Did you know that many billionaires, including Elon Musk and Jeff Bezos, use borrowing against investments to access cash while avoiding capital gains taxes? Instead of selling stocks and triggering taxable events, they take out loans backed by their investment portfolios.
This strategy, known as securities-based lending, allows them to maintain ownership of their assets, benefit from market growth, and reduce their tax burden. But can borrowing against investments work for everyday investors? What risks should you consider?
In this article, we’ll explain how borrowing against investments works, why the wealthy prefer it, and whether it’s a smart choice for regular investors. We’ll also explore alternative tax-efficient strategies to help you build wealth while minimizing taxes.
How Borrowing Against Investments Works
What Is Borrowing Against Investments?
When investors borrow against their investments, they use stocks, bonds, or other securities as collateral for a loan. Instead of selling assets and incurring capital gains taxes, they keep their investments intact while accessing cash.
Common types of investment-backed loans include:
- Securities-Based Loans (SBLs) – Loans issued by brokerage firms using stock portfolios as collateral.
- Margin Loans – Borrowing funds directly from a brokerage account using margin.
- Home Equity Loans – Using real estate as collateral instead of stocks.
- Asset-Backed Loans – Loans backed by private business holdings, artwork, or other valuable assets.
Loan Terms & Interest Rates
- Lower Interest Rates – Investment-backed loans usually have lower rates than personal loans or credit cards.
- Loan-to-Value (LTV) Ratio – Borrowers can typically access 50% to 80% of their portfolio’s value.
- Collateral Requirements – If the investment value drops significantly, lenders may require additional collateral or repayment.
For example, an investor with a $1 million portfolio could borrow $500,000 at an interest rate of 3-5%, much lower than most personal loan rates.
Why Wealthy Investors Borrow Against Investments
1. Avoiding Capital Gains Taxes
One of the biggest advantages of borrowing against investments is avoiding capital gains taxes.
For example:
- If an investor sells $1 million of stock with a $500,000 capital gain, they could owe $100,000+ in taxes, depending on their tax bracket.
- By borrowing against the stock instead, they avoid immediate taxation while still accessing funds.
2. Keeping Investments Growing
Holding onto investments allows them to continue appreciating. If a portfolio grows at 8% per year while the loan interest is 3%, the investor benefits from a net 5% gain while maintaining ownership of their assets.
3. Accessing Cash Without Selling Assets
Many wealthy investors use borrowing against investments to:
- Fund new business ventures
- Purchase real estate
- Cover personal expenses
- Invest in other opportunities
4. Estate Planning Benefits
Instead of selling assets and paying taxes, wealthy investors pass down investments to heirs. The heirs receive them with a stepped-up cost basis, reducing future tax liabilities.
Can Regular Investors Borrow Against Investments?
Who Qualifies for Investment-Backed Loans?
- Many brokers require at least $100,000 to $1 million in a portfolio to qualify for securities-backed loans.
- Margin loans are more accessible but come with higher risks.
- Interest rates and terms depend on account size, brokerage policies, and market conditions.
Risks of Borrowing Against Investments
- Margin Calls – If investment values drop, brokers may force a sale to cover the loan, potentially leading to losses.
- Interest Costs – If market returns are lower than loan interest rates, borrowing can be unprofitable.
- Overleveraging – Borrowing too much can cause financial stress, especially in market downturns.
For example, if an investor borrows $100,000 and the market drops 30%, they may be forced to sell assets at a loss to repay the loan.
When Does Borrowing Against Investments Make Sense?
This strategy may work if:
- You have a large, diversified portfolio and need liquidity for an investment opportunity.
- Your investments generate higher returns than the loan interest rate over time.
- You’re comfortable managing leverage risk and market fluctuations.
Alternative Tax-Efficient Investing Strategies
If borrowing against investments isn’t a good fit, consider these alternative tax-saving strategies:
1. Invest in Qualified Dividends
Qualified dividends are taxed at lower capital gains rates, making them more tax-efficient than ordinary income.
Examples of dividend-paying stocks:
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
(See our guide: Qualified Dividends: Hidden Tax Savings Every Investor Should Know)
2. Maximize Tax-Advantaged Accounts
- Roth IRA – No taxes on qualified withdrawals.
- 401(k) Contributions – Tax-deferred growth potential.
- Health Savings Accounts (HSA) – Offers triple tax advantages.
3. Use Long-Term Capital Gains Rates
Holding investments for over one year qualifies for lower long-term capital gains tax rates, reducing tax burdens.
4. Consider Municipal Bonds
Municipal bonds provide tax-free interest income, making them attractive for tax-conscious investors.
Common Mistakes to Avoid When Borrowing Against Investments
1. Borrowing Too Much
Too much leverage can lead to forced asset sales during downturns.
2. Ignoring Interest Costs
If interest rates rise, loan costs could outweigh investment returns.
3. Underestimating Margin Calls
If your collateral falls in value, you may be forced to sell investments at a loss.
4. Not Having a Repayment Plan
Without a clear exit strategy, loans can become long-term financial burdens.
Final Thoughts on Borrowing Against Investments
For high-net-worth individuals, borrowing against investments is a tax-efficient strategy that provides liquidity while keeping portfolios intact. However, for the average investor, this approach carries risks, including market volatility and potential margin calls.
Instead, most long-term investors should focus on:
✅ Investing in tax-efficient assets
✅ Using tax-advantaged accounts
✅ Optimizing capital gains tax strategies
If you decide to borrow against investments, be sure to:
✔ Understand the risks
✔ Compare loan options
✔ Have a clear repayment strategy
Want more tax-saving strategies? Check out The Ultimate Tax Guide for Long-Term Investors for additional insights!
Happy Investing!