you might be wondering about estate taxes. Here’s the kicker: as of 2024, the estate tax exemption is $13.61 million per individual (or $27.22 million per married couple). That means unless your estate is worth more than that, your heirs won’t owe any federal estate tax at all.

And remember all that borrowing we talked about in the last section? Those loans reduce the value of your estate, potentially bringing it under the estate tax threshold.

The Generational Wealth Impact

This is how the ultra-wealthy pass on massive fortunes to their kids. By holding assets until death:

1. They avoid capital gains tax during their lifetime.
2. They potentially reduce or eliminate estate taxes.
3. Their heirs receive assets with a stepped-up basis, avoiding capital gains tax if they sell immediately.

It’s like a triple tax advantage. No wonder the rich keep getting richer!

But What If I’m Not Ultra-Wealthy?

You might be thinking, “This is great for billionaires, but I’m just trying to leave something for my kids.” Good news: This strategy scales. Even if you’re leaving behind a modest portfolio or a single property, the step-up basis still applies. Your heirs will benefit from potentially significant tax savings.

Planning for the Long Game

Remember, the “Buy, Borrow, Die” strategy is playing the long game. It’s not about getting rich quick. It’s about building and preserving wealth across generations. Here are some key takeaways:

1. Focus on acquiring assets that appreciate over time.
2. Use debt strategically to access funds without triggering taxable events.
3. Be thoughtful about estate planning to maximize the benefits for your heirs.

Building generational wealth isn’t just for the ultra-rich – it’s for anyone willing to play the long game.