This will be a complete guide showing you how to never pay taxes again!
Remember when Donald Trump shook the world when he said he paid $0 in taxes? WELL, Trump is certainly not alone, and it is common for real estate investors to never pay taxes.
Much of this is due to uber-complex tax laws! The so-called complexity of the tax law is almost entirely aimed at reducing your taxes, not increasing them.
Complex Tax Code
In the United States there are over 5,800 pages of tax law. About 30 pages are devoted to raising taxes.
The remaining 5,770 pages are devoted entirely to reducing your taxes.
So, if 99.5 percent of the tax law is written to reduce your taxes, then the government must really want you to do that.
If it weren’t true, then why would such legislation exist?
This is best evidenced by Ken McElroy and Robert Kiyosaki, who own real estate because the government gives them tax credits for providing housing.
In fact, real estate is such a good tax shelter that a serious real estate investor should never have to pay tax on their cash flow or on the gain from the sale of their real estate.
It’s What You Keep
Remember that building wealth is not just about how much you make, it’s what you keep.
You must make taxes your number one priority when you make an investment decision!
When you keep more money, you are making a better investment decision.
You may think that you have no choice about how much taxes you pay. “Everyone has to pay taxes, right”? This is so wrong it is actually laughable!
There are millions of people who legally pay little or no tax. What’s their secret?
They are doing exactly what the government wants them to do, and they follow the tax law.
The tax law is a map (or a code) to vast amounts of wealth. And the tax code doesn’t only show you how to reduce your taxes.
If you follow the tax law carefully, you will discover the secrets to amassing huge amounts of cash flow and wealth are found within its pages.
Cash Flow Diagram
This map is from Robert Kiyosaki’s book “Rich Dad Poor Dad“, and it is the roadmap to generating wealth!
The diagram is focused on limiting your tax liability and becoming an investor, so you never pay taxes again!
Employee (40% Taxes)
Employees generate their income by trading their time and labor for money.
Trading your time for money is a terrible way to create wealth, and it is very tax inefficient!
Earned income includes wages, salaries, bonuses, commissions, tips and net earnings from self-employment.
For tax purposes, earned income is any income that a person receives for work they have done, typically for an employer.
If you receive a W-2 at the end of the year for your tax return, you are an employee. Attached below are the marginal federal tax brackets for single filers in 2021.
As you can see, employees pay A TON in federal income taxes! This doesn’t even take into account Social Security (6.2%), Medicare (1.45%), and state income tax if applicable.
Individuals in high tax states (California and New York) pay almost 50% of their annual income in taxes.
It is very hard to build wealth when you give it all to the government!
Self-Employed (50% Taxes)
Being self-employed is even more tax inefficient than working as an employee. You are still held to the same federal income tax brackets, but you also have to pay an additional self-employment tax of 7.65%!
Self-employment tax is the imposed tax that a small business owner must pay to the federal government to fund Medicare and Social Security.
Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year.
Investopedia states, “In any business, both the company and the employee are taxed to pay for the two major social welfare programs, Medicare and Social Security.
When an individual is self-employed, she is both the company and the employee, so she pays both portions of this tax.
Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee.
A self-employed worker will be taxed 6.2% + 6.2% = 12.4%, as s/he is considered to be both an employer and an employee.”
Business Owner (20% Taxes)
Now, we start moving to the right side of the diagram and getting wise with our tax avoidance strategy!
Warren Buffett pays a lower tax rate than his secretary because his entire income is derived from capital gains.
So, what does this tell us about Warren Buffett’s taxes? Under the current US tax system, he will never pay more than a 20% tax rate on his income.
There is a net investment income tax that will tack on a few percentage points towards his effective tax rate.
You can read more about the net investment income tax here.
Business owners can structure their compensation package to only receive income in the form of company stock.
This is what Warren Buffett and Jeff Bezos do, so they guarantee a maximum tax rate of 20%!
Jeff Bezos currently holds onto 59.1 million shares of Amazon, good for $190 billion stake in the company.
However, he has the option to never pay taxes again by not selling his shares.
A “Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.
The gain is not realized until the asset is sold.
A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes”.
Short-term capital gains are taxed at your ordinary tax-rate (like an employee), which is why they are extremely tax inefficient.
Here are the tax rates for long-term capital gains (held longer than a year):
Investors Never Pay Taxes (0%)
Real estate investment properties have two INCREDIBLE advantages:
- Cash Flow
- Tax Treatment
According to Realty Mogul, “You can think of cash flow investing the same way you think about dividends with stocks.
At some interval, whether it is monthly, quarterly, semi-annually or annually, you will receive regular cash distributions from your investment.
You are buying a portion, or all, of an asset that can be leased or otherwise used to generate income.
With real estate investing, cash flow is the result of proceeds from rent payments. Let’s take a multi-family apartment building as an example.
Say the property has 50 units and each unit rents for $1,000 per month. If we assume an expense ratio of 40%, the net income per month on that property is $30,000.
While it is always a good idea to keep some portion of that net income in reserves, the remainder of the income is available for distribution, in this example, $28,500.”
As I mentioned in “9 Legitimate Ways to Earn Passive Income”, there are more millionaires in the real estate industry than any other industry in the world.
This is almost certainly due to the preferential tax treatment that landlords and investors receive.
According to Mad Fientist, a popular finance, investing, and real estate website, “Real estate is an I.D.E.A.L. investment:
Income: Regular cash flow from rents or interest payments. I consistently see un-leveraged returns of 5-10% from this one method of making money.
With reasonable leverage, it’s possible to see these returns jump to the 10-15% range or better.
Depreciation: A required accounting method that spreads the cost of an asset over multiple years (27.5 years for residential real estate).
This paper expense can “shelter” or protect other income from taxes and reduce your tax bill.
Equity: If you borrow money to buy a rental property, your tenant essentially pays off the property for you.
You use the rent to pay the mortgage, and each month the principal paydown (aka equity) gets bigger and bigger like a forced savings account.
Read my article about house hacking for advanced tips!
Appreciation: Over the long-run real estate has gone up in value about the same rate as inflation (3-4%). This passive style of inflation helps, but active appreciation is even more profitable.
Active appreciation happens when you force the value higher over a shorter period of time, like with a house remodel.
Leverage: Many investors use debt leverage to buy real estate. This means, for example, $100,000 can buy four properties at $25,000 down instead of just one property for $100,000.
Leverage magnifies the profits mentioned above (and potentially the losses). Plus, interest on debt is deductible as a business expense
Never Pay Taxes With Real Estate
Real estate investors can use debt to purchase a property, where the interest expense can be deducted as a business expense.
Depreciation on properties can typically be expensed over 27.5 years (talk about an incredible tax shelter). Finally, the best part about real estate investing!
You can reinvest 100% of your profits back into more properties, so the money theoretically NEVER gets taxed!
A powerful strategy used by savvy real estate investors is something called a section-1031 tax-free exchange.
Named after its section of the tax code, this type of property exchange allows you to defer all federal income taxes due at the time of the sale.
You basically sell one property and move your equity to a new property without touching the funds yourself.
Start taking immediate action to move yourself from an employee to an investor to enhance your tax efficiency.
The key to wealth building is holding onto more of your money (not giving it to Uncle Sam).
The strategies discussed within this article are all legal, and they work!
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