How the Rich Keep Their Cash

How the Rich Keep Their Cash

Every day I learn something new about the financial world. And Robert Kiyosaki has been helping me understand money in a way that no one ever has before.

Many people wonder how the rich keep getting richer while everyone else is financially stagnant…

Today, Robert teaches us how they’re keeping it up by using tax codes in their favor.

Let’s get started…

With Purpose,

Dr. Patrick Gentempo

Patrick Gentempo

Robert KiyosakiWhy I Hope Donald Trump Paid $0 in Taxes

A report published in The New York Times last month detailed how Trump’s core businesses of casinos, hotels and apartment buildings had lost $1.17 billion over a decade, allowing him to avoid paying income taxes for eight of those 10 years.

“You always wanted to show losses for tax purposes… almost all real estate developers did — and often re-negotiate with banks, it was sport,” Trump said in a post on Twitter the following day in response to the article.

His reason is the smartest thing you can do. I agree with his response.

During the last election cycle, then-candidate Donald Trump received a lot of criticism for not releasing his tax returns.

Jumping on this, Hillary Clinton and the Democrats speculated that one reason might be that he paid $0 in taxes. Most people saw this and immediately rose up in righteous anger. That would be so unfair!

As you probably know, the tax codes in the U.S. and in many different countries are long and complicated. The question is why?

The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what the governments want them to do AND get rich by utilizing the tax code.

In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing.

Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket and in turn create affordable housing.

Everyone wins.

There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with lower or zero-tax burden.

Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.

One of the reasons I supported Donald Trump as president was because I knew he understood how money actually works, including using the tax code to force the right behavior for the country.

A Simple Truth About Taxes

I don’t intend to get into the fray of that argument. Rather, I’d like to point out a simple truth that is often overlooked in this discussion.

Rather than talk about whether the tax code is fair or unfair, I propose that the discussion should be looked at through the lens of what I shared above.

Given that, the question becomes less, “Is it fair to tax the rich?” and more, “Are high-income employees building the economy and providing jobs?”

The answer is, of course, no. While it’s true they may help build a company’s bottom line and they may also do some hiring for that company, they are not personally building the economy or providing jobs. Their company is. They are just very highly paid (and high-taxed!) employees of that company.

Back in 2010, I wrote about a Fortune magazine article titled “Why the ‘Rich’ Aren’t Feeling so Rich.” The article covered the term its author Shawn Tully had coined, “HENRY,” which stands for “high earners, not rich yet.”

As I wrote then, “What Tully is getting at is that those we’d consider rich because they make a lot of money, such as doctors and lawyers making $250,000–500,000, aren’t really rich at all.”

As it stands today, these high-paid employees pay the most in taxes, with effective rates between 33–39.6% from roughly $191,000–418,000 a year in earned income. And unfortunately for these high-earning employees, there isn’t much they can do to find relief, aside from a mortgage deduction and family credits.

Some people find this to be incredibly unfair. Why should you pay higher taxes simply because you make more money? Depending on where you land on the political spectrum, you’ll most likely have passionate arguments for or against the idea of taxing the rich.

The Tax Code Is Made to Incentivize

As you probably know, the tax codes in the U.S. and in many different countries are long and complicated. The question is why?

The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.

In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing.

Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket and in turn create affordable housing. Everyone wins.

There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with lower- or zero-tax burden.

Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.

Playing by the Rules of the Rich

Years ago, my rich dad told me, “When it comes to taxes, the rich make the rules.” He also said, “If you want to be rich, you need to play by the rules of the rich.” The rules of money are skewed in favor of the rich and against the working and middle classes. After all, someone has to pay taxes.

There are many ways that the rich make a lot of money and pay little to no money in taxes, and anyone can use them. As an illustration, here’s a real-life situation in which I played by the rules of the rich and minimized my taxes:

2004: My wife Kim and I put $100,000 down to purchase 10 condominiums in Scottsdale, Arizona. The developer paid us $20,000 a year to use these 10 units as sales models.

So we received a 20% cash-on-cash return on which we paid very little in taxes because the income was offset by the depreciation of the building and the furniture used in the models. It looked like we were losing money when we were in fact making money.

2005: Since the real estate market was so hot, the 380-unit condo project sold out early. Our 10 models were the last to go. We made approximately $100,000 in capital gains per unit. We put the $1 million into a 1031 tax-deferred exchange. We legally paid no taxes on our million dollars of capital gains.

2005: With that money, we purchased a 350-unit apartment house in Tucson, Arizona. The building was poorly managed and filled with bad tenants who had driven out the good tenants.

It also needed repairs. We took out a construction loan and shut the building down, which moved the bad tenants out. Once the rehab was complete, we moved good tenants in and raised the rents.

2007: With the increased rents, the property was reappraised and we borrowed against our equity, which was about $1.2 million tax-free, because it was a loan — a loan that our new tenants pay for. Even with the loan, the property still pays us approximately $100,000 a year in positive cash flow.

Chipping Away at Taxes

Clearly, one of the reasons the rich get richer is because they earn a lot of money without paying much, if anything, in taxes. They know how to use banks’ tax-free money to become richer.

Anyone can do the same. For instance, instead of paying capital gains tax on the sale of our condo units, real estate laws allowed us to defer paying these taxes and invest them into another property instead.

The cash that does come from this property goes into our pockets at a lower tax rate because there’s no Social Security or self-employment tax to pay, and the tax rate is further reduced by the depreciation of the property.

On the flip side, the poor and middle classes toil away for their money, pay more in taxes the more they earn and then park their earnings in savings and/or retirement accounts.

In the meantime, they receive little or no cash flow on which to live while waiting for retirement — when they’ll live on their meager savings.

Regards,

Robert Kiyosaki

Robert Kiyosaki