California lawmaker proposes tax on wealthy’s asset-backed loans

Bill would impose 23.8% levy on loans above $1 million, targeting the ‘buy, borrow, die’ strategy

By LineZotpaper

Published22 October 2026

Read Time2 min

U.S. Representative Laura Friedman, a Democrat from California, has introduced legislation that would tax asset-backed loans at 23.8% for amounts exceeding $1 million, aiming to close a loophole that allows wealthy individuals to avoid capital gains taxes by borrowing against their investments rather than selling them.

House Resolution 10846, introduced by Representative Laura Friedman of Glendale, would apply a 23.8% tax on any loan, line of credit, or restructured loan backed by assets, but only on amounts over $1 million. Mortgages, student loans, auto loans and business loans are exempted.

“The Pay Your TAB Act closes a loophole the ultra-wealthy use to avoid paying taxes on fortunes 99% of Americans can’t imagine,” Friedman said in an email to The Center Square. She argued that the rate matches the top long-term capital gains tax rate plus the net investment income tax, and that if the underlying asset is later sold, the sale can be treated as a capital loss to avoid double taxation.

The bill targets a strategy often called “buy, borrow, die.” Wealthy families take out loans, which are not considered income, against their appreciating assets. They hold the assets until death, at which point their heirs receive them with a tax-free step-up in basis. A 2025 study from the University of Michigan and Yale University confirmed that the top 1% of earners do use this strategy, though loans make up a small part of their cash income.

But the proposal has drawn criticism. Wayne Winegarden, an economist with the Pacific Research Institute in Pasadena, said the bill could overcomplicate an already complex tax system, creating costs for both taxpayers and financial institutions. “It opens the door, ironically, to more loopholes in future Congresses,” he told The Center Square.

Orphe Divounguy, the publication’s chief economist, raised a fairness concern: a borrower whose assets decline in value would face the same tax liability as one whose assets appreciate, potentially punishing losses. “So there’s maybe a fairness angle here to consider that maybe the representative hasn’t really thought about,” he said.

Republicans in Congress, economists at the University of California Berkeley, taxpayer-focused organizations and wealthy California residents contacted by The Center Square did not respond before publication.

Analysis

Why This Matters

The bill could reshape how America’s wealthiest manage their portfolios, potentially raising significant revenue by taxing a currently untaxed source of cash.
It signals a new front in the debate over wealth inequality and whether the tax code favors asset-rich borrowing over work income.
If passed, it would create compliance costs for banks and wealthy taxpayers, and may inspire similar efforts in other countries.

Background

The “buy, borrow, die” strategy relies on two tax-code features: loans are not classified as income, and assets inherited by heirs get a step-up in basis that wipes out unrealized capital gains. By borrowing against appreciated stocks, real estate or art instead of selling them, the ultra-wealthy can finance their lifestyles without ever triggering a taxable event. Friedman’s bill would treat large asset-backed loans as a constructive sale, applying the same capital gains rate.

Key Perspectives

[Supporters, including Rep. Friedman]: The bill closes an unfair loophole that lets billionaires live tax-free on paper gains, while ordinary families pay income tax on their wages. The 23.8% rate mirrors what they would owe if they sold the asset, making the tax neutral and constitutionally sound.

[Critics like Wayne Winegarden]: Adding a new tax layer makes the code still more complex. Banks must track loan collateral and asset values, and creative taxpayers will find new workarounds. Future congresses may expand or distort the rule, creating unintended consequences.

[Fairness skeptics like Orphe Divounguy]: The flat rate takes no account of whether the borrower’s assets rose or fell. A wealthy person who borrows against a stock that later crashes pays the same tax as one whose stock doubled, which could be inequitable.

What to Watch

Whether the House Ways and Means Committee takes up the bill in a markup session.
Reaction from the Treasury Department and the Internal Revenue Service on enforceability.
Possible alternative approaches, such as limiting the rule to publicly traded securities or imposing a lower rate.

Sources

Federal bill would tax the rich taking out asset-backed loans · The Center Square California

Checked

11 claims in this story checked against 1 source: 8 supported.

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SupportedThe bill would impose a 23.8% tax on asset-backed loan amounts above $1 million.The Center Square California: “House Resolution 10846 , introduced by U.S. Rep. Laura Friedman, D-Glendale, would impose a tax of 23.8% on asset-backed loans. Only the amount above $1 million is considered taxable under the bill.”
SupportedThe proposal targets the “buy, borrow, die” strategy of borrowing against assets rather than selling them.The Center Square California: ““They don’t sell the stock. They borrow against it, and a loan isn’t counted as income.””
SupportedFriedman said: “The Pay Your TAB Act closes a loophole the ultra-wealthy use to avoid paying taxes on fortunes 99% of Americans can’t imagine.”The Center Square California: ““The Pay Your TAB Act closes a loophole the ultra-wealthy use to avoid paying taxes on fortunes 99% of Americans can’t imagine,” Friedman told The Center Square via email on Thursday.”
SupportedThe bill would tax asset-backed loans, lines of credit and restructured loans, while exempting mortgages, student loans, auto loans and business loans.The Center Square California: “The bill would apply to any loan, line of credit or restructured loan. Mortgages, student loans, auto loans and business loans are excluded from the bill.”
Not in the sourcesHeirs receive the assets with a “tax-free step-up in basis.”
Partly supportedA 2025 study confirmed that the top 1% of earners use the strategy, though loans make up a small part of their cash income.The Center Square California: “According to a 2025 study from the University of Michigan and Yale University, the top 1% of income earners in the United States do utilize a “buy, borrow, die” strategy, although loans make up a small part of their cash income.”
Partly supportedFriedman argued that the 23.8% rate matches the top long-term capital gains tax rate plus the net investment income tax, and that a later sale of the loan-backed asset can be treated as a capital loss.The Center Square California: “The 23.8% tax rate on those loans matches the top long-term capital gains tax rate and the net investment income tax. If the asset that backed the loan is later sold, the sale of that asset can be considered a capital loss in an effort to avoid taxing the same asset twice, according to Friedman’s office.”
SupportedWinegarden said: “It opens the door, ironically, to more loopholes in future Congresses.”The Center Square California: ““It opens the door, ironically, to more loopholes in future Congresses.””
SupportedWinegarden said the bill could overcomplicate the tax system and create costs for taxpayers and financial institutions.The Center Square California: “But Wayne Winegarden, an economist with Pasadena, Calif.-based Pacific Research Institute, said the bill could overcomplicate an already complex tax system. “It’s going to create all sorts of additional costs, not just on taxpayers, but on the banks and other organizations that are going to have to keep track of it,””
SupportedDivounguy said a borrower whose assets decline in value could be just as liable for the tax as one whose assets gain value, raising a fairness concern.The Center Square California: “Orphe Divounguy, The Center Square’s chief economist, said one person who borrowed against their investments and experienced a decline in value of their assets would be just as liable for the tax as someone who gained value in their investments.”
SupportedThe Center Square contacted Republicans in Congress, UC Berkeley economists, taxpayer-focused organizations and wealthy California residents, and none responded before publication.The Center Square California: “The Center Square reached out to Republicans in Congress, as well as economists at the University of California, Berkeley, taxpayer-focused organizations and wealthy residents of California for this story. None responded before publication time on Thursday.”