How does borrowing avoid taxes that selling would trigger?
The key is two rules in the U.S. tax code. First, capital gains are only taxed when they are 'realized'—meaning you actually sell the asset [2]. As long as you hold onto a stock or property that has gone up in value, that gain is 'unrealized' and untaxed. Second, borrowed money is not considered income, because you have to pay it back [2]. So when a wealthy person borrows against an appreciated asset, they get cash in hand without ever 'realizing' the gain, and without the loan counting as income. This is perfectly legal and widely used.
A 2025 Yale Law School analysis argues that this practice fundamentally undermines the tax system: by pulling out cash against appreciation, the borrower has effectively monetized the gain, even though no sale occurred [2]. The author advocates for Congress to make such borrowing a taxable event [2]. For now, however, the combination of these two rules creates a powerful tax shelter.
Does this strategy actually make people richer?
Yes, and the evidence shows it's a key driver of wealth inequality. A 2022 study of Australian households found that the more a household's assets are in stocks and investment properties (versus their primary home), the higher their odds of being in the wealthiest 20% [1]. Specifically, an increasing share of assets in equity and 'other property' (not your main residence) significantly raised the likelihood of being in the top wealth class [1]. In contrast, putting more wealth into your primary home actually slightly reduced those odds [1].
This makes sense: borrowing against a primary residence (a mortgage) is common, but borrowing against stocks or rental properties lets you reinvest the cash into more assets, compounding your wealth without selling anything. The same study found that the wealthiest 20% own a much larger share of stocks and investment properties than the bottom 80% [1], which is exactly the kind of portfolio that makes the borrow-don't-sell strategy most effective.
What's the catch? Isn't this risky?
It is not risk-free. If the value of the collateral (say, a stock portfolio) drops sharply, the lender can issue a margin call, forcing the borrower to sell assets at a loss or put up more cash. This is a real danger, especially since wealthy investors tend to favor high-risk stocks. A 2023 study found that rich households are drawn to high-risk, lottery-like stocks, which are often overpriced and deliver lower future returns [3]. This 'low-risk anomaly'—where low-risk stocks actually outperform high-risk ones—is driven largely by wealthy households' demand for risky stocks [3].
So the strategy works best when asset prices keep rising. If markets fall, the borrower can be squeezed. The tax advantage is real, but it comes with market risk that can backfire. The evidence suggests wealthy people are willing to take that risk, partly due to social status concerns and a preference for lottery-like payoffs [3].
About These Sources
This answer is built on 3 studies (1 peer-reviewed, 2 preprints) — published from 2022 to 2025, 1 from 2024 or later, 1 in Q1 journals — selected as the most relevant from 3 studies that passed quality screening, drawn from 32 papers retrieved from a database of over 500 million.
Sources used in this answer
Asset composition of wealthy households in Australia: how does owning stocks and property assets contribute to the likelihood of being in the top wealth class?
Using Australian household data, this study found that increasing the share of assets in stocks and investment properties (not the primary home) significantly raises the likelihood of being in the wealthiest 20%, while a larger share in a primary residence slightly lowers that likelihood [1].
Borrowing as Realization: Taxing Billionaires' Unlocked Gains
This legal analysis explains that borrowing against appreciated assets avoids taxes because the U.S. tax system only taxes gains upon sale (realization) and does not treat borrowed funds as income; the author argues this should be a taxable event [2].
Do the rich gamble in the stock market? Low risk anomalies and wealthy households
Using a large household dataset, this study found that the low-risk anomaly (low-risk stocks outperforming high-risk ones) is driven by wealthy households' demand for high-risk, lottery-like stocks, which become overpriced and yield lower future returns [3].