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How To Use The Buy Borrow Die Strategy To Build Wealth And Pay ZERO Taxes


9m read
·Jan 31, 2025

Hey guys, Toby Mathis here. And today we're going to go over the buy borrow die strategy for building wealth and paying zero taxes. Also, we will do it as a how-to in three steps. It's actually pretty straightforward. And then I'll give you some examples of how people use it, so you can understand exactly how powerful it is.

Now, it is one of those concepts. If you've ever googled buy, borrow, die, have you heard about Elon Musk or all these wealthy billionaires who pay almost nothing in taxes? Here is why. Because if you have assets that appreciate in value, there's something called unrealized capital gains or taxable income that is oftentimes derived from those items where they never pay tax, like depreciation on a building.

For example, I buy a building for $1 million. Over the years, rent comes in and I maintain it, and normal appreciation occurs, which is around 4 or 5%. Lately, it's been like super, like even higher because of inflation. But let's just say inflation makes that building worth, let's say in ten years, it's now worth $2 million. Well, I didn't pay tax on the $2 million of appreciation.

So, the same is true if I buy stocks. I buy some Microsoft stock and I buy it for $1,000, and now it's worth $10,000—or, you know, fill in the blank of maybe I just buy SPY, or maybe I buy an index, maybe I buy some bonds, whatever. I'm buying these things and they're just going up in value over time. And hey, I'm chill with that. Most of those, other than the bonds, bonds would pay interest.

But let's just say that it's appreciating assets. It could be art, it could be real estate, it could be stocks, it could be REIT. And I'm just letting them become more valuable. Even my house. Hey, I just buy my house and over time it becomes more valuable. I'm not paying tax on that appreciation. And that's an important concept when you think about this.

So, when we start talking about the three steps, keep in mind that we are talking about buying those types of assets. And that is step one. Step one is buy, and you're going to buy appreciating assets, things that go up in value because that going up in value is tax-free. So, I want to buy specific types of assets.

Now, there are assets that you wouldn't consider something like art. You might not consider that is something that I'd ever borrow against. But it is. It's lendable. I want to buy assets that I could borrow against because that's going to be the next step. So, when I'm buying something, I need to make sure it's lendable.

When you buy securities, I buy a bunch of stocks. If you're like Morgan Stanley, Raymond James, Fidelity Schwab, you should be able to get a loan against that called a security-backed line of credit. In other words, I can borrow against that if I get cash value, life insurance, indexed universal life, whole life. If I'm doing something where it has cash value that under 7702 gross—that's a section of the IRS Internal Revenue Code—gross, tax-free.

It just keeps getting bigger and bigger, and you don't pay tax on it. But I can borrow against it. Even things like, hey, I have my IRA or my 401(k). Actually, my IRA wouldn't work because I can't borrow against it. But if I have a 401(k), I could borrow against that potentially up to $50,000, up to half my plan assets I can borrow. During COVID, it went up to $100,000, right? And you pay that back over five years. I can borrow against those things.

So, that's step one: buy assets and lendable assets that I'm going to be able to borrow against. Step two is to borrow. And this is where the secret is because borrowing money, loan proceeds are not taxable to you. I'm going to say that again: borrowing money is not taxable to you.

So if I use a home equity line of credit against my house and, let's say, I bought my house for $500,000, over the years, it's gone up in value. Now it's worth a million, and I borrow $200,000 out of it. I don't pay tax on the $200,000. What the wealthy are good at is buying things, putting them in a crockpot, letting them cook over a long period of time and get good and valuable.

Then they borrow against it, and they live off of what they borrow. And you're going to say, "That sounds crazy, Toby. They have to pay back that loan." Yeah, but they're not paying tax. So even if I have to pay back that loan in some cases, I don't. If I do life insurance, I'm not paying back that loan. But I am eventually going to die, and it's going to pay itself off out of the death proceeds from the insurance.

So, the insurance or that cash value, it's paying it off. I am not paying it off. You're going to say, "Well, wait a second, that's got to be taxable." Nope. Because the death benefit from insurance proceeds is also not taxable. So the borrowing of the money—pass away—pays it back. Never pay tax. That's why it works well.

But my heirs will have to pay it back. Okay, let me show you how that works. Step three: something we all got to do is you have to die. Why is that important? I bought an asset, I let her depreciate, and in some cases, I even got tax benefits out of it.

So, like, if I bought real estate as investment real estate, I got to depreciate that sucker. I borrow against it. I never had to pay tax on that. On those proceeds, there are some things like if you own real estate, you got to be at risk and things like that. But if I'm borrowing against it, it's my real estate in my LLC or something like that. I'm not going to pay tax on those proceeds.

Eventually, I'm going to pass away. And what happens when I pass away? There's something called a step-up in basis. And what that means is that whatever—when the day you die, whatever the fair market value of that asset is, that's its new basis. Why does that matter? Because you only pay tax on the difference between the sale price and your adjusted basis, or your basis.

So if the basis—let's say I buy a house, I'm just going to use the example of $500,000. Over the years, I borrow $1 million against that house, and then I die, and that house is worth $2 million. Am I here? Sell it. What's the tax bill? The tax bill is zero because the basis is now $2 million. If I sell it for $2 million, I pay back my million-dollar loan, and I still have $1 million in my pocket. And I paid zero taxes.

Works with stocks too. Same thing. Let's say I buy half a million dollars worth of Tesla. I'll use Elon Musk because he likes to use his stock to acquire things and buy things. So let's just say that I have half a million dollars of stock. It goes up in value over the years. I use it to get a line of credit, and I borrow $1 million against that stock.

And then when I pass away, those stocks are worth $2 million. So I sell them and pay off the million-dollar loan, which you might have to do. Maybe not. You might be able to just keep rolling it on, just keep carrying it on. But worst-case scenario, I'm left with $1 million tax-free. Remember, I bought it for half a million, I used a million, and now I have a million.

So I've literally used $2 million tax-free. That's why the wealthy do this. Now, I'm going to twist your mind a little bit further. There are ways to trade assets that you buy during your lifetime and not pay tax on them. So, for example, let's say that you bought half a million dollars, and you bought four houses.

So I'm just going to put four houses. So I bought $500,000, and it was four houses. So each one has a basis of $125k. Over the years, those go up in value. So you sell them, but you buy more real estate. It's called a 1031 exchange. You're going to see a 1031 exchange. It's tax-free.

So let's say that those houses each go up to be worth $250,000. So I bought them for $500,000 for houses, $125 each. And now they're up to $250. So now they're worth $2 million. And I borrow the money off again. I didn't pay any tax. All you have to do is pass. But let's say they go up further.

I could even 1031 them again. But let's just say that when I pass away, they're worth $4 million. In the meantime, I could have been borrowing that out. So again, wealthy people understand I have access to it. It doesn't mean I have to take it, but I have access to it now.

You pass away. Your basis is now $4 million. So you sell the property for $4 million, or you keep it. You could keep it. You could pay off the loan. Maybe there's life insurance proceeds and use it to pay off the million dollars you took out of it. Whatever the case, I'm not paying tax on that growth.

I bought it for $500,000. It's now worth $4 million. Let's say 30, 40 years later, I have $3.5 million of growth that I'm not going to pay tax on. And I could have been using the entire $4 million during my lifetime. I'm zero tax again. That's why the wealthy use the buy, borrow, die strategy. That's it in a nutshell.

It's not more complicated than that. It's a three-step formula. You could do this with art. Hey, I buy some art. Maybe you're a collector. You don't even realize that you could get a loan against it. And you're sitting there, and you're like, "What happens? You know, I get older, I'm worried about my housing, I maybe I have some medical expenses, and I'm like, 'Shoot, what am I going to do?'" I'll sell my Picasso or I'll sell my art collection, and I have—I know people that collect these things. They get very valuable. I have to pay tax on those types of things.

That's up to 28% plus net investment income tax plus your state tax. You could be paying 35% on selling that art, or you could borrow and pay zero tax on that. And then all you have to do is die, and it steps up in basis.

Let's do that again, but with stocks this time. Hey, I bought a bunch of stock. I have a portfolio. And your financial planner says, "Hey, whenever you need money, like hey, you know, do you have any? You want to do that around-the-world trip? Why don't you sell some stock?" And you look at it and you go, "Shoot. If I do that, I have to pay tax on that."

Maybe you're in a high-tax state like California or New York or somewhere on the East Coast. You're like, "This is really going to suck. I'm going to pay 20% long-term capital gains plus my state plus net investment income tax." When I'm all said and done, you might be paying 36%, and you're annoyed versus you borrow the money, you go do your trip. You pay a little bit of interest.

Like, in some cases, it's federal IFR rates, which could be 4 or 5%. It just depends. You look it up. At that time, they went down to 2 and 3%, and sometimes they go up. It just depends on what's published. It's the federal IFR rates. They come out quarterly. You could use that or you have terms that you're borrowing against.

For example, if you're with Morgan Stanley—That's right, I do some of my transactions. They have fixed rates, or they have variable rates, and they're a little different. But the variable rates went down; at one point, they were 11.7, 1.8. Depending on where you're at and what interest rates are doing, sometimes they're up to 6 or 7%, right? But it fluctuates and goes back down.

Let's just say, "Hey, you know what, I needed it. I was going to do that way around-the-world trip. It was going to cost me $100 grand." I would have had to sell $150,000 of stock, pay the tax on it. I would have had $100,000. So I lost quite literally more than a third of my money. That was a 33% tax, versus I borrowed $100,000 out. I didn't pay any tax, and I have to pay 5% interest. How long is it going to take? It's going to take many, many years before—oh well, I ended up paying more in interest.

And here's the funny part. Depending on what you're borrowing against and what you're using the money for, quite often it could be tax-deductible. Like if I use a home equity line against my house and buy more investment property and then borrow against that investment property, I literally could deduct the cost of that interest.

Again, I can lever assets, borrow money and go buy more. I could literally go out and buy more of this and keep doing it. And that's what the wealthy do—they compound it. They use it over and over again with the same strategy in mind, which is sell nothing, let things appreciate, borrow against that, and live off of those proceeds because they're tax-free.

So it's like getting a 30% return depending on where you live. It's going to be somewhere between probably 15% and 30% return on all your money because you avoided the tax on it. And because, well, you avoided the tax on it. That's the biggest one. Right? And then the other big benefit is when I pass away, all sins are forgiven, right?

I don't have to worry. My basis is now stepped up. My family could sell those assets if they need to, to pay off some of the loans that I used to live off of, and nobody pays tax. And all we did was avoid completely throughout our life paying the tax man.

If that appeals to you, buy borrow die; your strategy is for you. If it doesn't, well, you can always leave a tip to the IRS too. They do take donations.

All right, guys, if you like this type of information, go ahead and like and subscribe. Give me your comments down below. If you've known anybody that's used this, or if you've seen it in practice, or if you have any questions, I'll go ahead and answer them. And if you know anybody that would benefit from this information, please share.

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