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Despite carrying a depressing name, the buy, borrow, and die tax strategy has its merits and is used extensively by high-net-worth individuals.

Hey, but don’t just take my word for it.

But the surprising truth is that many everyday investors can leverage (pun intended) this strategy.

Unfortunately, you don’t hear much about it; the name itself is enough to scare off most people.

But not you, my friend.

Today, we’ll break it down so you can add another tool at your disposal for your wealth-building journey.

But first…a disclosure. Please bounce this strategy off a professional before you DIY it.

Playing the leverage game without working with a professional is like playing a game of musical chairs — you’re never quite sure when the music will stop, and you don’t want to be the person left without a seat.

Let’s jump in!

Step 1: Buy

This step is exactly how it sounds.

You buy an appreciating asset. This might include:

ETF’s
Bonds
Stocks
Real Estate
Mutual Funds
Cryptocurrency

But be mindful that the assets you purchase are used as collateral when executing this strategy.

So be sure to pick the right assets when you use this strategy.

Using a highly volatile asset like cryptocurrency is ill-advised.

Step 2: Borrow

Next, you borrow against the appreciating assets from Step 1.

Why borrow?

You avoid taxable gains when you borrow because the underlying assets are not actually sold.

Real estate provides a clear-cut example of how this works, so let’s start there with a guy named Lenny...Lenny Leverage.

He finds himself a nice $100k property in Debtford, Ohio, and purchases the property with cold hard cash (singles mostly).

A year later, Lenny finds an incredible investment opportunity in a neighboring town, Creditville, for $50k.

Lenny has no cash at his disposal, so he decides to borrow against the equity in his Debtford property to purchase the property in Creditville.

This is known as a cash-out refinance, and you probably heard about them or even used it yourself before interest rates shot up to 39%.

This is an example of how the Borrow component of the strategy works and is used all the time in real estate.

But you can deploy this strategy with other assets like Stock, ETF’s, Mutual Funds, Bonds, etc., in your non-retirement investment accounts.

But the terms of the loan are different. Let’s explore.

Borrowing Example

Let’s take the Schwab Blank Pledged Asset Line, where borrowing has never been more fun.

The name is rather confusing, but in essence, you are creating a line of credit with Charles Schwab secured by the assets you pledge in a separate account.

This revolving credit line is often called a Securities-Based Line of Credit (SBLOC).

The credit line has no maturity date, and interest rates are 6-10% depending on how much you borrow.

Borrowing Base

You can typically borrow (advance) a max of 30-70% of the fair value of the securities you pledge.

So if Lenny Leverage pledges securities worth $100k, the max he could borrow is $70k or 70%, depending on the securities he pledges.

To quickly understand how that advance rate varies across securities, Schwab has an advance rate lookup tool on their site.

Using an S&P 500 Index ETF Fund as an example ($VOO in this case), you can advance up to 70% of the fair value of your pledged $VOO assets.

Now, compare that to a more volatile security like $RIOT, a Bitcoin mining company, where the advance rate is 30%. Logically, since $RIOT is more volatile, the amount you can borrow is less.

**IMPORTANT** - Just because you can potentially borrow up to 30-70% of your pledged assets definitely does NOT mean you should.

When securities drop in value, a “margin call” can be triggered where you must immediately post collateral to make the lender whole.

So if our friend Lenny pledges $100k of crypto and borrows $30k and crypto drops 80% or $ 80k (like it has in the past), Lenny needs to come up with $80k…quickly.

This is why you must execute caution with this strategy in (1) the volatility of the securities you pledge AND (2) the amount you borrow.

Opinions vary on this, but borrowing against more than 10-25% of the pledged value on volatile securities is generally not advisable.

With less volatile securities like bonds, a higher % could be appropriate.

But again, discuss this with your trusted advisor.

Step 3: Die

Sorry, Lenny.

Sadly, this is last step is where your story ends.

But good news!

Since Lenny waited so patiently, his heirs now receive a stepped-up tax basis at his death.

What does this mean?

If Larry held onto that $100k property in Debtford that’s now worth $200k, the $100k gain vanishes entirely.

Larry’s son, Maury…Maury Leverage…receives a starting basis of $200k and pays ZERO taxes - yay!

You will, of course, need to settle any outstanding debt with the lender.

Use Cases

Generally, this strategy is helpful as a means for short-term financing.

Some examples of how you might apply this strategy include:

Liquidity for unexpected expenses
Real estate investments
Business investments
Debt consolidation

With real estate, you can get creative.

If you’re flipping homes or using the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), you can borrow against securities to float repair costs, use it for down payments, etc.

You could also look at this strategy if you need to float an initial down payment on a business acquisition or provide a working capital injection for an existing business.

The strategy puts you in the position to become your own bank, so when credit is tight, you have access to capital quickly.

Finally, as previously noted, please talk with an experienced professional before you attempt this strategy.

Thank you for tuning in!

See you in two weeks (we’re off to Iceland this next week!)

How Can I Help?
If you’re a Solopreneur having difficulty managing your finances, avoiding tax surprises, or ensuring you’re on the right path toward building wealth, book a free 15-minute call.

I can do the heavy lifting to give you financial clarity, so you can focus on doing what you do best.

SCFO #018: The Buy, Borrow, Die Tax Strategy: Not Just For The Affluent