Opening my mind to the principle of Buy, Borrow, Die
Over the past month and a half, I have done quite a bit of continuing education in tax, estate planning, and business planning. I hope to share helpful tips from it over the next several months.
I recently attended the Arizona Tax and Legal Seminar, where Professor Edward McCaffery presented his well-known principle, “Buy, Borrow, Die and Beyond.” He advises the ultra-wealthy, teaches at USC, and shares these concepts with everyday investors. His central point is that the tax code taxes income, not assets.
The IRS does not tax borrowed money or the interest you pay on it. Capital appreciation is taxed at a lower rate than ordinary income, and only when the asset is sold and the gain is realized.
Some of what I have been studying involves highly complex strategies for working within the tax code, but this presentation was straightforward. It simply requires a major mental shift: treating debt as a tool rather than a burden. Most of us think debt is bad, but once I suspended that belief and kept an open mind, I plan to have a major family conversation and meet with our financial advisor.
Here is the simple tax saving strategy:
- Buy appreciating assets.
- Borrow against those assets instead of selling them and recognizing capital gains.
- Die holding the appreciated assets, potentially allowing heirs to receive a stepped-up income-tax basis under current federal law.
In other words, buy assets that generate little or no income but appreciate in value, and never sell them. Instead, borrow against them. When you die, the assets step up to their fair market value for the benefit of your loved ones, free of capital gains tax. This is one of the great benefits of the tax code: since 1921, capital gains tax has been eliminated at death, and assets step up to their fair market value on the owner’s date of death.
Most of us try to avoid debt, but the very wealthy pay little to no tax by using leverage, and it is the same concept most of us use when we buy a home. Home buyers typically borrow 80-90% of the purchase price, and as long as they hold the home for a reasonable period, it appreciates over time. Historically, that appreciation has outpaced the borrowing rate, so you actually make money. Thankfully, there is a $250,000 per-person exclusion on a primary home, so most people never think about capital gains tax on their home.
However, some of my clients who have lived in their homes for decades are stuck. Their homes are paid off, and they can’t sell without a large capital gains liability. They also refuse to take a reverse mortgage or HELOC (home equity line of credit) to pull out some of that equity. If they did, and held the home until death, the capital gains tax would disappear when the home steps up to its fair market value on the owner’s date of death. The home is also likely to keep appreciating, possibly at a greater rate than their borrowing cost.
Similar examples were given for whole life policies and investment accounts. The models showing how much higher your asset value is when you borrow against your stock portfolio instead of selling appreciated stocks are eye-opening.
This is relevant to all of us, so here is a practical example from my own family. My adult kids recently sold some highly appreciated Apple stock, which they had held for more than 10 years, to cover the money they needed. I offered to lend them the money instead and tried to explain the capital gains tax they would owe, but they didn’t want to borrow from the bank of Mom. I have also taught them that debt is bad, so it never occurred to them to borrow against the stock. They may be more receptive after they file their 2026 taxes next year. They could have borrowed at 10% or lower, instead of paying 20% capital gains tax, and they would still own their Apple stock, which has appreciated over 26% this year, even after the big election sell-off. The math is straightforward, and it made me pause and rethink my blanket belief that debt is bad.
I will work with our financial advisor to better understand margin account borrowing, and how the income distributions from some of my stocks can be used to reduce the margin balance and, in turn, the dividend income that is taxed. This is a simple example of how those of us who are not Leon Black, Jeff Bezos or Elon Musk can use these strategies with more modest capital, letting it grow while paying less tax.
If you are a business owner, these strategies are even more helpful, because businesses can deduct interest against their income.
Professor McCaffery has been planning and writing about this for decades, and a recent, publicly available article is linked below. What I learned wasn’t earth-shattering, but the shift in my thinking was seismic. I hope you find it helpful, and that appreciate that unlike me, you didn’t have to get to a conference room by 7:45 am on a Friday, like I did.
