Three types of Income, which one is best?

The current IRS code is over 44,000 pages long, with over five million printed words. It is beyond confusing and could take a few years to read through the whole thing, and by the time you are done, it will have changed. That is why most Americans don't bother to understand the rules that could actually propel them into becoming millionaires. To help you in your journey to financial freedom (and for me, it is freedom of time & choice), I will break down THREE different types of income: Earned Income, Portfolio Income, and Passive Income, and spell out in simple terms how you can legally stop paying taxes, or at least HEAVILY off-set the amount of tax you are paying each year.

It is often quoted that the only things that are certain in life are death and taxes. The first one is inevitable, but what about the second? The entire IRS code is set up to discourage people from doing things that hurt them and cost governments lots of money (think taxes on a pack of cigarettes or alcohol), or to encourage people to something that will increase the tax revenue for the government (start businesses, invest in businesses, and create jobs - which then creates more wealth that can then be taxed). The government knows and has created a system where they can maximize the amount of taxes they collect, while still maximizing the number of people that work, which keeps the government coffers full. The government generates the vast majority of its tax revenue from everyday working Americans, and they tax them at the highest rate. This kind of tax is called Earned Income tax, it's the taxes you see taken out of your W-2 or 1099 statements. The largest sector of working Americans is paying between 22% - 37% of their earned income in tax. Yup, a good quarter to third of your income is going to the government involuntarily.

Tired of the government taking your money?

The second type of income is called Portfolio Income. This is the income you get from investing in businesses in the forms of stocks, bonds, mutual funds, as you receive dividends, returns, sales, or interest. When you sell some of these holdings you pay a tax on any gain received. In most cases, if you held the investment for more than 12 months you will pay long-term capital gains that are SIGNIFICANTLY less than W-2 or 1099 earned income, usually a 15% tax on your gains. Not bad considering how much lower it is than earned income. But there is still a better way to invest.

***Passive Income*** Passive income is better than both W-2 income and portfolio income because it has the possibility to be tax-free. It is considered passive because you don't have to personally do anything to earn this type of money. If you own property that you rent out, this money comes passively from the tenants paying their rents. These gains are realized after all business expenses are paid for and any leftover profit is your income. However, the IRS code is set up for LOOPHOLES, or commonly known as "deductions," that can further lower your taxable income. Deductions include depreciation of the asset, which can show a paper-loss on the books, which means you won't pay any tax. This paper loss is not a real loss because you likely made money each year on the investment, but the ALLOWABLE deductions make it look like you had a loss - therefore no tax. At the same time you are realizing legal deductions your asset is also appreciating in value over time and as you make forced improvements, then when you go to sell, those appreciation gains can also be tax-deferred through a legal and allowable 1031 exchange.

So the question is: how much of your income is taxed as earned, portfolio, or passive? One thing the government will not tell you is that the most wealthy Americans have very large passive and portfolio incomes while having very little W-2 earned income. By not paying as much in taxes they are able to keep more of their income and then reinvest back into more passive or portfolio income.

How do I create passive income? To start off with you should save as much as you can and purchase an investment property. Or sell your current single family home and buy a multifamily home, where you can live in one unit and rent out the rest. At a minimum buy a single family home with an additional dwelling unit (ADU) that you can rent out. This will lower your mortgage payment, maybe even PAY for your entire mortgage. With the money you save you can then buy more investment properties that pay you Passive Income. Then scale.

If you are an accredited investor, then there is an even easier way. You buy into a large commercial multifamily investment where you are COMPLETELY PASSIVE. The asset management company like Growth VUE Properties handles all property management, and you just sit back and collect tax-advantages checks. You get all the benefit of owning passive real estate without having to do any of the work. Sound to good to be true? It's not, you just have to read through those 44,000 pages of IRS tax code with a crackerjack decoder ring, and I'm sure you have better things to do than that!

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.