Buy, Borrow, Die vs 1031 Exchange (+ Installment Sale + ILIT): Which Leaves Your Heirs More?

What would the federal estate tax be at 90?

Federal estate tax at 90, by age and net worth

Buy, borrow, die: what it really does

Buy, borrow, die is simple. You buy an asset that appreciates, you never sell it, and you borrow against it to live on. Loan proceeds are not income. At death your heirs take a new basis equal to fair market value under Section 1014, so the built-in gain is never taxed.

That is a real income tax strategy, and below the estate tax exemption it is hard to beat. The costs are loan interest, collateral calls if values fall, and the risk that Congress changes the step-up.

What it does not do is touch the estate tax. Everything you own at death, including the appreciated asset you never sold, counts toward the estate. In 2026 the first $15,000,000 per person ($30,000,000 for a couple who use both exemptions) is exempt under P.L. 119-21. Every dollar above that is taxed at 40%.

A 1031 exchange has the same blind spot

A 1031 exchange defers income tax on the gain you reinvest. Hold the replacement property until death and the step-up erases the deferred gain. That fixes income tax for your heirs. It does not shrink the estate by a dollar, so the 40% still applies to the value above the exemption.

Saving income tax on a sale matters less if 40% of what is left goes to estate tax. For an owner above the exemption, the estate problem is the bigger number.

The combination: 1031 + installment sale + ILIT

The combination uses three tools, each for its own job.

• 1031 exchange for property you want to keep owning. Income tax is deferred, and heirs get the step-up.
• Installment sale for property you are ready to sell. Under Section 453 you report gain as the buyer pays you.
• ILIT, an irrevocable life insurance trust. The trust owns a life insurance policy on you (or on you and your spouse). The death benefit is not subject to income tax under Section 101(a), and it stays out of your estate under Section 2042 because you own none of it.

The link between them is suspended passive losses. Rental and other passive losses you could not use in earlier years sit unused. When you sell the whole passive activity on an installment note, Section 469(g)(3) releases those losses in proportion to the gain you report each year. If the losses are large enough, the tax on each payment's gain falls to near zero.

The tax the losses save is real cash, and that cash pays the premium. The policy pays the estate tax, or leaves your heirs the money to pay it, without the premium dollars or the death benefit ever sitting in your estate.

What the losses do not do

Be exact about the limits, because this is where the idea gets oversold.

• Suspended losses absorb only passive gain. Raw land held for investment is not passive. A leased farm, a rental building or a passive business interest can be.
• The losses must belong to the activity you sell, and you must dispose of your entire interest in it. Selling a slice of a building does not release them.
• Interest on the note is still taxed. So is any depreciation recapture the losses do not cover, and so is state income tax in most states.
• The result is near zero tax on the payments, not zero.
• If you die before the note is paid, the unpaid gain is income in respect of a decedent and does not get a step-up.

Worked example: a couple with $40,000,000

Marcus and Elena are a hypothetical married couple, both in their 60s, with a $40,000,000 estate. Assumptions, all labeled: no growth and no inflation indexing; federal tax only; both exemptions available ($30,000,000 total) through portability; 23.8% blended federal rate on gain (20% plus the 3.8% net investment income tax); no state tax; no depreciation layer taxed at 25%, which would make the no-loss tax higher and the savings larger.

Path A: buy, borrow, die. They sell nothing and borrow against what they own. At the second death the estate is $40,000,000. Taxable amount: $40,000,000 minus $30,000,000 is $10,000,000. Estate tax at 40%: $4,000,000. Heirs receive about $36,000,000 with a full step-up and no income tax.

Path B: 1031 + installment sale + ILIT. They exchange one building into replacement property they keep. They sell a second building, Building A, for $4,000,000 on a ten-year note. Building A has an adjusted basis of $666,667, so the gain is $3,333,333, or 83.3% of each principal payment. It carries $3,000,000 of suspended passive losses.

• Principal paid: $400,000 a year, with gain of $333,333 a year.
• Tax on the $3,333,333 gain with no losses: $793,333.
• The losses absorb $3,000,000 of the gain as the payments arrive. Remaining gain: $333,333. Tax on it: about $79,000.
• Tax saved: $714,000, or $71,400 a year for ten years.

They gift $71,400 a year to an ILIT (annual exclusion gifts with withdrawal rights, or lifetime exemption, reported on Form 709). The trust buys a survivorship policy on both lives. Total premiums: $714,000.

The size of the death benefit depends on age, health and design, and must come from a real illustration. For this example assume a benefit of 6 times total premiums, or $4,284,000.

On these assumptions the combination leaves heirs about $3,500,000 more. The result is sensitive to the death benefit. Even at 1.1 times total premiums, Path B breaks even with Path A. A lower multiple, an early payoff, a buyer default or a smaller loss balance all change it.

When buy, borrow, die wins

Take the same couple at $20,000,000. Their estate is under $30,000,000, so Path A owes no federal estate tax. The step-up removes the income tax. They sold nothing, paid no premiums and set up no trust. The combination would add cost and complexity to solve a problem they do not have.

Buy, borrow, die also wins when you have no passive losses to release, when you are unwilling to sell anything, or when your estate sits far enough below the exemption that growth and a change in the law would not reach it. Check state estate tax separately. Some states tax estates well under the federal exemption.

When the combination wins

The combination wins when three things are true at once. The estate is above the exemption at death. You hold property you are ready to sell. And you carry suspended passive losses that the sale can release. Singles cross the line first: one person above $15,000,000 owes tax even if a couple with the same wealth would not.

It also wins on liquidity. Estate tax is due in cash nine months after death. Heirs holding a $40,000,000 estate in buildings and farmland may have to sell in a hurry. A death benefit paid to a trust is cash on day one.

Costs and risks of the combination

The ILIT must be drafted by an estate attorney, and the policy must be bought by the trust. If you transfer an existing policy to the trust and die within three years, Section 2035 pulls it back into the estate.

Premiums cost real money for as long as the policy is in force, and the insurer's ability to pay claims is a credit risk you take on. The buyer on the installment note is also a credit risk; protect the note with security, a personal guarantee from the buyer's owners, and clear default terms.

A gift to the trust uses annual exclusion or lifetime exemption, and the policy has to be underwritten, so health matters.

This page is education, not a recommendation. Hans is an Enrolled Agent, not an attorney or a registered investment adviser. If you place the insurance through his separate insurance business, he earns a commission; you can use any licensed agent, or none.

Also free: the book Same Sale, Different Tax, the same $1,000,000 gain taxed ten ways. Want it run on your sale? Book a free scope call to see whether the Big Sale Tax Analysis is worth it.

Who you will talk to

Hans Goldstein · Sacramento, California
Hans Goldstein: Tax & Exit Planning, an independent practice. Enrolled Agent, admitted to practice before the Internal Revenue Service. CA Insurance License #4273294, NPN 20602398.

What happens first

You fill in the short form for a free scope call, about 5 minutes. Hans reviews every one personally and replies within 1 business day. If it is a fit, you get a link to book the call.

The scope call

Fifteen minutes, free: price, timeline, what you are selling and what the money is for. Scope means you hear whether the analysis is worth it for your sale.

What you get

A written side-by-side comparison of your cash-sale baseline against every path that fits, year-by-year numbers, a written recommendation, and a review meeting with you and, if you like, your CPA and attorney.

What it costs

The scope call is free. The Big Sale Tax Analysis is $5,000 per household per transaction, only if you decide it is worth it. No retainer, no hourly billing, no obligation to use any strategy.

How Hans is paid

The $5,000 fee pays for analysis only and is not reduced or credited if you buy anything. You are never required to buy anything. No referral fees are paid to or received from brokers, CPAs or attorneys. Hans is also a licensed insurance producer with a separately owned insurance business. That business is not part of this engagement, and the analysis does not recommend insurance products. If you later choose an installment sale funded through an insurance company, that company pays Hans a commission through his separate insurance business. He may be compensated by that business if you use an insurance-funded installment sale. Hans is an Enrolled Agent (EA), admitted to practice before the Internal Revenue Service. He is not a CPA, attorney or registered investment adviser; the analysis models tax effects and does not recommend specific securities. Read the disclosures.

Book a free scope call or call 213-340-2018. Hans answers or calls back the same business day.

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