Why "Buy, Borrow, Die" Gets the Tax Debate Wrong

A homeowner who takes out a home equity loan to pay for a kitchen renovation or a child's college tuition does not owe income taxes on the borrowed money. Neither does a business founder who borrows against company stock to purchase a yacht. Although the amounts involved may be vastly different, both transactions operate under the same financial principles. The borrower receives a loan, pays interest, and remains responsible for repaying the debt.

That comparison is often missing from the debate over “Buy, Borrow, Die,” a term used to describe how wealthy individuals can borrow against appreciated investments rather than sell them and incur capital gains taxes. Critics portray the practice as a tax loophole that allows wealthy Americans to access their fortunes without paying taxes. However, the argument overlooks a basic feature of lending: borrowed money is not income.

Borrowing Against Assets Is a Common Financial Practice

Homeowners regularly borrow against the equity in their properties to finance renovations, college tuition, or other major expenses. Workers can similarly borrow from their 401(k) retirement accounts, subject to plan rules and repayment requirements, without immediately incurring income taxes on the loan proceeds. Business owners and investors can pledge stock as collateral for loans, allowing them to access cash without selling their ownership stakes. Although these arrangements differ in their specific terms, each provides access to funds with an obligation to repay the borrowed money.

In each case, the borrower takes on a financial obligation. Interest accrues under the terms of the loan, and repayment is required. For conventional secured loans, lenders can pursue collection or exercise their rights against pledged collateral if the borrower defaults. Retirement plan loans have different rules, including potential tax consequences if repayment requirements are not met.

Federal tax law generally excludes loan proceeds from taxable income because the borrower has an obligation to repay the money. A $100,000 loan does not represent $100,000 in new income when it comes with an equivalent debt.

The same principle applies to a loan secured by $100 million in company stock. The size of the transaction does not change its underlying character, and the borrower does not receive a special tax exemption simply because the collateral is more valuable.

The Buy, Borrow, Die Argument Leaves Out Repayment

Criticism of securities-backed lending often focuses on the ability of wealthy investors to avoid selling appreciated assets. By borrowing instead, investors can obtain liquidity without immediately realizing capital gains that would otherwise be subject to taxation.

However, borrowing carries costs and risks that are frequently overlooked. Interest payments can be substantial, and a decline in the value of pledged stock may require additional collateral or force the borrower to sell assets to satisfy the lender.

Outstanding debts do not disappear when a borrower dies. They remain obligations of the estate and must generally be settled using estate assets.

The federal death tax may apply to taxable estates above the applicable exemption, while inherited assets generally receive a new income tax basis reflecting their fair market value at death. Although the treatment of unrealized capital gains at death is a separate policy debate, it does not change the financial obligations associated with borrowing.

The S Corporation Association recently challenged the popular characterization of “Buy, Borrow, Die,” including claims that the practice represents a $5 trillion tax avoidance strategy. Its analysis emphasizes the broader financial process of earning income, saving, investing, paying interest, repaying loans, and potentially paying the federal death tax.

The association's argument highlights the shortcomings of treating all borrowing against appreciated assets as evidence of tax avoidance.

Tax Policy Should Treat Similar Loans Consistently

There are legitimate reasons for business founders to borrow against company shares rather than sell them. Selling a significant ownership stake can dilute control of a business, disrupt long-term investment plans, or create unnecessary financial complications.

Borrowing provides an alternative source of liquidity, just as home equity loans allow homeowners to access the value of their properties without selling their homes.

Policymakers may disagree over how capital gains and inherited assets should be taxed, but those debates should not obscure the distinction between borrowing and earning income. Creating different tax treatment for loans based on the borrower's wealth or the type of collateral would undermine a basic principle of the income tax system.

A loan secured by founder stock should be treated according to the same rules as a loan secured by a home. Both involve borrowed money that must be repaid, regardless of whether the proceeds finance a home renovation or an expensive yacht.

CFE Takeaway

The “Buy, Borrow, Die” debate often portrays borrowing against appreciated stock as a special tax advantage available to the wealthy. In practice, the same lending principles apply to homeowners, business founders, and other borrowers. Loans carry interest costs, repayment obligations, and financial risks. Tax policy should recognize those obligations and maintain consistent treatment of borrowed money rather than redefine loans as income based on the borrower's wealth.