Why do wealthy people often use debt (leverage) to make more money?

Wealthy people use debt to amplify returns on appreciating assets while minimizing taxes. The strategy is called leverage. Borrowing at low rates against valuable assets (real estate, stock portfolios, businesses) to invest in higher-return opportunities allows them to deploy more capital than they own outright. The tax code reinforces the strategy by making most loan proceeds non-taxable income, by allowing interest deductibility on certain investment debt, and by stepping up the basis of inherited assets, which often eliminates capital gains tax on the heirs. The strategy is mathematically powerful but only works under specific conditions and carries real risks.

The basic mechanics. If a $1 million stock portfolio earns 8% per year, the owner makes $80,000 of unrealized gain. If the same investor borrows another $500,000 against the portfolio (a margin loan, securities-based line of credit, or pledged-asset loan) at 5% interest and invests the $500,000 also at 8%, the portfolio now earns 8% on $1.5 million ($120,000) minus $25,000 in interest, or $95,000. The leveraged return on the original $1 million is now 9.5% versus 8% unleveraged. The lever amplifies both gains and losses; if the portfolio drops 8%, the leveraged version drops further because the interest still has to be paid.

Buy, Borrow, Die. The classic ultra-high-net-worth strategy follows three steps. Buy: acquire appreciating assets (stocks, real estate, private business interests). Borrow: instead of selling assets and incurring capital gains tax, borrow against them at low rates for liquidity and lifestyle expenses. Die: at death, the heir receives the asset with a stepped-up cost basis under IRC § 1014, eliminating the capital gains tax that would have been owed if the original owner had sold. The estate uses some of the assets to repay the loan, and the rest passes to heirs largely tax-free (subject to estate tax above the federal exclusion, which is $13.61 million per person in 2024 indexed for inflation).

ProPublica's 2021 reporting on tax records of billionaires highlighted this strategy in detail; some of the highest-net-worth individuals in the United States have reported relatively low federal income tax in years when their net worth grew enormously, because their wealth growth was unrealized capital gains and their cash flow came from borrowing rather than selling.

Real estate leverage. Real estate is the most common form of household leverage. A $500,000 home purchased with $100,000 down and a $400,000 mortgage gives the buyer 5x leverage on the property's value. If the home appreciates 5% in a year, the equity grows from $100,000 to $125,000 plus principal paydown, a roughly 25% return on the down payment. Real estate professional investors use the same principle at scale: cash-out refinancing every few years to extract appreciation tax-free (loan proceeds are not taxable income) and redeploy into more property.

Securities-based lending. Major brokerages (Morgan Stanley, Goldman Sachs, Charles Schwab, Fidelity, Vanguard) offer pledged-asset lines of credit at rates indexed to SOFR plus a margin. For high-net-worth clients, these rates can be 1.5 to 4 percentage points above the index, often producing borrowing costs of 5% to 9%. The borrower's portfolio serves as collateral. The benefit: liquidity without selling assets, no taxable event, often a lower rate than mortgage or unsecured borrowing for clients with sufficient collateral.

Business borrowing. Profitable businesses borrow to expand operations, acquire competitors, or buy back stock. Interest is generally deductible at the business level (IRC § 163), making after-tax cost of debt lower. The business uses the debt to generate higher returns on operations than the cost of the borrowing.

Why this works for the wealthy and rarely for the average household.

1. The assets are appreciating reliably. Leverage amplifies whatever the underlying asset does. Wealth-building leverage works on assets that historically appreciate (broad stock indexes, well-located real estate, profitable businesses). Leverage on depreciating or non-productive assets (cars, consumer goods, stagnant property) destroys wealth.

2. The borrower has the cash flow to service the debt in any market. Margin calls, securities-based loan calls, and real estate lender workouts all require cash to handle. A borrower with $5 million in liquid assets can ride out a 30% portfolio drawdown without selling at the bottom. A borrower with $50,000 net worth and a $40,000 margin loan often cannot.

3. The borrowing rate is meaningfully below the asset return. Wealthy borrowers access prime rates, securities-based loan rates, and large-balance mortgage pricing that average borrowers do not. The same strategy at retail rates (8% to 12% on personal loans, 7% to 9% on mortgages, 9% to 12% on margin) is much harder to make work.

4. The tax treatment magnifies the benefit. Loan proceeds are not taxable. Interest on certain investment debt is deductible. The basis step-up at death eliminates capital gains tax on inherited assets. These features compound the financial advantage.

The risks that destroy household leverage strategies.

Margin calls. Brokerages require minimum equity in margin accounts (typically 25% to 30% of portfolio value). If the portfolio drops, the broker forces the borrower to either deposit more cash or sell assets to restore the ratio. Forced sales at the bottom of a market crash have wiped out leveraged investors in 1929, 2000, 2008, and 2020.

Variable rate risk. Most securities-based loans, HELOCs, and margin loans are variable-rate. Rates that move from 4% to 8% double the interest cost. Borrowers who took out HELOCs at 4% in 2021 and saw them rise to 9%+ by 2023-2024 felt this directly.

Concentration risk. Borrowing against a concentrated stock position (one company's stock) compounds the risk that a single bad outcome wipes out wealth. Diversification before leverage is one of the most important rules.

Behavioral risk. Easy access to borrowed money tends to encourage spending rather than investing for many borrowers. The wealthy who use leverage successfully usually have hard rules about what borrowed money is for (only investments at higher expected returns) and discipline about not crossing those rules.

The version that works for households. Most middle-class wealth in the United States was built with one form of leverage: the home mortgage. A 30-year fixed mortgage at 5% to 7%, used to buy a primary residence, produces real estate leverage with limited downside (foreclosure is the cap on loss for non-recourse states; even in recourse states, deficiency judgments are uncommon and bankruptcy can discharge the residual). The mortgage is the leverage tool that has actually delivered for most households, not the more exotic strategies. Maintaining a low-rate mortgage while investing surplus cash is the household-scale version of "buy, borrow, hold."

Productive uses of debt for typical households.

Mortgage on primary residence. Typically the highest-leverage, lowest-rate, longest-term debt available to households.

Federal student loans for high-ROI degrees. Engineering, computer science, medicine, finance, and many trades produce earnings boosts that outpace federal student loan rates over the borrower's career.

Business loans for profitable businesses. If the business generates returns above the cost of debt, leverage compounds the equity holder's return.

Real estate investing with cash flow positive properties. Properties that produce rental income above the mortgage payment, taxes, insurance, and maintenance enable refinancing and redeployment over time.

Unproductive uses that often destroy wealth.

Credit card debt for consumption. 22% to 28% APR on consumer goods. The math never works.

Long-term auto loans on luxury vehicles. Depreciating asset, high effective rate, often negative equity for years.

Private student loans for low-ROI degrees. High rates without federal protections.

Borrowing against retirement accounts for short-term spending. Loss of compounding plus penalty risk.

The strategy works when assets appreciate reliably, borrowing costs stay meaningfully below the asset return, and the borrower has reserves and discipline. Most middle-class households participate through their mortgage. Trying to replicate the full version without the underlying conditions is how leveraged households go broke.