Roy J. Riley 
The ultra-wealthy have long exploited a loophole in the way the tax system conceptualizes what is and is not “income.” By using highly appreciated assets as collateral for loans, they can access vast amounts of capital without paying taxes on those gains—immediate cash, with no taxable event.
This “buy/borrow/die” strategy bypasses the need to sell assets, which would otherwise result in significant tax liabilities, and leans on the basis step-up that assets receive when they transfer as part of an estate. While some have proposed taxing loans at the time of disbursement to address the issue, and that is a viable solution, such a policy leaves open many doors to strategies that would allow the ultra-wealthy to continue to avoid taxation.
Instead, a more effective solution would be a “repayment realization” rule—treating repayment of these secured wealth-access loans as the moment when taxation should occur. This approach would better align with traditional tax principles, reduce the risk of arbitrage, and ensure that taxes are paid when wealth is monetized and required cash flows are most evident.
To be clear, while disbursement-based taxation creates the possibility for avoidance strategies, it would still stand as a marked improvement over the current regime—which allows ultra wealthy to access their wealth without incurring any tax liability whatsoever. A “repayment realization” rule would be superior in many ways, but we needn’t allow perfect to be the enemy of good.
Disbursement-Based Taxation
Taxing loans secured by appreciated assets may seem like a straightforward solution, but this approach opens the door to a suite of arbitrage opportunities. For instance, ultra wealthy individuals have access to highly customizable or outright bespoke financial products that could easily be designed to minimize tax exposure. A loan with deferred interest or revolving credit lines could make it appear as though very small amounts of wealth are accessed at any given time, reducing any immediate tax burden.
Additionally, foreign or offshore lending could be used to duck a disbursement-based tax policy—with borrowers limiting themselves to jurisdictions with more favorable tax rules, weaker enforcement mechanisms, or decreased financial transparency. Access to a credit line, facilitated by a bank located in a tax-shelter jurisdiction, and leveraged against appreciated assets, would be very difficult to detect for tax assessment and enforcement purposes.
By taking out a series of smaller loans over time and avoiding any large disbursement, ultra wealthy borrowers could structure their secured loan to come in under whatever threshold is set by the policy. Put simply, if secured loans with appreciated assets for collateral above $100m are to be taxed—every billionaire looking to take out such a loan would opt for two smaller loans of $50m each.
Most saliently, taxing loans at disbursement could result in wealthy borrowers opting for hard-to-value or illiquid assets as their collateral. Shares in privately held companies, intellectual property, or real estate could be strategically undervalued to reduce the taxable base. This would necessitate tax authorities engage in nuanced market valuations of collateral at the time of a loan’s disbursement—and would likely be administratively unworkable.
“Repayment Realization” Rule
Taxing loans at the time of disbursement opens the door to many avoidance opportunities—whereas a so-called repayment realization rule would offer a more equitable and effective approach. Such a rule would operate on the high-level policy that loans collateralized by appreciated assets are triggered for taxation when they are repaid, rather than when they are disbursed.
A key benefit of the repayment realization rule would be that it preserves the fundamental principle of tax theory that loans are not income because they must be repaid. At the time of disbursement, the borrower has not realized any wealth, the logic goes—they are just accessing liquidity that they will later need to pay back.
By taxing loans upon repayment, the tax system would be focusing on the moment when the borrower has, ultimately, monetized their wealth to repay that debt. There is also a compelling “ability to pay” incentive to key taxation to repayment—if the individual has sufficient funds or liquidated assets to pay off the loan, there is a clear indication wealth has been accessed.
The repayment realization rule could be designed to trigger taxation when an individual repays any portion of the loan collateralized by appreciated assets—both partial and full repayments could serve as taxable events. For example, if an individual repays a portion of a loan, this repayment could be taxed on a proportional basis: 20% of the loan is repaid and 20% of the unrealized gains tied to the underlying collateral is taxed.
This policy detail would ensure individuals cannot avoid taxation by rolling over loans or paying off loans incrementally without triggering meaningful taxable events. Even small repayments signal a realization of wealth and, therefore, each repayment would result in proportional taxation. It would also disburse the tax debt owed over time, making it easier for some borrowers to make their tax payments.
At its core, a repayment realization rule would align with the principle that taxation should occur when wealth is actually accessed and used—rather than when it merely exists on paper.
Benefits to Repayment Realization—Challenges to Manipulating Repayment
Taxing loans based on partial or full repayment, offers a robust and less easily manipulated approach compared to taxes levied at disbursement.
First, the act of repaying a loan whether it be through asset liquidation or other means, represents a clear monetization of wealth. At repayment, the borrower has demonstrated access to liquidity and this makes it hard for the borrower to make the argument that the underlying wealth has not been realized.
Money is fungible, and if we think of the loan at disbursement as creating a total tax levy due, it is immaterial if the taxes are paid using proceeds from that loan or some other source. Keying the taxable event to repayment seems counterintuitive, but while disbursement only results in wealth being potentially accessed, it is clearly accessed when that debt is repaid.
Second, timing strategies to avoid taxes, such as deferring the sale of an appreciated asset under the current tax regime or borrowing in small increments under a disbursement regime, are curtailed.
Repayment, like death and taxes themselves, is unavoidable and inevitable if properly defined. Tying taxation to repayment aligns the interests of society with those of the lender—they are each motivated to see ultra wealthy borrowers repay their debt sooner rather than later, but in all cases eventually.
Third, a repayment realization regime would provide less flexibility for asset valuation manipulation. When taxed at disbursement, the value of a piece of collateral used for a loan can fluctuate significantly. This creates opportunities to undervalue assets in order to minimize taxes owed. A tax tied to repayment avoids this issue, as the taxable base is set to settlement of the debt, in whole or in part. It is immaterial what the underlying asset was actually worth, the only relevant figure for purposes of tax calculation is how much of a debt secured by that asset has been repaid.
Caveats and Conclusions
There are, as with all policies, numerous caveats and complications. First and foremost, under a repayment realization rule there is the possibility for double taxation if an individual repays a loan and then sells the collateralized assets—this would need to be met with a corresponding credit for taxes paid during repayments to reduce capital gains liability at the time of sale.
A particularly thorny challenge will be distinguishing loan types and ensuring loans that are taken out to avoid paying taxes on gains are captured, but other loans are not. Without question, policymakers would face numerous complexities that will need to be addressed to ensuring legitimate borrowing activities are not unduly affected in pursuit of the ultra wealthy paying their fair share.
In sum, a repayment realization rule would constitute a radical shift in the way we conceptualize tax realization events—but it might represent a workable policy middle ground between current tax policy and something like a wealth tax, which might stand on dubious legal footing.
