How to Build Massive Wealth by Permanently Lowering Your Taxes
Tom Wheelwright
The tax code rewards specific behaviors — learn to use it proactively instead of paying reactively.
The wealthy don't pay less tax by cheating — they pay less by understanding the incentives governments deliberately built into the law. Wheelwright shows how the shift from reactive filing to proactive planning is the highest-leverage financial skill most people never develop.
Everything Wheelwright wants you to walk away with
More than two hours of every workday feed the government. The tax code was designed to be used, not feared. Millions of people legally pay little or no tax simply because they understand how the system works.
Governments reward entrepreneurship, real estate investment, energy production, and job creation with deliberate tax breaks. The code punishes passive wage-earning and rewards those on the business and investor side of the Cashflow Quadrant.
A 7% real estate return can beat a 10% stock market return once you factor in depreciation deductions, tax-free cash flow, and reduced taxes on your other income. Evaluate every investment on an after-tax basis.
Your business activities, investment activities, and personal activities determine your tax. Proactive planning means structuring decisions before transactions happen — entity choice, depreciation timing, and deductions are nearly impossible to recover after the fact.
When you buy an income-producing asset, you deduct a portion each year. You get the full depreciation deduction even if you borrowed every dollar to pay for it. Cost segregation accelerates deductions by separating components that depreciate faster.
This flexibility gives you the best of both worlds: asset protection and tax optimization. Start as a sole prop when income is low, then elect S Corp status when it makes sense to reduce employment taxes.
Converting personal expenses to legitimate business deductions gives you an effective 20-30% discount on everything. Meals, travel, and family employment all qualify when the business purpose is real, ordinary, and necessary.
Paying your children reasonable wages for real work gives you a deduction at your rate while they report income at theirs. A child earning $4,000 in a 40% bracket family saves $1,600 in taxes — and learns the business.
Deferring taxes just means paying them later, often at higher rates. Permanent tax reduction comes from structuring your activities to align with what the government actually wants to incentivize. Don't start a business just for tax benefits — it must be real.
Too many people ignore taxes when investing and only look at pre-tax returns. One of the best business decisions you can make is to keep excellent records. Without documentation, even legitimate deductions become indefensible.
These notes are inspired by direct excerpts and woven together into a readable guide you can follow from start to finish.
By Tom Wheelwright
People with lots of money have lots of time because they don’t have to spend their life trading time for money. Instead, they can trade their money for time. The average person in a developed country spends 25 to 35 percent of their life working to pay taxes. That means more than two hours of every workday go to feeding the government, and three to four months out of every year are spent working solely to cover your tax bill. Over a lifetime, that adds up to roughly 20 years—effectively a prison sentence.
Yet there are millions of people who legally pay little or no tax. Their secret is not loopholes. They simply understand how the tax law works. The tax law is not just a revenue tool—it is a tool the government uses to shape the economy and promote social, agricultural, and energy policy.
It’s not just what you make that matters—it’s what you keep. Include tax planning in your wealth strategy. When you keep taxes in mind as you invest, you keep more money and make better investment decisions.
To see the impact, consider how a $10,000 investment grows with and without taxes over 30 years:
| Year | With 40% Tax @ 10% Return | Without Tax @ 10% Return |
|---|---|---|
| 1 | $10,617 | $11,047 |
| 5 | $13,489 | $16,453 |
| 10 | $18,194 | $27,070 |
| 15 | $24,541 | $44,539 |
| 20 | $33,102 | $73,281 |
| 25 | $44,650 | $120,569 |
| 30 | $60,226 | $198,374 |
After 30 years the tax-free investment is worth more than three times the taxed one. That gap is your future.
Your “facts” include your business activities, your investment activities, and your personal activities—plus how you keep track of them. All taxes are based on your facts and circumstances. If you want to change your tax, change your facts.
Too many people ignore taxes when investing and planning their wealth strategy. They look at the return on investment as the return before they pay taxes on their investment income. Consider the difference between a stock market investment and a rental property. Suppose you invest $100,000 in stocks earning 10% and also buy a $500,000 rental property ($100,000 of your own money, $400,000 from the bank) earning 7%. The stock return of $10,000, after roughly 20% capital gains tax, nets you $8,000. The real estate return of $7,000 owes no tax thanks to depreciation. But it doesn’t stop there—the depreciation deduction of about $27,000 creates a $20,000 write-off against your other income, worth roughly $6,000 in a 30% tax bracket. Your real estate total: $13,000, or $5,000 more than the stock investment’s after-tax return.
Taxes can kill your hopes and dreams by stealing your wealth and diminishing your quality of life. That surprise vacation, those home improvements—gone come tax time. Worldwide, the average person pays 30 to 50 percent or more of their hard-earned income in taxes through income, sales, value-added, payroll, estate, or property taxes. Almost a third to one-half of the world’s wealth is handed over to governments.
Invest where you travel. Do you have a favorite destination? Consider investing in the area. It gives you a great reason to keep returning, and you turn the travel expenses you already have into deductible expenses, keeping more money in your pocket.
Any travel can be deductible by making it a business or investment expense. As long as the primary purpose of your travel is business, all expenses—hotel, airfare, and meals—will be deductible. To qualify, the IRS requires that you spend more time doing business than you do in recreation.
The LLC (limited liability company) has become the entity of choice for asset protection. For tax purposes, your LLC can be whatever it wants to be—a sole proprietorship, a partnership, a C Corporation, or an S Corporation. This flexibility gives you the best of the tax and asset protection worlds. In countries without LLCs, the LLP (limited liability partnership) may offer similar flexibility.
By understanding that LLCs can be treated any way you want for tax purposes, you get asset protection while still enjoying the tax advantages of an S corporation, C corporation, or partnership.
Suppose you are just starting a new business. You may want your entity treated as a sole proprietorship in the early years when there is a loss or not much income, so you don’t have to file a separate tax return (corporations require their own return). When you’re ready to change to an S Corporation to reduce your employment taxes, you can simply check the box on the form and file the election with the IRS.
In many countries, including the United States, you can file amended returns anytime to correct errors on returns for up to the previous three years if you discover you overpaid. You can even carry back a loss from the current year to a prior year, offset the prior year’s income, and receive a refund now.
What if you could get a 20 to 30 percent discount on all of your purchases any time of the year? That’s exactly what happens when you change a personal expense into a business deduction. The government essentially pays for 20 to 30 percent of your purchase in the form of a tax deduction.
Business meals are a great way to spend time with employees, clients, and customers. You can discuss business and turn your meal expense into a deductible expense. But the expense must meet three tests:
1. Business purpose. The primary reason for spending money must be for your business. For a meal, you need a conversation about business with your dining partner before, during, or after.
2. Ordinary. The expense must be “customary and usual” — typical for your industry in both amount and frequency.
3. Necessary. The purpose of the expense must be to make more money for your business. It’s not enough to simply have lunch with a friend and talk business — the conversation must have the intention of increasing your business profits.
These three rules are not difficult to meet. If your business partner is your spouse, for instance, you likely discuss business every time you dine out. Just don’t be extravagant on a regular basis — one rule of thumb is that “pigs get fat and hogs get slaughtered.” If you regularly go to expensive restaurants, the IRS may not look kindly on your meal deductions. One of the most common mistakes is couples who are always talking business at dinner but not paying with their business credit card.
The Cashflow Quadrant separates income earners into four categories. On the left side are employees (E) and self-employed individuals (S). On the right side are big business owners (B) and investors (I). Those who earn their income from the left side of the quadrant pay much higher taxes than those on the right side — and that is by design.
The right side (B & I) pays far less tax — highlighted in green.
Why? Because governments want entrepreneurs to create jobs and investors to build affordable housing. The market does a better job at both than government-sponsored programs, and it costs far less to give tax benefits than to fund those programs directly. Governments get even more specific by offering targeted tax breaks for oil and gas investing, farming, green energy, and low-income housing.
Make your business a family business. When you travel for business, your family’s travel becomes deductible, and you can shift income from your higher tax bracket to their lower one — creating permanent tax savings. The nice thing about having your children work for you is that you get a tax deduction at your higher bracket while they report the income at their lower bracket. A child might earn $4,000 per year doing bookkeeping for your real estate investments. That $4,000 is a deduction to you. If the child has no other income and the standard deduction plus exemptions exceeds $4,000, the child pays zero tax. In a 40 percent tax bracket, that represents $1,600 in tax savings.
There are great tax benefits for you, huge educational benefits for your children, and you have someone in place to take over when you are ready to retire. What an incredible exit strategy.
Business expenses are the best kind of deductions. Real estate expenses are the next best. Depending on your country, energy-related expenses are often valuable as well. Even expenses related to stock market investing may be partially deductible, though these are the least deductible because they aren’t active investments.
Your first step to increasing your deductible expenses is to become an entrepreneur or investor. Until you take this step, you’ll always be an average taxpayer and the tax laws will be stacked against you.
The right side of the Cashflow Quadrant includes both business owners and investors, but there’s a catch: you can’t be a typical investor if you’re going to enjoy the tax benefits of investing. You have to become an active investor — one who invests for passive income, not earned income. Passive income comes from dividends, rents, and business and is taxed at much lower rates than earned income from appreciation, capital gains, or your paycheck. With the right tax strategy, you can even deduct losses from investments against income earned from other sources.
Passive income comes from dividends, rents, and business. It’s taxed at a much lower rate. Earned income comes from appreciation, capital gains, or your paycheck — and is taxed at the highest rates.
The key to good passive investing is a good team: a great investment advisor, a stellar tax advisor, a good lawyer, and a knowledgeable banker.
Start a business or start investing for passive income. You don’t have to quit your job — just start small. One of the best business and investing practices is to keep good documentation of your income and expenses, and to document them well.
When you buy an asset that produces income, you can deduct a portion of it each year you own it. For physical assets like real estate or equipment, this deduction is called depreciation. For intangible assets you can’t feel or touch — such as a customer list or computer software — it’s called amortization. The benefit is the same either way.
In the United States, commercial buildings are currently depreciated over 39 years. But the actual building cost is a non-cash expense that gives you a deduction. Even better, you get a depreciation deduction for the entire cost of the building, even if you borrowed all the cash to pay for it from someone else.
The tax benefits of long-term real estate investing can be equal to or even greater than the cash flow and appreciation from your properties.
To illustrate, consider a restaurant owner who buys a building for $780,000. A portion of that price tag applies not to the building itself but to contents like floor coverings, window coverings, and cabinetry. These other items can be depreciated faster than the building, putting more money into your pocket sooner. The more deductions you can take today, the more money you have to reinvest.
In the restaurant example, the total annual deduction came to about $37,500, meaning that much of the restaurant income is shielded from tax entirely. The trick is to properly document the values of all items you depreciate through a cost segregation or chattel appraisal — or, even better, have a tax professional or engineer document them for you.
Cost segregations are not only legal — they are specifically sanctioned by the IRS and technically required by law.
Consider a restaurant owner who earns $200,000 after normal expenses. If he took all of that money out of the business, it would be taxed at regular rates. Instead, suppose he puts $80,000 back into additional supplies and equipment that will generate even more future income, and another $20,000 into marketing. All of that reinvestment is deductible against his $200,000, leaving him with only $100,000 of taxable income.
Some real estate investments have “built-in” tax savings that don’t require you to do anything extra to write off losses against other income. Oil and gas are examples, where as much as 100 percent of the investment can be written off in the first year.
Think about your income as if you had to put it into one of five buckets:
The buckets matter not only because of different tax rates but also because of the deductions that may be available only to a certain bucket of income.
Tax-free (like-kind or 1031) exchanges have very detailed rules you must follow. If you don’t follow every rule precisely, your exchange will not be tax-free and you will have to pay taxes.
Passive Activity Losses (PALs) are losses from passive investments, such as real estate depreciation. Passive Income Generators (PIGs) are investments that produce passive income. When you combine the two, your passive losses offset your passive income, sheltering it from tax entirely.
Suppose you have $10,000 in passive losses from real estate and you invest $100,000 in a friend’s S corporation for 5% ownership. If the company earns $100,000, your $5,000 share is fully offset by your real estate losses. The remaining $5,000 of losses carries over to the next year. If the company earns $300,000 the following year, your $15,000 share is offset by $10,000 in new real estate losses plus the $5,000 carryover. You’ve completely sheltered the business income. That’s tax-free money — the magic of combining PIGs with your PALs.
By dividing ownership of a business between family members, you can save substantially on taxes. If children are still in school with little taxable income, the business income flowing to them could be taxed at 12 percent or less — provided it is structured correctly. The savings add up to thousands of dollars every year.
It’s not how much you own that matters — it’s how much you control.
You can maintain control at two levels: as the manager of the company and as the trustee of your children’s trusts. In the United States, beginning in 2018, the corporate tax rate is a flat 21%, so all income you want to stay in a corporation is taxed at that single rate.
Many big companies outsource work to other companies — marketing, accounting, human resources. You can do the same with your small company. A separate corporation can handle marketing, bookkeeping, administrative work, billings, or payroll and employee benefits.
You can also give a part of your business or real estate to your parents and reap major income tax savings. Any income from their share flows through to their tax return at their lower rates. As long as you are careful about how much you give, you won’t trigger gift tax, and with the current estate and gift tax exemption, there likely won’t be estate tax when they pass away.
Businesses operating as pass-through entities (sole proprietorships, partnerships, S corporations) receive a deduction equal to 20% of net revenue. Key limitations:
Limitation #1: Cannot exceed 50% of W-2 wages paid by the business.
Limitation #2: If wages are low but assets are significant, an alternative asset-based limitation may be more favorable.
Limitation #3: If taxable income is below $315,000 ($157,500 single), there is no wage or asset limitation.
Limitation #4: Accounting, legal, health, performing arts, actuarial, athletic, consulting, financial services, and brokerage businesses do not qualify unless taxable income is below $315,000 ($157,500 single).
Phase-Out: The deduction phases out for income between $315,000–$415,000 ($157,500–$207,500 single). Consult your tax advisor to determine your actual deduction in this range.
A tax credit offsets your taxes dollar for dollar. Unlike a deduction, which only reduces taxable income, a $1,000 credit reduces your taxes by $1,000 regardless of your tax bracket.
Many education savings vehicles permit earnings to grow tax-free and distributions to be taken tax-free. While this sounds appealing, look closer — these vehicles often severely limit your investment options and how funds can be used, which can limit overall earning potential and work against making education more affordable.
There are also working-poor credits, including the earned income credit in the United States. These credits are usually refundable and intended for those at or just above the poverty level. Many countries and states also give tax credits to incentivize charitable giving — to schools, to the poor, and to other charities — often in addition to the deduction allowed for charitable donations.
Investment tax credits are reserved for business owners and investors. They include credits for building low-income housing, buying equipment, and doing research and development for new products and processes.
When paying your children to work in your business, consider having them invest their earnings into an LLC, limited partnership, or S corporation that owns a business or investments — rather than relying on Section 529 plans or other government-controlled educational savings plans. Like a 529 plan, you get a deduction when you pay your child a salary and there is no tax to the child when received. With good planning, especially in real estate, there is no tax on cash flow. But unlike a 529 plan, you have full control over the investment, you can use the money for any expense for your child (except support like food and clothing), you can withdraw it any time, and there are no penalties for distributing the money or accumulating a huge amount over a lifetime.
Stop using government plans and make your own plan. You will have much more control and get better tax benefits than the government plans.
Instead of being self-employed, you can become an employee of your own company as well as an owner. As an owner, your share of the income is paid as a distribution of the company’s earnings — this amount is not subject to employment taxes. As an employee, your earnings for services are paid as salary. You want the salary portion to be as low as possible and distributions as high as possible to pay the least employment taxes. However, the government wants the salary to be at least reasonable for the services you render.
Tax collectors are always on the lookout for salaries that are much higher or much lower than normal for your industry. If you take too low a salary, the government may treat all of your company’s income as self-employment income subject to employment taxes.
In the United States, you probably want your primary business taxed as an S corporation. An S corporation is simple to operate and avoids the potential double taxation that comes from operating as a C corporation.
There are as many exemptions and tax benefits in the sales and property tax rules as there are in the income tax law. These are taxes that many times are simply ignored by business owners and their tax advisors. The dollars involved are enormous.
As a business owner, you pay sales tax on two basic types of transactions: items you buy for your business and products your company sells. The bigger challenge is usually the tax on products you sell — because if you don’t collect tax on sales and a state later audits you, the tax burden shifts from your customers to your business.
Sales tax should always be collected unless you have clear proof that no tax is due. Unpaid sales taxes can grow without your knowledge for many years. All companies should have a sales tax professional review their collection requirements every few years.
Manufacturing equipment, inventory, equipment used in research and development, and other supplies.
Property tax is especially hard to swallow in difficult economic times because it isn’t charged only if you make a profit, and it doesn’t necessarily go down when property values decrease. Property tax is usually calculated as a percentage of the value of your real estate, so the obvious way to reduce it is to challenge the assessed value.
There are two approaches: First, show that your property’s actual value is much less than what the assessor says — using an appraisal, or by demonstrating reduced rental income compared to similar properties. Second, show that your property is being valued higher than a comparable property of similar use, size, and location. Pay attention to the time period on your property tax bill within which you must protest or appeal the assessed value.
Estate planning allows you to ensure your heirs have a painless financial experience and leave your assets with loved ones instead of the government.
Minority discount: A 20% share of a $500,000 business may be worth only $60,000 — not $100,000 — because it gives no control. This means you use less of your lifetime exemption when gifting it.
Marketability discount: People don’t like buying into a family business when they’re not family. Shares may have restrictions on who can buy them or at what price. The courts allow a further discount on value because partial interests in closely held businesses are difficult to market and sell.
Real estate works the same way as a business when it comes to value discounts. By giving small shares away early — while expecting those assets to go up in value — you reduce your taxable estate. In most cases, you can completely eliminate the estate tax through these strategies.
Limited partnerships are especially useful: you can give away limited shares to children or grandchildren while maintaining control as the general partner, and you can pay yourself a salary from the partnership.
A charitable remainder trust (CRT) lets you receive income for your lifetime; assets then pass to charity. A charitable lead trust (CLT) gives the charity income while you’re alive; assets then pass to your family. Both provide an income tax deduction in the year the trust is set up, and CRTs provide an estate tax deduction for the full value of assets at death. Do not set these up yourself — work with your tax advisor and discuss your plans with your family.
1. You’ll be taxed where you have property. 2. You’ll be taxed where you have an office. 3. You’ll be taxed where you have employees. 4. You may be taxed where you have contractors. U.S. General State Rule: If you get benefits from a state, the state can tax you.
Every location has different tax rules, and paying tax in several locations can result in paying less total tax than if you did business in only one location. In many cases, you can pay tax on as little as half of your income just by working the rules of different tax locations against each other. When structured properly, some of your business income can become “nowhere” income and escape state tax altogether.
Most countries allow a credit for taxes paid to a foreign country on income earned in that country — usually the smaller of the amount actually paid or the taxes you would have paid at home on that income. To receive the foreign tax credit, the same taxpayer (entity) who pays the tax in the foreign country has to report the income in the home country.
All state formulas include a sales factor. How many sales you have in a state helps determine how much income is taxed there. Whether a sale belongs in a state depends on where the product is shipped. If your main office is in Arizona with a warehouse in Nevada, you only report Arizona-shipped sales on your Arizona return. Since Nevada has no income tax, all other sales become “nowhere” sales — taxed on only a small portion of your income in Arizona and not subject to tax in any other state.
Taxes are important but not nearly as important as personal and business goals. Make sure your tax planning doesn’t interfere with personal, wealth, or business goals.
Each entity type has a place in your tax strategy. You may want an LLC to own real estate, a corporation (or LLC taxed as a corporation) to own your business, a limited partnership to own assets you want to transfer to your children, and trusts to protect assets set aside for children from creditors — particularly while they’re young. Limited partnerships work well when one person runs the business and others are passive investors, and as part of an estate plan where the younger generation are limited partners and the older generation are general partners.
One powerful strategy is a partnership and two S corporations. Own the business in an LLC taxed as a partnership, then own your interest in the partnership through an LLC taxed as an S corporation. This gives you the flexibility of partnership income allocation plus the self-employment tax benefits of an S corporation. In one example, two business partners lowered their combined taxes by about $70,000 simply by owning through S corporations instead of directly through a partnership.
An asset is something that puts money in your pocket. Anything else is a liability because it takes money out of your pocket. By this definition, your home is not an asset. Your business or investments (including investment homes) can be assets if they produce cash flow.
The rules for protecting your assets involve three goals: (1) prevent a lawsuit, (2) stay under the radar so you are less likely to be sued, and (3) win any lawsuit that does come.
Be sure to have both an attorney and a CPA help you with your entity structure. Combine your tax strategy with an asset protection strategy — the two go hand in hand.
Government-qualified retirement plans contain a fundamental lie: they presume that when you retire, you will be in a lower tax bracket than when you are working. The only way this could be true is if your goal is to retire poor. If you plan on retiring with even the same income you have while working, you will be in a higher tax bracket.
Why? While working, you benefit from dependent children deductions, mortgage interest deductions, and business or employment deductions. These all disappear in retirement. Some argue that losing these deductions means you need less income — but if you’re like most people, you’ve deferred life’s pleasures hoping to enjoy them later: more travel, more golf, a house on the beach, spoiling grandchildren. These are additional expenses you didn’t have while working.
When you invest in the stock market through a qualified plan like a 401(k), all income is eventually taxed at regular rates — not the preferred capital gains rate. This alone can more than double your tax rate on investment earnings. If you invest in rental real estate inside an IRA, the depreciation deduction gets trapped inside the plan and you lose its benefit. And when you leverage investments inside a retirement plan, the income becomes taxable even as it’s earned — you lose the tax-deferred benefit.
In summary, government-qualified plans (1) increase your tax rates, (2) increase your risk by leaving money in someone else’s hands, (3) reduce overall returns because you’re limited in using leverage, and (4) take away control over what you can do with your money and when.
Roth IRAs can be a good part of a tax strategy, provided that the investments that work in a Roth are also part of your wealth strategy. Focus on a single asset class first, then decide how to get the best tax benefits from that asset. Never put a tax shelter inside another tax shelter — for example, don’t hold multifamily housing in a retirement plan.
Leverage is the difference between building massive wealth and barely getting by in retirement. With mortgages, real estate becomes a great investment. Without debt, real estate returns are no better than buying and holding stock. The same is true for business — borrowing to improve equipment returns, purchasing the business with leverage, and hiring employees to leverage your time are all critical. Like real estate, without leverage, business is just a mediocre investment.
Employment credits are a favorite government tool to encourage companies to hire more people or certain types of people. Many governments give credits for hiring people who have been unemployed for a long period. Beyond credits, you can deduct salaries, wages, and the value of stock options once employees have the right to exercise them. Qualified or “incentive stock options” (ISOs) allow employees to receive options without paying ordinary income tax.
| Business Tax Strategies | |
|---|---|
| Tax Credits | |
| Leasing or buying a building in an enterprise zone | |
| Hiring people to work in an enterprise zone | |
| Hiring specific types of people | |
| Increasing your employee work force | |
| Business equipment | |
| Research and development | |
| Deductions | |
| Travel, Meals, Auto expenses, Medical expenses, Depreciation, Salaries and wages paid to employees | |
| Tax Brackets | |
| Using multiple types of entities |
You could have your business year-end on March 31 even though your personal tax year ends on December 31. This gives flexibility about when you pay taxes on your income — for example, a bonus paid in March is deducted by the company for the year ending that March, but you don’t personally report the income until your December 31 tax year.
Give part of your business to a family member who doesn’t work in it. Their share of the income becomes passive income. Then give them a part of real estate that has passive losses. The real estate losses offset the passive business income. While simple in concept, don’t do this without your tax advisor’s help — there are many details to get right.
In U.S. tax law, there is a little-known provision called Section 1202 stock that allows owners of a business to completely avoid tax when the company is sold.
Real estate is such a good tax shelter that a serious investor should never have to pay tax on their cash flow or on the gain from selling property. The key is to continue buying more and more real estate.
Here’s why: cost segregations give you more depreciation in the first several years of ownership. Your tax basis — the purchase price minus all depreciation taken — is reduced dollar by dollar. Once your basis reaches zero, you get no more depreciation, and when you sell, your gain is the difference between your basis and the sales price. To continue sheltering cash flow from both your real estate and your business, you need to keep buying more real estate, rolling gains into like-kind properties through tax-free (Section 1031) exchanges. One great feature of tax basis is that it includes debt — you can buy a property with no money down and still get all of the basis and depreciation.
Like-kind exchanges + depreciation = zero taxes.
Consider a progression: you start with single-family homes, build comfort and equity, then sell them through a 1031 exchange to buy apartment buildings for more cash flow and less management. After enjoying apartment income sheltered by depreciation, you exchange again into a triple-net-lease property like a Walgreens — where the tenant handles all maintenance and expenses and you simply pay the mortgage.
Suppose over the years your total depreciation across all properties was $4 million, and your final Walgreens cost $5 million. Your basis would be $1 million. Selling for $6 million the day before you died would trigger a $1,000,000 capital gains tax at 20%. But if you hold the property until death, your basis is automatically increased to the property’s value on your date of death — called a basis step-up. Your heirs inherit at $6 million basis and pay zero tax when they sell.
Selling assets creates unnecessary capital gains taxes that could be avoided simply by holding onto them until death. You can always get cash from real estate by borrowing against it — and debt is tax-free. In the United States, there is also no tax on the sale of a personal residence as long as you lived in it two out of the past five years.
People who make a lot of money in the stock market are well educated about it. They understand how to make money whether the market goes up, down, or sideways, using options, futures, and other hedges to reduce risk and increase reward — they don’t just buy, hold, and pray.
If you invest in a mutual fund, you can owe tax on gains you never benefited from. Suppose the fund bought a stock at $10 fifteen years ago; you join when it’s worth $50. The fund sells the next day. You pay tax on the $40 gain per share — even if the fund’s overall value drops by year-end and your shares are worth less than you paid. All investors who owned shares on the day the fund sold share the gain.
To make stock expenses deductible, you need to qualify as a stock trader, which makes your activity a “trade” and allows you to deduct expenses as ordinary deductions while your trading gains remain capital gains.
Court cases constantly change these rules, so have your tax advisor research them each year.
Since stock and option trades are treated as short-term capital gains taxed at ordinary income rates, trading them inside an IRA means you don’t give anything up — you simply postpone the tax. Even better, trading inside a self-directed Roth IRA means none of the gains are taxable, ever. If you have money inside a 401(k) or IRA, consider rolling it into a self-directed IRA and converting to a Roth before you start trading. Just remember that you are limited on withdrawals before age 59½.
In the U.S., oil and gas is one of the truly great tax shelters. Not all oil and gas investments qualify for tax benefits, however.
| Type of Oil & Gas Investment | Tax Benefits? |
|---|---|
| Buy stock in an oil and gas company | No |
| Buy royalties from a producing well | No |
| Invest in exploratory (“wildcat”) drilling | Yes |
| Invest in development operations | Yes |
Development companies have two main expense categories: equipment (about 30% of drilling cost) and intangible drilling costs (IDC) — labor, survey work, ground clearing, drainage, fuel, and repairs. Congress allows you to deduct both IDC and equipment costs in the year you spend the money, typically the first year of investment. You also get to deduct 15% of the well’s gross income each year as depletion — like depreciation, but ongoing even after IDC and equipment are fully deducted.
To get all IDC and equipment deductions, you must own your investment through a general partnership or sole proprietorship. You can’t own it through a corporation, LLC, or limited partnership.
Mining operations have similar benefits. Renewable energy — wind turbines, solar, electric cars — also gets substantial tax benefits, including investment tax credits and state-level incentives. Equipment used in business is 100% deductible in the year purchased.
Farms, orchards, and ranches benefit from immediate deduction of operating expenses like feed, seeds, and labor — without having to add them to inventory. Farms also get special estate tax treatment, allowing reduced payments or installment payments to keep the farm in business. Certain crops, like U.S. citrus groves, get specific additional tax breaks.
United States tax policy does not promote ownership of gold and silver. Investment in precious metals is discouraged through a special, higher tax rate than other long-term capital gains rates.
Step 1: Maintain organized bookkeeping records. Use good accounting software, record business income and expenses, prepare income statements and balance sheets with timely updates, record personal income and expenses, create budgets and forecasts, generate reports, and compare income and expenses between years.
Step 2: Maintain and organize receipts. Keep receipts for deductions you intend to take, scan them into organized files or create separate paper folders for each type, and maintain receipts for 7 years.
Step 3: Be prepared with other documents. Legal contracts or agreements, copies of tax returns, and corporate books (articles of incorporation or organization, operating or partnership agreement, by-laws, and minutes).
What you call the deduction on your tax return matters. Instead of listing an expense as “seminar,” consider listing it as “continuing education” or — if you went primarily to network — as “sales or marketing expense.” You’re still reporting accurately but without raising a red flag that invites scrutiny. Also be careful with estimates: if you paid cash and don’t know the exact cost, avoid choosing round numbers. Choose a number that is closer to looking precise, which reduces the chance someone thinks you guessed.
Being passionate about reducing your taxes is only one trait to look for in a good tax advisor. The other key question is how the advisor views the law — with fear, or as an opportunity?
The reality is that you have all of the answers. Your advisor should have all of the questions. If you have to ask the questions, you simply have the wrong advisor.
There are three concepts you must understand to produce massive wealth: compound interest, leverage, and velocity.
Compounding interest is important — but it’s a pretty slow way to build wealth on its own. Leverage is what happens when you earn interest on not just your money but also someone else’s. That’s exactly what the bank does: it borrows your deposits and lends them at a higher rate. You can do the same — borrow $100,000 at 8%, invest it in equipment and inventory generating $12,000 per year, pay the bank $8,000, and net $4,000. Compare that to the $500 you’d have earned from a bank CD.
Leverage is really just compound interest using someone else’s money. Velocity is a way to increase your leverage. When you reinvest earnings to borrow more and earn even more, you create momentum. The faster you re-employ your money, the faster you build wealth.
Suppose you invest $10,000 of your own money and borrow $100,000 to earn 12% ($13,200). After paying the bank $8,000, you have about $5,000 in retained earnings — which the bank treats as more of your “skin in the game,” allowing you to borrow an additional $50,000. In year two, you earn 12% on $165,000 ($19,800), pay $12,000 in interest on $150,000 of debt, and net roughly $8,000 — $3,000 more than year one. It’s all about momentum.
#1 — Include Tax Planning in Your Wealth Strategy
#2 — Invest Where You Travel
#3 — Elect How Your LLC Will Be Taxed
#4 — Deduct Your Meals
#5 — Put Your Family to Work in Your Business and Investing
#6 — Document, Document, Document
#7 — Cost Segregations of Business and Rental Properties
#8 — PIGs Are Your PALs
#9 — Make Your Parents Your Business Partners
#10 — Save for Your Child’s Education with Maximum Tax Benefits
#11 — Reduce the Wages You Take from Your Business
#12 — Reduce Your Sales Tax Burden
#13 — Reduce Estate Taxes through Charitable Trusts
#14 — Being Taxed in Multiple States or Countries Can Reduce Your Taxes
#15 — Use a Combination of Entity Types
#16 — Include Asset Protection When Creating Your Tax Strategy
#17 — Use a Roth IRA for Certain Wealth Strategies
#18 — Turn Your Business into a Passive Investment
#19 — Change Your Residence Every Few Years
#20 — Do Stock Trading inside a Self-Directed Roth IRA
#21 — Avoid Passive Loss Rules on Oil and Gas Investments
#22 — Purchase an Audit Defense Plan
#23 — Hire the Right Tax Advisor
#24 — Build Massive Passive Income through Tax Savings
Tip: Include tax planning in your wealth strategy. It’s not just what you make — it’s what you keep.
Tip: Invest where you travel. Turn existing travel expenses into deductible expenses.
Tip: Your LLC can be whatever it wants to be for tax purposes — sole proprietorship, partnership, C Corp, or S Corp.
Tip: Eat while you work and save taxes. Business meals with business conversation are deductible.
Tip: Put your family to work. Shift income from your higher bracket to their lower bracket for permanent savings.
Tip: Document. Document. Document. If you pretend to document a deduction, you get a pretend deduction.
Tip: Properly document depreciation values through cost segregation or chattel appraisal — without it, your savings can disappear.
Tip: Modify your investment strategy. Some investments have built-in tax savings — oil and gas can be 100% deductible in year one.
Tip: Partner with your parents’ lower tax brackets through an LLC.
Tip: Watch out for education savings traps — limited investment options can undermine earning potential.
Tip: Don’t pay yourself too much or too little. A reasonable salary reduces audit risk and saves over $4,500 in annual employment taxes.
Tip: When in doubt about sales tax, collect it. The cost is minimal but exposure from not collecting is substantial.
Tip: Consider charitable trusts — give assets to charity now, keep the income stream for your lifetime, and avoid estate tax.
Tip: Operating in multiple states can work to your benefit. Some income can become “nowhere” income.
Tip: Have a business partner? Form your own S Corp entity and have it be the partner, reducing self-employment taxes.
Tip: Combine your tax strategy with asset protection — the two go hand in hand.
Tip: Develop your wealth strategy first, then decide whether a Roth IRA works within it.
Tip: Turn your business into a passive investment so real estate losses can offset business income.
Tip: Sell your residence every few years — in most countries there’s no tax on the sale if you’ve lived in it. Just don’t speculate; buy because you want to live there.
Tip: Trade stocks and options in a self-directed IRA or Roth IRA for enormous tax benefits.
Tip: Oil and gas is the only investment where you aren’t subject to passive loss limitation rules.
Tip: Purchase an audit defense plan every year to control out-of-pocket costs.
Tip: Hire the right tax advisor — know what questions they should be asking you.
Wealth Tip: Start with earned income, invest in growth assets, create capital, then invest in assets that generate passive income. With substantial capital, even modest returns result in massive passive income.
Rule #1: It’s your money, not the government’s.
Rule #2: The tax law is written primarily to reduce your taxes.
Rule #3: The fastest way to put money in your pocket is to reduce your taxes.
Rule #4: Everything you do either increases or lowers your taxes.
Rule #5: The tax law is a series of incentives for entrepreneurs and investors.
Rule #6: You can deduct almost anything given the right circumstance.
Rule #7: It’s not how much you own that matters — it’s how much you control.
Rule #8: Treat your business just as you would if it were a big public company.
Rule #9: All tax planning must have a business purpose other than reducing taxes.
Rule #10: When you want to reduce a tax, reduce the base on which it’s measured.
Rule #11: Paying tax in several locations can result in paying less total tax.
Rule #12: To receive the foreign tax credit, the same entity must pay and report.
Rule #13: Taxpayers with long-term, flexible strategies always pay less tax.
Rule #14: You must maintain control of your assets at all times.
Rule #15: Never put a tax shelter inside another tax shelter.
Rule #16: The single best tax shelter in most countries is rental real estate.
Rule #17: Mutual funds are one of the few places where you can lose money and still owe tax.
Rule #18: The better the tax benefits, the more complicated the rules.
Rule #19: You can eliminate audit fear simply by being prepared.
Rule #20: Never handle a tax audit yourself — always use your tax advisor.
Rule #21: The more passionate you and your advisor are, the lower your taxes will be.
Rule #22: It’s not how much your preparer charges — it’s how much they cost you.
Estate Tax Rule #1: The lower your assets’ value, the lower your estate tax.
Estate Tax Rule #2: There is a portion of your assets that are not taxable (the exemption).
U.S. General State Rule: If you get benefits from a state, the state can tax you.