Transcription
Hi, I'm Sharon Winsmith, a tax attorney, active investor, and your go-to resource for proven investment and tax planning strategies. In this video, I'm going to talk about how to repay the loan if you were using the buy, borrow, die tax planning strategy.
So I personally think buy, borrow, die is the best tax and investment strategy that you can use. I have been working my entire career with wealthy people—with people who are some of the wealthiest people in this country to people who you know only have a couple million dollars, 5 million, 10 million—all across the range of people who have been using this strategy in a way that they can build wealth efficiently while paying little to no tax.
So before I start, I want to be clear that I do recognize that this strategy is not for everyone. I've been getting a lot of kind of crazy comments; I see a lot of crazy things said about buy, borrow, die. There's people who just don't get it, and there's people who just don't really understand how to use the strategy. I will be the first to admit it is not for everyone. Personally, it is my favorite strategy, but I understand that, you know, if you're new to financial concepts, if you're someone who just doesn't believe in using good debt for investment purposes or just at any point, you know, if you're someone who needs to pay off your mortgage so that you can sleep at night, if you're someone who doesn't have a lot of money, if you're very new in your journey and you know you just don't have a big portfolio of assets or a lot of net worth, then this is not the time to do that.
So this strategy is not for everyone, but just because it's not for you doesn't mean it doesn't work. I see people saying buy, borrow, die doesn't work for various reasons that are wrong. I have been working my entire career with people to implement this strategy. I have been using this strategy myself. Yes, we were in a higher interest rate environment at the time I'm recording this video, but this strategy still works if you know what you're doing.
So you may see people say things like buy, borrow, die doesn't work because you could never own, you know, you never want to own the same company for your entire life, or interest rates are too high, and they're quoting some crazy interest rates that nobody that knows what they're doing is paying on anything right now. So make sure that you understand what you're doing; make sure you, you know, think about the strategy, learn about it—is this the right strategy for you? You either kind of get it; you either buy into this methodology and way of thinking about investments and tax planning, or you don't. And so I understand it's not for everyone. Yes, you need to be careful; there is a loan involved, and I've gotten a lot of questions about how do you repay that loan? How do you make the interest payment? So let's talk a little bit about how you can think about that if you're going to think about using the strategy for yourself.
So to start with, I want to be clear about, you know, buy, borrow, die. I have a lot of videos on this; I'll link below to my main video. It's a very long video, but it's important that you understand this. If you can't spend 40 minutes, you know, watching a video to understand the most important tax planning strategy that exists, then I'm not sure that, you know, my channel is the right one for you. You really have to invest the time to learn this. Buy, borrow, die is so critically important; it is not something that they teach you in school; it is not something your CPA or financial advisor is ever going to tell you about. This is something your rich uncle or, you know, your wealthy aunt is going to know. This is not something you're going to hear about from anybody else, and a lot of people don't understand it or really understand how to use it.
So I'm just going to start; I'm not going to dive into what buy, borrow, die is in any detail. I have a very long video on that, so if you haven't seen that, check that out. You should understand what the strategy is first, but really it's just a three-step process. First, you're going to buy an asset; needs to be an asset you own long-term. There are tons of types of assets that I am happy to own for the rest of my life that I do own, and yes, there's tons of assets that I wouldn't want to own for the rest of my life, so I'm not going to use those for buy, borrow, die. Buy, borrow, die, step one: buy an asset you're willing to own for a long term, and I mean a very long time. I'm talking 10, 20, 30 years. You know, I own assets that I never plan to sell in my entire life. Then, if you, you, you want to access appreciation or whatever you want to diversify your investments, you cash out whatever it is; you're going to borrow against that asset instead of selling the asset and paying tax on it. You're going to borrow against that asset. So then you continue to hold that asset throughout your life, and so then, you know, you've been able to access the appreciation that asset by borrowing against it and getting that cash and doing whatever you want with that cash, but you still own the underlying asset. What you're going to do is own that asset for the rest of your life, and then, in step three, you know, and unfortunately we all die at some point, when you die, there is going to be what's called a step-up in basis in the value of your asset. So your heirs, if that's your children, are going to inherit that asset, and they can turn around on day one that they receive that asset, sell that asset, and pay zero tax—income tax on that gain. Yes, I know there's other taxes; there's estate tax, there's property taxes, there's all kinds of taxes. I'm not dealing with those here. There are definitely strategies to mitigate those; we are talking about income tax, obviously. So what you're going to do is buy an asset, own that asset for the rest of your life, never pay a dime of income tax on it if you set everything up properly, and then when you die, you can pass that asset down while your heirs can avoid paying any income tax on that asset.
So that's just a quick refresher of what buy, borrow, die is. It is very simple; again, like I said, you either get it or you don't. This is either for you or it isn't. This is just the strategy; it's, it's amazing, you know, when you can really put this into practice and use it; it is so incredibly powerful. This is how Jeff Bezos built Amazon and became a billionaire without paying any tax. This is how Elon Musk has used the strategy. This is how real estate investors like Robert Kiyosaki—he's one of the first people that really talked about buy, borrow, die in any kind of, you know, intelligent way where you could see that he really understood the strategy—this is how these people use this strategy to build massive amounts of wealth while paying zero tax on that money, but it also allows you to take advantage of the appreciation that asset by borrowing against it and using that cash to do other things.
So that leads us to the question that I keep getting, which is how do I repay the loan? So this might not be a super satisfying answer, but that depends on how you're using the strategy. You can use buy, borrow, die for a lot of different things. You can use it against your business; you can, you know, the Jeff Bezos, Elon Musk way; you can use it against real estate, the Robert Kiyosaki way; you can use it against stock portfolios with margin loans; you can do, you know, anything that you can borrow from against; you could technically do buy, borrow, die with if that asset is something you're willing to own for your life. So when you're thinking about how you repay the loan, or and when I say repay, I'm also, you know, how you, you have to pay interest—this is a loan. Yes, buy, borrow, die does, you know, involve taking out a loan against an asset, so you need to think about how you're going to repay it, how you're going to pay the interest on it. That's not super controversial; we know there's a loan; we've got to think about how to handle it. There are different ways the loans work depending on how you're using the strategy, which I'll talk a little bit about in the next slide with some of the most common ways of using the strategy, but I want to be clear: I don't care how you repay the loan; I don't care how you pay the interest; I don't care if you're getting money from your Aunt Sally; I don't care if you're paying it with your business income; I don't care if you have a W-2 job and you're paying it with your salary. You know, when you go out and take a mortgage on your home, nobody's sitting here asking how you repay that mortgage or how you service the interest. You've got to have disposable money or, you know, a way to repay that loan or pay the interest if you're required to make current payments of that. So it does not matter what you don't want to do is borrow against asset one, invest in asset two in a way that it's tax-inefficient and that you're, you know, paying a bunch of tax on that that, you know, secondary source of income. So people keep saying, you know, well, you've got to pay tax on your secondary source of income. No, you don't. You can make investments where you don't pay tax. I don't understand why we all make this basic assumption that if we're going to make money from something, we've got to pay tax on it. That is not true, unless you're someone who's going to have a very tax-inefficient way of earning money, like a W-2 job, or someone who invests in really tax-inefficient assets like bonds, stocks, you know, high dividend-paying stocks, things like that, then yeah, you're going to pay a lot of tax, but I'm not paying tax because I'm not ever investing my money, and I'm not really making money in a way that I'm ever going to pay a lot of tax. So don't operate from that assumption; that is incorrect. You can invest your money; you can make your money in a way that you don't pay tax.
I just want to reiterate what matters is that you know what you're doing. You've got to be careful; the strategy is not for everyone. If you're not, if you're new to these concepts, you know, this is, it seems basic like, yes, these steps are pretty basic, I think, but it's, it's can be more complicated when you get into practice. So, you know, this is, this is really what more sophisticated investors are doing. You've got to understand what assets you're are safe to own long-term; do you have the ability, you know, are you going to have a liquidity issue, that kind of thing? So you need to know what you're doing. If this is the first time that you're learning about buy, borrow, die, this is not, you're not ready yet, right? You really got to understand the ins and outs. This is the strategy now; you've got to go study, you know, the, the details of it; you've got to model it yourself; you've got to understand what investments are safe to make long-term, what aren't, and this and that, and just, you know, understand what you're doing. You can always get yourself in trouble with debt. You know, most people are going to tell you to run for the hills; they're so scared of debt that they don't do it, but when you know what you're doing, to me it is more risky not to use good debt when you have access to low-cost borrowing, and with buy, borrow, die, you're going to always, not not in every environment, but you're going to, you know, usually have good access to low-cost borrowing if you want to use the strategy to, to its maximum potential.
The best practice with buy, borrow, die—so, you know, there's different ways you're doing this and that operates very differently; we'll talk about that when we go through some of the common strategies of how people use this and how I would think about repaying the loan—but Jeff Bezos is going out and borrowing against his Amazon shares to fund his lifestyle; that is very different. Yes, he's not, I mean, he's, he's also investing; he's borrowing against Amazon to invest and diversify his, his holdings because nobody wants, you know, even if you're a billionaire, you still don't want 100% of your money tied up in the, the stock of one company, obviously, but also people are borrowing against, you know, to, to fund their lifestyle, so like they may borrow against their business or, you know, stocks to pay their rent or pay, you know, pay their mortgage, whatever it is for personal expenses. So you need to be very careful; I'm not saying don't do that; I've done that before because, you know, for example, my rent is extremely high because I live in New York City, but you really need to be careful with that. The best practice, especially if you're new to this, is to redeploy the cash at a higher rate of return than the interest you're paying. So it's really that simple; it's really an arbitrage play. I call that the double dip approach; we'll talk more about that in the next slide, but if I can borrow at 5% and invest and get 15 or 20%, then yes, I'm net ahead; I'm happy to pay 5% interest all day long if I can beat that with what I'm investing that money with. So if I borrow 100 grand and I've got to pay 5%, it's really more like 6%, a little bit over 6% right now what I'm paying, you know, for my margin loan for example, but when I'm borrowing, if I can borrow, you know, 5% for 100 grand and I can invest at 100 grand and make 20% returns, then why, you know, that's crazy to me that I wouldn't do that. People are going to say, yes, you could lose the money twice, but you need to know what you're doing. Don't make dumb investments; don't, you know, people might say that's easier said than done, but if you know what you're doing, it is easy to make safe investments. They don't always hit the returns that you expect, but they should the vast majority of the time. So it is not hard to make investments where you're getting decent returns. If you're not getting 10% returns on investment, then you're, you're not doing it right. I'm sorry; I don't know what anybody else is telling you; I don't care if you are not making at least 10% returns; that is not a good investment.
So the way this works is, you know, best practice: borrow against asset one, invest in asset two, and asset two, on a post-tax basis—hopefully you're not investing in something tax-inefficient—but on a post-tax basis that return needs to exceed the interest cost on the loan with respect to asset one. And yes, you, you know, if you're just making 1%, it's probably not worth it; you need to exceed it by a good bit; you want to build a cushion there, but it's really no more difficult than that. That is the best practice; that is the best way to use the buy, borrow, die strategy.
So just run through a couple of strategies here, you know, I'm not going to spend a lot of time in this; this is not the only way you can use buy, borrow, die; it's not the only way I've personally used it, but this is just common strategies that I think most of us have probably heard about that, you know, have read a lot about. This, I'm going to start with the margin loan. Margin loan, I have, you know, I'll link to my, my intro on margin loans if you don't know what that is. That is a loan against your public securities. So if you have a brokerage account of securities, you can borrow against those securities at a very low cost of interest. It is always about the lowest cost of interest you can have, you know, right now I'm paying just right over 6% pre-tax on my margin loan. There are people who are going to tell you they're paying 12 and 13%, but they, they're doing it at the wrong place; they're not doing it right. So margin loan rates should always be comparable to mortgage rates, and mortgage rates are usually the lowest cost financing. We're always happy, usually, you know, nobody's going out and buying a house right now, you know, and taking out a mortgage because it's just not the right time, but I, if I'm, if I've got a house—I don't own my, my apartment, but if I did, if I were going to buy a business, I would, the first thing I would do is look at a margin loan, take out the loan, you know, as much of a margin loan as I could and, and be safe, or take a mortgage out of my house because that is the lowest cost borrowing you can—that is much better than going out and getting an SBA loan, for example, because that's always going to be a higher interest rate. So with margin loans, keep in mind interest accrues daily. If you're not going to pay it, margin loans are unique because you were not required to make current interest or principal payments. So with the margin loan, you can just leave the, the loan outstanding. If I go take a $100,000 margin loan against my portfolio, I'm just going to, you know, keep that $100,000 outstanding; I don't have to pay it. Some people like to, but I don't; I mean, it doesn't make sense to me to pay it when I can borrow at such a low cost of interest, and you, you technically don't have to make interest payments. So that interest can just accrue; it just keeps getting added, and yes, it accrues daily. If you don't understand what daily interest accrual means, you need to understand those concepts before you're doing something like this, but you can just keep that outstanding and let that accrue. With margin loans, you know, if you are someone who wants to pay the interest—I know a lot of people, especially with rates being, you know, 6%, that's a lot higher than a lot of us are used to, you know, I used to pay lower, less than 2%, you know, back when rates were really low during COVID times—but, you know, people like to pay the interest when it's higher, and some people just, they need to pay the interest just psychologically. So, you know, how are you going to pay the interest? Well, I don't really care. Some people can let their dividends start to, to pay the interest; it's not going to cover it all right now because right now, you know, your, your interest rate's going to be higher than the dividend rate most likely, the div, the rate of dividends that you're getting on your portfolio. So, you know, that's probably not going to do it completely for you. You could use any other type of income. If you're going to borrow against your margin loan, you know, I, I, I'll link to a video below where I talk, I use an example of where you, you take a margin loan to invest in a real estate fund. You can use that income from that real estate fund to partially pay off the interest and still have net profit at the end of the day. So check out that video for a good example of how you can do it and do it tax-efficiently on both ends—both asset one and two—but that's how margin loans work. They're unique in the sense that you don't have to make current interest or principal payments.
A lot of people do this with business loans. So this gets a lot more risky; you have to be more sophisticated; you have to have a decent business that, you know, someone's willing to, to loan to you against. This is the strategy that Jeff Bezos used; it's kind of a, a combination of one and two because Amazon, you know, those are public companies that we're talking about here, but, you know, you're borrowing against the business—whether it's assets, inventory, whatever it is—in order to, you know, get some, take some cash off the table. You can take that money, invest it in something else; you can use it to, to pay your personal expenses if you're, you know, being very careful, but in that case, you know, how do I pay the business loan? Well, you know, if your business is profitable enough, I would start by looking at business profits. You know, could you pay the interest in the loan with your current business profits? If you're doing this, is kind of the, the Elon Musk strategy where you borrow against business one to invest in business two or start business two; the, you know, hopefully pretty quickly, the net profits of business two can repay that loan that you have with respect to business one. So, you know, again, I don't care how you repay the loan, but hopefully you're redeploying the cash in a way that that secondary investment is going to repay—well in excess—repay the interest and principal payments on the loan, or, you know, you just have other disposable income available to you. You know, I know a lot of people who, you know, use this strategy are actually W-2 employees, so they're getting very tax-efficient income in the first place, but they're going to invest their money in a way that they're using buy, borrow, die. So they may not be using buy, borrow, die with their primary source of income, but then they're going to invest in, you know, by owning a business, for example, as a side, as a side business, then they may borrow against that business to fund business two or to, to buy, you know, real, to invest in real estate funds, to buy a real, you know, buy real estate yourself, whatever it is, you just got to, you know, hopefully have a way to, to service the debt. It just, you know, it doesn't matter. Without knowing your personal situation, I can't advise you on the best way to do it, but hopefully you're not, you know, taking on a loan you can't afford, but also hopefully you're not taking the money from the loan and investing that in a tax-inefficient way or in a way that you're not going to, you know, get returns that exceed the debt, which should be easy to do.
The third strategy is real estate buy, borrow, die. This is, this is what I think about the Robert Kiyosaki—he's the guy who wrote Rich Dad Poor Dad—this is the way someone like him would think about this; this is the way, you know, some of the, the wealthiest real estate investors invest in, in a way that, you know, again, real estate, you want to buy properties that you're willing to own for long-term—life, however, you know, own them as long as possible, ideally buy, borrow, die, you want to die owning the property—but, you know, you take out a mortgage against the property. So maybe, for example, I want to go buy a new property, so this, you know, property one's doing well, and I'm ready to, you know, extract the equity; it's increased in value—say you bought it at 100 grand and now it's worth 200 grand several years down the road—and I want to be able to, to get the benefit of the fact that that property is appreciated so much value, but I don't want to pay tax from selling it. So what I'm going to do is, you know, do it—we call that cash-out refi—so you refinance, take out more of the equity in the property, leave, you know, as little as possible is equity, extract out, you know, a bigger mortgage, take that money, invest in something else; you might want to go buy property two, for example, and then how do you repay that loan on property one? Well, the rental income from the property is the first place I would look—either property one or two; again, it doesn't matter—but hopefully when you're getting, you know, a bunch more money out of the property by doing the cash-out refinance, you're going to be able to go buy a nicer property that should be netting you even more. So that's the first place I would look to repay the loan; it's not, I mean, it doesn't mean that you have to do that, but you want to think about, again, taking that investment, cashing out, you know, the, the appreciation and investment one and investing it into investment two in a way that you can service the debt and still net a profit at the end of the day. This is very easy; again, people who tell you this can't be done don't understand the strategy; the strategy has been being done for years and years; it is the best strategy out there—that the most
Sophisticated investors are doing so. You need to just understand what you're doing. You need to study it. You need to find smart investments that you're willing to own and that can net you the returns that you're looking for.
Last, I just want to talk about the double depth approach. As I mentioned on the first slide, this is the best way to use buy borrow die, especially if you are new to this. Then you know, I definitely wouldn't use buy borrow die to pay my rent, to pay personal expenses. If you don't know what you're doing, especially with SB LOCs, because people just let the interest accrue, and they get themselves into trouble if they don't really understand how that works.
But with the double dep approach, what you're doing is what I've been talking about: you're taking out the appreciation in asset one, and you're investing in asset two. So in that case, you're looking to the profits of the second investment to repay that loan, or if it's an SB LOC, to, you know, to pay the interest on it.
So think, think about, you know, if you check out my video where I do SB LOC to real estate fund, there I'm going to borrow, you know, I'm going to take out an SB LOC, say $100,000 SB LOC right now. I'm paying about 6% pre-tax; it's going to be less than that post-tax because I am going to get a tax deduction for that interest, and I'm investing that in a real estate fund, for example. That real estate fund is kicking off returns that are far exceeding that 6% interest that I have to pay. So I am not only able to service the interest payments, but I'm also able to put more cash into my pocket.
Not only am I getting more cash in my pocket from this strategy, I now get the benefit of appreciation in two assets. So I still own asset one, and I am still getting—I still own it—so any appreciation the asset increases my net worth further, and now I own asset two. So as the underlying real estate that is owned through the fund appreciates, so does my net worth. So this is the beauty, or one of the million great things about this strategy, is that not only am I pocketing more cash after servicing the debt, you know, paying the interest on my SB LOC, I am also increasing my net worth every year.
People may say things like, "Well, you've got to pay tax on that second investment." No, I don't, for my real estate funds. I've got my passive investment set up in a way that I, you know, never pay tax there. There would have to be some major, you know, thing I wasn't prepared for for me to ever have to pay tax on my passive income and my investments, is what I mean by that.
So you know, don't take an SB LOC and go invest in something—well, a bond wouldn't make sense because returns aren't high enough—but don't take something like an SB LOC and then go buy something that's tax inefficient. Yes, that's going to be bad; you don't want to pay tax, right? But you've got to be looking at returns on an after-tax basis. If the returns on investment two after tax well exceed the interest you're paying on that SB LOC, or you know whatever the loan is on investment one, then that is when the strategy really works. And yes, it still works in the current environment. I am happy to borrow at 6% all day long to use this strategy.
Don't let people tell you that interest rates were too high for this to work. Maybe I'm not going out and taking a business loan right now. I would still use it on real estate because you can still get, you know, 6% mortgages on properties in some cases, but you probably want to, you know, refinance those quickly once interest rates go down. But the strategy still works on my SB LOC; I'm still doing it; I'm not paying it down, and it still works. But you have to know what you're doing.
So hopefully you found this video helpful. Hopefully this starts to answer some questions on how to think about repaying the loan if you're going to do buy borrow die. Again, this is the best tax planning strategy. I hope you know you'll go to learn more about this strategy, watch my other videos on it, and hopefully you will begin to love this strategy as much as I do. If you found this video helpful, please like the video and subscribe to the channel.