Leveraging Assets and Living Like the One Percent

How many times have you seen a click bait article or YouTube thumbnail that promises to spill the beans about how the wealthy really make money and pay little in taxes? Yea, I have seen a lot of them as well. Most of the information is 75-80% correct with details left out. This post will give a concise explanation and a way for you to implement the same techniques.

How do they do it?

This is the most asked question. How do wealthy people have money and pay little to no taxes. The simplest answer is leverage. Most wealthy people have built or inherited a large portfolio of real estate or other assets that have a large value. The value of these assets is not in the liquidation of said assets but in the ability to leverage said assets as collateral.

Lets break this down further.

When assets are sold a taxable transaction is created and the IRS will come looking for its share of the profit. Sometimes assets are sold at a loss, which can be beneficial for tax purposes but this is a rare situation and not a strategy utilized by the wealthy because, well, you have lost money.

Instead, the wealthy have found a loophole that allows them access to cash and not pay taxes.

Leverage.

Instead of buying and selling assets the one percent buy assets and leverage them as collateral so they have access to a low interest line of credit. The line of credit allows access to most of the money used to purchase the asset and it doesn't create a taxable transaction. You read that right, they rich own an asset, pull the money back out and do not pay taxes.

In fact.

If the asset is real estate that generated rental income, it can be depreciated over time (typically 27.5 years as of this writing) which is a cashless expense that reduces the rental income generated and often times can create a "loss" for tax purposes.

So.....

Here is what just happened

1. Real estate is purchased in full via cash.

2. Real estate leveraged against a line of credit or loan.

3. Up to 80% of the initial investment will be available from the leveraged event.

4. No taxable transaction has taken place.

5. The real estate generates rental income.

6. Depreciation expense helps to offset rental income possibly reducing it to $0 or less for tax purposes.

7. Little to no taxes paid.

As you can see, this is a 360 win for the investor and a large reason the wealthy continue to remain wealthy and increase the wealth gap. I will write a post soon on how you can do this yourself with various forms or real estate investing and over time, you too can become wealthy like the 0ne percent.