How High Net Worth Individuals can Reduce their Tax Burden Legally and Ethically

This week I had the privilege of speaking with two high school friends who are absolutely CRUSHING it in the business world. They both work their butts off making great W-2 incomes -- they have young healthy families -- they both have gratitude for where their hard work has taken them. BOTH OF THEM ARE FRUSTRATED! Half of their hard-earned money is going to pay taxes. In the recent political debate, the question was posed to President Trump: "How much do you pay in taxes?" While I am personally apolitical, his answer was spot on: "I pay what I am required." Which is next to nothing! One report shows that the year before the election Donald Trump paid $750 in taxes. Yes, you read that correct: seven-hundred and fifty dollars. How did he do this without getting arrested by FBI white-collar crimes unit? Certified Personal Accountant and best-selling author Diane Kennedy states in her book Tax-Free Real Estate Investments, "If you pay taxes and don't want to, then one of two things is wrong: 1) You don't own enough real estate 2) You or your tax preparer don't know the strategies."

Americans last year spent more on Federal, State, and Local taxes than they spend on FOOD, CLOTHING, and HOUSING.

97% of Americans HATE April 15th, the date when taxes are due. But there is a select few that love April 15th, it means they are going to make money, and they are going to make a lot of it.

So what was my advice to my two high-school friends? YOU HAVE GOT TO TRADE YOUR W-2 INCOME FOR PASSIVE INCOME FROM REAL ESTATE. For a simple example; if you make $1,000,000 in income this year you will be in the 37 percentile bracket. This simply means that you will pay a whopping $370,000 to just the federal government. This doesn't account for the state taxes you will pay; examples include CA - 10.3%, OR - 9.9%, IA - 8.98%, NY - 8.62%, ME - 8.5%, NC - 7.75%. So for this example, if you make $1,000,000 the North Carolina State income taxes will take $77,500. So we are at a total of $447,500. Add in another 1% property tax for your primary residence, and then the taxes you pay on food, merchandise, and fuel at approx 5% and the total is over half a million dollars at $507,500!

What steps should you take if you are a high net worth earner and you want to alleviate your tax burden? The answer is to trade your W-2 income to passive income through tax-advantaged passive real estate investing. If you invest that $500,000 that you are paying the federal government, you will start to receive income in the I.D.E.A.L way:

• Income: Cash flow from your percent ownership of the asset. These returns are usually 5-10%. This cash flow is seen as a "paper loss" based on the next principle called depreciation.
• Depreciation: This is an accounting tool that spreads the cost of asset ownership over 27.5 years. Recent legislation also allows for cost segregation surveys that allow itemized depreciation for an asset, or land improvements outside the asset. I will cover depreciation in detail in a follow-on article. But this principle shows a paper loss above the income gain received. This is how investors make money while "sheltering" their tax burden.
• Equity: When you borrow money from a bank or a federal lender (currently 75% loan to value, LTV) then your tenant base pays off the mortgage for you. Each month the principal amount gets paid down more and more as the interest burns off. Upon the sale, refinance, or exchange of the asset this equity will be gained by the investor. HOWEVER, there is a tax-advantaged technique called the 1031 Exchange that defers capital gains tax. I will go over this technique in detail in a separate article.
• Appreciation: Everyone knows that real estate appreciates over time. This is due to the fact that you can rarely create more land. Appreciation nationwide usually grows at the same rate of inflation, which is between 3-4%. However, in commercial real estate investing you can FORCE appreciation by making improvements that will increase rent, and then also streamline operations lowering expenses. These tactics increase Net Operating Income (NOI), which is how commercial real estate is valued.
• Leverage: Many savvy real estate investors use this principle to make massive increases in their net worth. If you had that $1,000,000 you could buy one asset for $1,000,000 or you could buy four assets at $250,000 while the bank loans you 75% for each property. Additionally, and magically, interest on that 75% debt is tax-deductible as a business expense.

By using the above method your $500,000 investment (that you were paying to the government) will start generating income that is tax-sheltered, leaving more money in your pocket. What can you do with that extra money?

• Retire early
• Create that non-profit you are passionate about
• Work less W-2 time, so you can spend more time with your family
• Run for President!

If you are a high net worth earner, and you are frustrated like my friends in this example are, then contact me at [email protected] or private message me on Linkedin to find out how you can invest with Growth VUE Properties to shelter your hard-earned money.

• Brad Penley, Growth VUE Properties, Principal

www.thegrowthvue.com

Lt Commander Penley is an active duty Explosive Ordnance Disposal Officer with five successful counter-terrorism deployments, the comments made in this article are his own and do not reflect the United States Department of Defense. He has advanced degrees in Special Operations Low-Intensity Conflict, Strategy & War, and Financial Analysis. He currently has a multimillion-dollar personal investment portfolio, and also is a Principal at Growth VUE Properties which provides large commercial multifamily assets to passive investors.