2021-03-22_How_to_Live_Income-Tax_Free_in_the_USA
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00:00:30.360 | Welcome to Radical Personal Finance,
00:00:32.620 | a show dedicated to providing you with the knowledge,
00:00:34.260 | skills, insight, and encouragement you need
00:00:36.260 | to live a rich and meaningful life now
00:00:38.360 | while building a plan for financial freedom
00:00:39.800 | in 10 years or less.
00:00:41.000 | My name is Joshua, I am your host,
00:00:42.340 | and today on Radical Personal Finance,
00:00:44.000 | I want to share with you how you can live income tax-free
00:00:47.600 | in these United States.
00:00:50.440 | Now, a couple of caveats as we begin.
00:00:52.520 | I'm going to be talking in today's show
00:00:54.480 | about the United States,
00:00:56.220 | how you can live in the United States
00:00:58.560 | and live income tax-free.
00:01:00.080 | Obviously, there are many ways to live income tax-free
00:01:03.020 | in many places around the world.
00:01:04.860 | You could move to the Cayman Islands
00:01:06.660 | and make millions of dollars as a banker,
00:01:09.140 | as a finance guy, or as an online business guy,
00:01:12.460 | and pay $0 of income tax,
00:01:14.300 | as long as you're not a US American citizen.
00:01:16.800 | You could, of course, do all kinds of things
00:01:19.880 | in other countries.
00:01:21.100 | Every country, if you go through and study their tax code,
00:01:23.580 | usually winds up with some strange little loophole,
00:01:26.320 | some strange little thing that makes that country
00:01:28.340 | attractive.
00:01:29.580 | In Canada, you can actually earn a significant amount
00:01:31.560 | of money in the form of dividends
00:01:34.160 | from Canadian corporations
00:01:35.620 | and pay $0 of income taxes on that.
00:01:38.260 | In the United Kingdom,
00:01:39.520 | you can generate your income as a professional gambler
00:01:42.160 | and not pay any income on that.
00:01:44.260 | So if you're a professional poker player,
00:01:46.100 | it behooves you to be living in the United Kingdom,
00:01:49.480 | rather than, as long as you're not a US citizen, of course,
00:01:51.700 | the caveat we always have to give,
00:01:53.680 | rather than in other places.
00:01:55.320 | Today, I'm going to talk about the United States,
00:01:59.280 | and I'm gonna tell you how you can live income tax-free
00:02:02.220 | in the United States.
00:02:03.680 | Some of this will apply to other countries,
00:02:05.820 | because many countries have some form
00:02:08.500 | of this particular planning idea that I'm gonna focus on,
00:02:12.180 | but it definitely works in the United States,
00:02:14.100 | so you'll wanna consider that.
00:02:15.580 | There are a number of obvious,
00:02:17.340 | but low-hanging tax savings ideas
00:02:20.020 | that I'm not gonna cover today.
00:02:21.620 | For example, in the previous episode in this podcast,
00:02:24.000 | I talked about how if you simply work under the table
00:02:27.900 | and you don't report your income,
00:02:29.360 | yes, you can pay no taxes, but I don't recommend it.
00:02:33.100 | And I explained that, number one,
00:02:34.900 | I don't recommend it because it winds up
00:02:37.060 | causing you a significant, potentially,
00:02:39.300 | amount of legal risk, but perhaps more importantly,
00:02:41.900 | it just keeps you at the lower echelons of society.
00:02:44.460 | You're never gonna build a big business
00:02:46.500 | that you're proud of, that you can put your name on,
00:02:48.180 | that you can really build something
00:02:50.180 | if you're worried about the taxman.
00:02:51.660 | Yeah, you'll do some little fly-by-night business,
00:02:55.000 | working out of the back of your truck,
00:02:56.200 | and you might make tens of thousands of dollars a year.
00:02:59.040 | Conceivably, could you make six figures?
00:03:00.880 | I think absolutely you could,
00:03:02.660 | but you're gonna be worried about spending it, right?
00:03:04.640 | You're not gonna put pictures
00:03:05.540 | of your nice vacations on Facebook
00:03:07.520 | because you're worried about the taxman
00:03:09.080 | using that as evidence against you
00:03:10.480 | of how much money you're spending.
00:03:11.580 | It's just, it's no way to live, in my opinion.
00:03:14.200 | But what if you genuinely want to build something big,
00:03:19.000 | live in the United States,
00:03:20.380 | and live completely income tax-free?
00:03:23.560 | Well, if we go to those basic requirements,
00:03:28.340 | we have a very, very small number of planning ideas
00:03:31.700 | that we can choose from.
00:03:33.100 | And there is basically one big planning idea that works,
00:03:37.980 | but that also has a huge problem.
00:03:40.540 | But here's the big planning idea.
00:03:42.180 | It's called debt.
00:03:48.260 | Here's the key thing about the US Income Tax Code.
00:03:52.500 | When you borrow money, that is not income.
00:03:57.440 | And so if you borrow money,
00:04:00.660 | and then spend that borrowed money,
00:04:05.660 | you can spend money without generating taxable income.
00:04:09.860 | You say, "Okay, Joshua, that's obvious,
00:04:13.860 | but what's the planning idea?"
00:04:15.580 | Well, I think there are more planning ideas here
00:04:17.180 | than people often recognize.
00:04:19.300 | You know, years ago, I remember I didn't have very much money
00:04:21.660 | and I was investing heavily in my business.
00:04:23.640 | I was using credit cards,
00:04:24.900 | borrowing money for personal expenses and business expenses,
00:04:27.700 | putting them on credit cards.
00:04:28.980 | And I wound up at the end of the year
00:04:30.660 | with a big fat tax refund, no tax bill, big fat tax refund,
00:04:35.540 | because I hadn't made any money.
00:04:37.020 | I had just borrowed money.
00:04:38.700 | And yet I had gotten my way through the whole year
00:04:41.340 | and I had lived.
00:04:42.780 | I had spent money, I had paid my bills,
00:04:45.460 | and I hadn't paid any income taxes
00:04:48.020 | because I hadn't created or received any income.
00:04:52.420 | I had simply borrowed money.
00:04:54.980 | So this is the key,
00:04:55.820 | and we're gonna explore some aspects of this.
00:04:58.660 | Now, credit cards have a rather limited shelf span,
00:05:02.620 | shelf life.
00:05:03.620 | All right, you can borrow money on credit cards
00:05:05.980 | for actually a significant amount of time.
00:05:08.460 | As you know, I sell a course on it,
00:05:10.220 | available at radicalpersonalfinance.com/store,
00:05:12.700 | how to borrow money safely
00:05:13.840 | and never pay interest using credit cards.
00:05:15.840 | And basically in that course,
00:05:17.300 | among other important topics,
00:05:19.040 | I teach you how to play the 0% credit card game.
00:05:21.860 | In a country like the United States of America,
00:05:23.820 | where credit flows easily,
00:05:25.740 | almost anybody can get their hands on credit cards.
00:05:27.680 | You can get good credit offers
00:05:29.060 | and you can borrow vast sums of money
00:05:31.020 | and you can regularly roll those sums of money over
00:05:34.260 | and providing yourself with spendable money, right?
00:05:36.660 | Most places they'll take a swipe,
00:05:38.020 | a credit card that you can swipe,
00:05:39.700 | but you haven't created income.
00:05:42.160 | But usually in almost any circumstance that I can think of,
00:05:46.940 | you do reach an end to your ability to borrow.
00:05:50.160 | You can't just roll over credit cards indefinitely
00:05:53.140 | and not have any income.
00:05:54.340 | After all, when you sign up for a new credit card,
00:05:56.560 | you have to declare your income.
00:05:58.100 | And you can only kind of play the game of,
00:05:59.980 | well, I just had a job making $200,000,
00:06:02.300 | so I'll declare that.
00:06:03.140 | You can only play that game for a little while
00:06:05.180 | before at some point in time,
00:06:06.820 | the credit card company comes along and says,
00:06:09.020 | yeah, you're not such a great risk.
00:06:11.100 | Now, clearly, if you've got some way
00:06:13.220 | to pay off those credit cards, that doesn't depend on you.
00:06:16.740 | For example, you might receive annual gifts
00:06:19.380 | from a family member.
00:06:20.260 | Well, of course, annual gifts, as long as they fall below
00:06:23.060 | the annual exclusion amount, those are always tax-free.
00:06:26.620 | And then if they are actually taxable
00:06:28.700 | at some point in time, income that's received as a gift
00:06:30.980 | is not taxable to you.
00:06:32.720 | So if you have a wealthy parents
00:06:35.100 | and your wealthy parents want to gift you
00:06:38.140 | with a certain amount of money every year,
00:06:39.780 | they can gift you 30, 40, hundreds of thousands
00:06:42.420 | of dollars per year, and that won't be taxable income to you.
00:06:45.940 | So that's one idea that can sometimes come into play.
00:06:48.800 | You might have a spouse, right?
00:06:51.460 | A husband or a wife who is generating a lot of money.
00:06:54.260 | Well, income that your husband or your wife receives
00:06:56.980 | is not yours, and there's no gift tax
00:06:59.100 | on money that's transferred among spouses.
00:07:01.620 | So maybe you spend hundreds of thousands of dollars a year,
00:07:04.000 | you swipe your credit cards,
00:07:05.380 | but your husband or your wife gives you money
00:07:08.140 | and you just use that money to pay off
00:07:11.460 | your credit card bill.
00:07:12.300 | So obviously that would work,
00:07:13.480 | but of course it's kind of cheating, right?
00:07:15.180 | It's not really delivering the good.
00:07:17.520 | So how do you genuinely live income tax-free?
00:07:20.740 | Well, the answer is you need something that's growing,
00:07:24.040 | that's going to allow you to pay off your debt
00:07:26.560 | before you start falling behind on payments.
00:07:31.380 | And it's ideal if that thing is not taxable, right?
00:07:35.420 | So how do most people use credit cards?
00:07:37.360 | Well, most people would swipe a credit card,
00:07:39.900 | they would go out and they would buy a bunch of stuff,
00:07:43.660 | and then they would plan that in the future
00:07:45.500 | they're going to make more money.
00:07:46.580 | So in my case, when I was borrowing money
00:07:48.720 | to start a business, yeah, I wasn't making any money,
00:07:51.080 | but I was planning to make money.
00:07:52.360 | And then in the future, when I made money
00:07:54.460 | and then I paid off those credit cards,
00:07:56.380 | I couldn't deduct those credit card expenses
00:07:58.580 | because the business once had already been deducted.
00:08:01.180 | But later I had the opportunity
00:08:02.820 | to pay a higher amount of income tax on my income
00:08:05.460 | to pay off those credit cards.
00:08:07.220 | And so that plan ultimately breaks down.
00:08:09.840 | But what if you could have something that could grow
00:08:13.520 | and could allow you to continue borrowing on it
00:08:16.320 | almost indefinitely?
00:08:18.260 | Wouldn't that be cool?
00:08:19.440 | Wouldn't that solve the problem?
00:08:21.480 | The answer is yes, but it's really hard to find.
00:08:23.880 | Now let's talk about this for a moment.
00:08:27.440 | Let's use perhaps the most popular tool for this,
00:08:31.280 | although perhaps not the only one,
00:08:32.960 | but the most popular tool for this,
00:08:34.840 | which is something like real estate.
00:08:37.660 | Let's assume this.
00:08:38.840 | You go out today and you buy a house
00:08:43.280 | that's marketed under value.
00:08:44.960 | I'm gonna play fast and loose with my numbers
00:08:46.840 | to get the point across to you.
00:08:47.760 | You buy a house, this house,
00:08:49.440 | you pay $100,000 for this house.
00:08:52.620 | Right, you had to have the $100,000 in some form.
00:08:55.800 | Maybe you can borrow it,
00:08:57.840 | but maybe you just start with $100,000
00:08:59.680 | that you've already paid tax on.
00:09:00.680 | So you buy a house for $100,000.
00:09:03.480 | But because of your skill in negotiating a superior deal,
00:09:07.440 | your house is actually worth $150,000.
00:09:11.140 | So you buy it at $100,000,
00:09:13.920 | and on day one, you have $50,000 of gain in the property.
00:09:18.760 | Well, then you go out and you get a mortgage on the property.
00:09:21.840 | In our case, for simple math,
00:09:23.440 | let's assume that you mortgage $150,000 on the property,
00:09:28.200 | and you take and set aside the $150,000
00:09:30.280 | in your bank account.
00:09:31.440 | Well, what you've just done in our silly little example
00:09:34.720 | is you have just created for yourself
00:09:37.040 | $150,000 of spending power
00:09:40.640 | that you don't owe any kind of income tax on.
00:09:43.700 | You don't owe any kind of employment taxes,
00:09:46.920 | no Medicare, no Social Security.
00:09:49.280 | You also don't owe any kind of income taxes,
00:09:51.340 | no federal income taxes, no state income taxes.
00:09:53.600 | Why? Because you borrowed money.
00:09:55.440 | But what does a house often do for you?
00:09:58.480 | A house often generates for you
00:10:00.280 | a certain amount of rental income.
00:10:02.400 | And so you can take that rental income
00:10:04.120 | and you can pay down the mortgage,
00:10:06.560 | or at least make the mortgage payments.
00:10:08.100 | Now you say, "Whoa, whoa, whoa, whoa, wait, Joshua.
00:10:10.400 | Is that rental income not taxable income?"
00:10:12.560 | Answer is absolutely yes, it is.
00:10:15.200 | It is taxable income.
00:10:16.800 | But there are some assets for which taxable income
00:10:22.240 | is sheltered in some way.
00:10:25.120 | In real estate, it's called depreciation, right?
00:10:27.200 | The idea is that your house becomes,
00:10:29.580 | the structures of your house become worth less
00:10:31.880 | and less each year as they're used up.
00:10:33.880 | And so you get a certain amount of depreciation allowance
00:10:36.240 | where you can offset the income with those expenses.
00:10:40.200 | Now, this can be something of a very interesting
00:10:43.160 | financial engineering game in some circumstances.
00:10:45.960 | Because the reality is the land under your house,
00:10:48.020 | while your house itself is steadily being used up
00:10:52.000 | and is running out of value,
00:10:52.920 | thus your depreciation expense,
00:10:54.680 | the land underneath your actual house
00:10:56.760 | might be increasing in value.
00:10:58.920 | And it might be becoming more desirable.
00:11:01.140 | And thus people might want your house,
00:11:02.600 | even though it's more used up than it was previously,
00:11:05.060 | they might want your house more than they did before.
00:11:07.860 | And so your actual property is increasing in value.
00:11:10.400 | Please note, it's not because the house
00:11:12.100 | is increasing in value.
00:11:12.980 | The house is not decreasing in value.
00:11:15.480 | The house is being worn out, it's being used up.
00:11:17.880 | That's why you have a depreciation expense.
00:11:20.060 | But what is happening is the attractiveness
00:11:22.820 | of your house is increasing in value.
00:11:24.960 | And the land underneath your house is increasing in value.
00:11:28.660 | And so someone might be willing to pay you more for it
00:11:30.940 | at some point in the future.
00:11:32.180 | And so you can often shelter your income payments
00:11:35.980 | from tax by your depreciation expenses.
00:11:38.640 | This really works best if you don't have a lot
00:11:41.160 | of other expenses associated with the house.
00:11:43.260 | So in a perfect world here,
00:11:45.540 | if we were just designing our perfect
00:11:47.340 | how to live income tax-free world,
00:11:49.620 | we would have a house and we would never pay
00:11:52.260 | any principal on the mortgage.
00:11:53.680 | We would just pay interest payments.
00:11:55.640 | That way the interest expense is a pure cost.
00:11:58.060 | We don't need to generate additional income
00:12:00.140 | in order to pay down the mortgage
00:12:01.340 | 'cause we don't wanna pay down the mortgage
00:12:02.780 | in this current example.
00:12:04.280 | We just wanna keep the mortgage there
00:12:05.860 | and borrow the money and just pay the bare minimum.
00:12:08.180 | And so thus we don't realize very much income
00:12:11.100 | to pay down the mortgage.
00:12:12.380 | And then it's best if all the other expenses
00:12:14.100 | are controlled as well.
00:12:15.420 | Now let's say that you buy the right kind of house
00:12:17.160 | in the right kind of neighborhood
00:12:18.940 | and then you own it for a few years, three years say,
00:12:23.340 | and then you sell it.
00:12:24.180 | And maybe now it's increased in value in the marketplace
00:12:26.680 | because people wanna move where you bought
00:12:28.460 | or they like the land underneath the house
00:12:30.060 | and they say the house will work for now.
00:12:31.540 | And now somebody comes along and offers to pay you
00:12:33.900 | $250,000 for the house.
00:12:36.620 | Well, in the US tax code,
00:12:38.460 | there's something called a like-kind exchange
00:12:40.500 | where you can exchange certain capital gain property
00:12:43.260 | for other capital gain property
00:12:44.740 | without recognizing the embedded taxable gain
00:12:48.420 | in the property.
00:12:49.240 | So you can swap out one rental house
00:12:50.980 | for another rental house.
00:12:52.580 | And so you go and you do this called a 1031 exchange.
00:12:55.380 | You do this exchange from one rental house
00:12:58.360 | to another rental house.
00:13:00.200 | And now you have another rental house,
00:13:02.040 | but now you go and you take the,
00:13:04.280 | what number did I use?
00:13:05.260 | I guess $250,000, I guess was the number I said.
00:13:08.480 | Somebody gave you $250,000 for the property.
00:13:11.060 | So you take your $250,000,
00:13:13.480 | you go out in the marketplace
00:13:14.640 | and you find a house that's actually worth $350,000,
00:13:18.440 | but you get a good deal on it
00:13:19.800 | and you pay $250,000 for it.
00:13:22.040 | So now you repeat the process.
00:13:23.520 | You take out, you buy the house
00:13:25.200 | with the money that you have.
00:13:26.400 | You do a like-kind exchange into the property
00:13:28.400 | so you don't recognize any taxable gain.
00:13:30.660 | Then you mortgage that property.
00:13:32.640 | You go ahead and put a $300,000 mortgage on it.
00:13:35.360 | Now all of a sudden you've got another,
00:13:37.080 | what do we have, two hundred and something thousand dollars
00:13:39.720 | of money in your pocket.
00:13:41.840 | And you repeat this process again and again and again.
00:13:44.380 | You buy a property, you buy capital gains property,
00:13:47.440 | you allow that property to appreciate,
00:13:49.460 | you borrow against that property
00:13:52.000 | and you spend the borrowed money
00:13:53.760 | while allowing the income from the property
00:13:56.480 | to pay your necessary payments to your lender.
00:14:00.800 | This is how you generate tax-free income.
00:14:04.700 | It's not actually income, 'cause it's not income, it's debt.
00:14:07.320 | But this is how you have spendable money
00:14:08.980 | on your bank account that's genuinely income tax-free.
00:14:12.800 | Now you'll quickly see the restrictions
00:14:14.600 | and you'll quickly see the disadvantages of this.
00:14:16.820 | So one obvious thing is you need capital gains asset.
00:14:20.080 | You need something that's not creating income
00:14:21.760 | necessarily, you just need a capital gains asset
00:14:24.000 | that's growing in value.
00:14:25.640 | You also need something that's growing in value.
00:14:28.520 | If you go and you buy a house
00:14:29.880 | and you mortgage $300,000 on it,
00:14:32.440 | and all of a sudden now you can't sell it
00:14:34.240 | for more than $200,000, you got a major problem.
00:14:36.840 | Because the lender comes knocking and says,
00:14:38.480 | "Hey, we want some money."
00:14:39.840 | And you've got to go and generate that money
00:14:41.760 | in some other way, and that other way
00:14:43.180 | might not be as tax efficient as you had hoped.
00:14:46.200 | But this is the basic process of living income tax-free
00:14:49.640 | in the United States.
00:14:50.720 | The secret is borrow money.
00:14:53.400 | Borrowed money is not income.
00:14:57.640 | And if you can supplement that borrowed money,
00:15:00.920 | if you can buttress or backstop that borrowed money
00:15:04.400 | with a high quality asset that's growing in value
00:15:07.860 | and not sell the asset, in theory,
00:15:11.360 | you can actually live this way for your entire lifetime.
00:15:14.200 | So let's say you had that real estate investor
00:15:16.400 | who purchased those houses,
00:15:18.160 | it was constantly taking out new mortgages,
00:15:20.080 | was spending the money from the mortgages,
00:15:22.160 | that investor would have a very low taxable income.
00:15:24.520 | Now, in reality, no investors don't keep it at zero,
00:15:27.740 | but they can often keep it at a very low amount
00:15:29.840 | of actual taxable income because of this process.
00:15:34.000 | Well, if you continue to own those properties
00:15:36.200 | at the end of your life,
00:15:37.480 | remember that we're dealing with capital gains property,
00:15:39.680 | and so you could even leave that property to your heirs.
00:15:43.160 | And then under current US estate tax law,
00:15:45.760 | any capital gain property that you own
00:15:47.740 | at the date of your death receives what's called a step up
00:15:50.000 | in tax basis.
00:15:51.400 | So if you own the property,
00:15:52.560 | and let's say your whole portfolio,
00:15:54.160 | your basis in the property is a million dollars,
00:15:57.400 | but it's worth $5 million,
00:15:59.360 | and you've been spending the equity in the form of debt,
00:16:02.600 | but allowing your tenants to pay that off for you,
00:16:05.820 | and your depreciation expense is sufficient
00:16:08.480 | so that you don't have a lot of taxable income.
00:16:10.860 | Well, now at your death,
00:16:11.840 | you own $5 million of real estate,
00:16:13.800 | you can leave that $5 million to your heirs,
00:16:16.840 | your heirs would inherit the money,
00:16:19.900 | with no income taxes due,
00:16:22.480 | because there's no income taxes due on inherited property.
00:16:25.560 | They would, in our example,
00:16:27.680 | not owe estate taxes under current law.
00:16:30.000 | And what's more important is the entire capital gains
00:16:33.480 | that you had embedded in the property
00:16:35.380 | would have been cleared out
00:16:36.920 | by the step up in tax basis at your date of death.
00:16:40.640 | And so now your heirs can genuinely live tax free, right?
00:16:43.160 | They could take the $5 million,
00:16:44.440 | they can go and sell it,
00:16:45.280 | they can sell it all at once,
00:16:46.100 | they can sell it piecemeal,
00:16:46.960 | and they can spend all that money
00:16:48.740 | completely income tax free,
00:16:50.400 | or they can repeat the process, right?
00:16:52.760 | They can keep your $5 million portfolio,
00:16:55.080 | they can borrow against it,
00:16:56.440 | maybe they go out and they mortgage it for $3 million,
00:16:59.240 | the property continues to appreciate in value,
00:17:02.000 | they spend the mortgaged money for their living expenses,
00:17:05.360 | and then they can repeat that year after year after year,
00:17:07.600 | or decade after decade after decade.
00:17:09.400 | Now, is this an unwieldy plan?
00:17:11.760 | It is, it really is.
00:17:13.480 | Is it hard to do this purely?
00:17:15.800 | I've never known anyone
00:17:16.920 | who was able their entire lifetime
00:17:19.360 | to live completely income tax free in the United States.
00:17:22.900 | But this is a valuable component
00:17:24.460 | that can fit into what you're doing.
00:17:26.620 | And you can actually repeat this process a number of times.
00:17:30.620 | Now, real estate's not the only thing that this works with,
00:17:32.860 | but it does work very nicely with real estate, why?
00:17:35.700 | Well, there are a couple of other things
00:17:37.060 | that can come into play.
00:17:38.420 | So with real estate,
00:17:39.700 | you can often force the appreciation with your own labor.
00:17:43.040 | So years, about three or four years ago,
00:17:45.060 | I did a series of shows on real estate
00:17:47.440 | and how to get wealthy and pay no tax with real estate.
00:17:50.600 | And in that, I gave the example.
00:17:51.800 | Let's say that you're skilled, right?
00:17:53.080 | You're a good carpenter, you enjoy working with your hands,
00:17:55.560 | you're good at fixing up houses.
00:17:57.840 | So you go and you buy a handyman special house,
00:18:00.520 | and you just simply buy it.
00:18:02.200 | You spend your time forcing the appreciation
00:18:06.760 | by painting it, fixing the walls, fixing the house up, right?
00:18:09.480 | You're now forcing appreciation of the property.
00:18:11.200 | It's becoming more valuable,
00:18:12.640 | not because it's just magically becoming more valuable.
00:18:14.700 | No, it's becoming more valuable
00:18:15.840 | because of the work that you put into it.
00:18:17.640 | But because you're just investing your own time,
00:18:19.960 | your own labor, your own work, and some of your own money,
00:18:22.640 | you're not generating taxable income.
00:18:24.680 | Well, now you can go ahead and if you live in the property,
00:18:27.680 | you can file that property as a personal residence.
00:18:30.600 | And that personal residence is now eligible
00:18:32.860 | for the exclusion on capital gains
00:18:34.840 | from the sale of a personal residence.
00:18:36.400 | Up to $250,000 of capital gain for an individual,
00:18:39.040 | $500,000 for a married couple filing jointly.
00:18:41.960 | With a few exceptions,
00:18:42.920 | basically you got to live there
00:18:43.840 | at least two of the last five years.
00:18:45.740 | And there's no reason why you can't repeat this process.
00:18:48.020 | So a real estate investor,
00:18:49.600 | especially one who's willing to put work into the property,
00:18:52.640 | can do this again and again and again.
00:18:54.200 | They can buy a house, they can fix it up,
00:18:55.840 | they can rent it out, then they can go on and repeat.
00:18:58.740 | And anytime they want to go ahead
00:19:00.240 | and get some of that tax-free gain,
00:19:01.920 | they kick out their renters, they move in themselves,
00:19:05.940 | then they live in it for two years,
00:19:07.800 | then they sell the property,
00:19:09.200 | and now all of a sudden there's genuine
00:19:10.820 | tax-free gain to them.
00:19:11.760 | And so they can do this back and forth.
00:19:14.040 | Now, I don't know that many really successful
00:19:16.640 | real estate investors who are willing to move that much.
00:19:19.160 | I've never known anybody that was that committed
00:19:21.040 | to tax savings where they were willing
00:19:22.920 | to deal with the lifestyle costs.
00:19:25.100 | Most of us at some point in time realize
00:19:27.160 | that tax savings are not the be-all, end-all,
00:19:29.600 | that actually you just want to live a nice lifestyle.
00:19:32.160 | And if you can save some tax, great.
00:19:34.000 | Otherwise you'll pay the amount of tax
00:19:35.720 | that's necessary for your lifestyle.
00:19:37.600 | But it is possible.
00:19:40.320 | What other assets could do this?
00:19:42.080 | Well, other assets might include
00:19:46.360 | something like a family business, right?
00:19:48.560 | So if you had a family business
00:19:50.940 | that you had shares of stock that you could borrow against,
00:19:54.100 | now you could possibly just simply borrow
00:19:57.360 | against those assets, pledge the stock as collateral,
00:20:01.840 | and then spend the debt.
00:20:04.160 | Doesn't have to be a family business though.
00:20:05.500 | You can do this with publicly traded companies as well.
00:20:10.200 | In fact, in many cases,
00:20:11.160 | it's easier to do with publicly traded accounts
00:20:13.240 | because margin financing is more easily available
00:20:17.000 | than on something like a closely held corporation.
00:20:19.640 | If you've got a big, giant stock portfolio
00:20:22.120 | and all of a sudden you need a bunch of money,
00:20:24.320 | income tax-free, well, you can just simply borrow the money
00:20:28.240 | by pledging some of the stock portfolio as collateral.
00:20:31.260 | This is not without risk.
00:20:34.000 | What if your stocks go down in value
00:20:35.760 | and all of a sudden you wind up facing margin calls?
00:20:38.120 | Not without risk.
00:20:39.240 | But it without question works
00:20:40.760 | and it allows you to spend money without selling assets.
00:20:44.560 | So if you have a portfolio
00:20:45.720 | of just amazingly performing stocks
00:20:49.440 | that are growing in value all over the place,
00:20:52.440 | you can simply keep it and borrow against it.
00:20:55.840 | You could do this with other assets.
00:20:58.080 | You could do this with cryptocurrencies.
00:21:00.200 | If you have a big portfolio of Bitcoin
00:21:02.200 | and you find somebody who's willing to lend you money
00:21:04.260 | using the Bitcoin as collateral,
00:21:06.320 | then you will be able to spend that loaned money
00:21:11.320 | and not pay any income tax on the loan.
00:21:13.800 | The downside with some of these assets
00:21:15.520 | has to do more with,
00:21:17.800 | well, how do I actually service the debt?
00:21:21.180 | Where do I get the money from to service the debt?
00:21:23.480 | See, real estate, because it has often income
00:21:26.920 | and because it has depreciation expense
00:21:29.400 | that can offset some of that income,
00:21:31.520 | real estate works well.
00:21:32.800 | And it's hard to find another asset
00:21:34.480 | that has that same profile,
00:21:36.480 | where you have income that you can spend right now,
00:21:39.520 | but that income is sheltered by a depreciation expense,
00:21:42.880 | a depletion expense,
00:21:44.080 | if you're doing this with an oil and gas well
00:21:45.760 | or something like that.
00:21:47.720 | And it's enough to allow,
00:21:49.660 | to give you time for the asset to grow.
00:21:52.400 | But this is the basic concept.
00:21:54.040 | To repeat, I've never known anybody
00:21:57.980 | who's lived their whole life totally tax-free
00:22:00.480 | in the United States.
00:22:02.200 | But if you genuinely want to live really well,
00:22:06.280 | and you genuinely want to spend as much money as you can,
00:22:10.360 | and you don't wanna pay a lot of tax,
00:22:12.640 | this is how you do it.
00:22:14.200 | While I don't think it's practical
00:22:15.600 | to live totally tax-free,
00:22:17.220 | I do think that you can use this idea
00:22:19.700 | to be intelligent about your personal tax planning.
00:22:23.360 | It's very important for investors
00:22:25.880 | to develop these capital gains assets
00:22:27.940 | while they have other income,
00:22:29.560 | and then to use these sources of financing
00:22:33.240 | when they're recognizing other income.
00:22:35.640 | Example, you're looking at a real estate portfolio
00:22:38.200 | and you're doing financial planning for yourself
00:22:40.640 | or for a client if you're a financial advisor.
00:22:42.880 | And you recognize, look,
00:22:43.880 | we got $3 million of paid off real estate over here.
00:22:46.640 | And then over here,
00:22:47.460 | we've got some assets where the tax has been deferred.
00:22:50.200 | Well, if we could go ahead,
00:22:51.640 | and the client wants to spend more money,
00:22:53.200 | if we can borrow money
00:22:54.400 | on the real estate portfolio over here,
00:22:56.880 | and then we can have that income,
00:22:59.760 | now we don't have as high of an income.
00:23:01.560 | So when we're taking distributions from a 401k,
00:23:03.680 | we're taxed at a lower rate.
00:23:05.400 | So that can be an appropriate application.
00:23:08.400 | You can use the credit card technique
00:23:11.360 | to shelter some of your income
00:23:13.000 | and allow you to provide some opportunities.
00:23:15.400 | So for example,
00:23:16.840 | if I were working with somebody
00:23:17.920 | who was just totally flexible,
00:23:19.240 | and we're making up these clients,
00:23:20.560 | they're not real life,
00:23:21.680 | but just someone who's totally flexible.
00:23:23.440 | Just pretend that you could spend an entire year
00:23:26.400 | living on your credit cards.
00:23:27.820 | This is very easily done.
00:23:29.120 | If you've got a good credit score,
00:23:30.200 | you've got a good credit history.
00:23:31.520 | You can spend an entire year living on your credit cards.
00:23:33.840 | Maybe you have a paid off house.
00:23:35.040 | Maybe you're living in Airbnb's,
00:23:36.320 | traveling around the world,
00:23:37.640 | but you're just swiping your credit card for everything.
00:23:40.320 | It's not that difficult
00:23:41.480 | to do that entirely interest free and expense free
00:23:45.400 | by using a series of 0% introductory rate credit cards
00:23:49.400 | where you get 12 months or 18 months of financing.
00:23:52.160 | So during that period of time,
00:23:54.320 | you don't need to create any taxable income.
00:23:57.560 | You just simply borrow money for a year,
00:23:59.600 | borrow money for 18 months.
00:24:01.380 | Now, because you've borrowed money,
00:24:03.240 | your overall income declines massively.
00:24:06.240 | So now is a good time where you can do Roth conversions,
00:24:10.000 | and you can convert some of your 401k dollars to Roth dollars.
00:24:13.040 | You can go ahead and sell capital gains assets.
00:24:15.160 | And when your earned income is very low,
00:24:18.160 | you may be able to sell tens of thousands of dollars
00:24:20.300 | of assets at a 0% tax rate.
00:24:22.960 | And so for somebody who's very flexible,
00:24:24.320 | this can work really well.
00:24:25.520 | Then the next year you go ahead,
00:24:26.960 | you generate enough income from your,
00:24:29.560 | you will go ahead and recognize, excuse me,
00:24:30.960 | recognize enough income
00:24:32.000 | from some of your other investment assets.
00:24:33.800 | You can pay off the credit cards.
00:24:35.020 | That's gonna be a high income year,
00:24:36.600 | but that's a year that you don't do Roth conversions.
00:24:38.760 | That's a year that you don't sell any other capital gains
00:24:41.600 | assets that are necessary, that aren't necessary.
00:24:44.280 | But that year you go ahead and create income.
00:24:46.160 | Then the following year you repeat.
00:24:47.760 | This can also work as a form of bridge financing.
00:24:51.280 | You use an asset and you combine all of the above.
00:24:55.920 | Somebody has a property,
00:24:57.320 | you go ahead and put a big mortgage on that property
00:25:00.200 | so that they can have income now.
00:25:01.840 | This allows you to retire early
00:25:04.020 | because you're spending that income.
00:25:06.080 | You can wait now until 59 and a half,
00:25:08.160 | so there's no early retirement distributions.
00:25:10.360 | And then during those years,
00:25:12.040 | you go ahead and do a bunch of conversions.
00:25:13.700 | You max out your conversions from a traditional IRA
00:25:16.600 | or a traditional 401k into a Roth IRA.
00:25:19.880 | You max those conversions out
00:25:21.360 | and then you'll be able to take that money tax-free again,
00:25:23.880 | or you sell capital gains assets.
00:25:25.920 | So the most important thing is for you
00:25:28.080 | to always look at the concept and remember,
00:25:30.240 | hey, I could borrow money.
00:25:32.160 | And if I borrowed money, that's not income.
00:25:37.040 | And so now I have a tool at my disposal.
00:25:39.880 | You can do this with life insurance.
00:25:41.520 | You could take life insurance loans against cash value.
00:25:44.080 | What's more interesting is if you are in a situation
00:25:47.320 | where you're planning with somebody who's terminally ill,
00:25:50.240 | right, you use life insurance,
00:25:51.960 | you take some sort of a viatical settlement.
00:25:54.400 | You take loans against the life insurance
00:25:56.680 | using the life insurance as collateral,
00:25:58.000 | maybe with friends or with,
00:25:59.360 | you could do it with a company as well.
00:26:02.080 | Just always remember in the back of your head,
00:26:03.680 | if you need spendable money
00:26:05.640 | and you don't wanna pay tax, the answer is to borrow it.
00:26:09.400 | Borrowed money is not income.
00:26:11.840 | One would hope I wouldn't have to do any,
00:26:15.160 | many disclaimers here.
00:26:16.680 | I would just simply point out,
00:26:18.440 | you always have to when dealing with debt.
00:26:19.760 | We're not dealing here when we're talking about these ideas.
00:26:21.880 | We're not dealing in a world where,
00:26:25.080 | somebody is going out and just frivolously
00:26:27.720 | is buying stuff on credit cards
00:26:29.280 | that they can't afford to pay back.
00:26:30.480 | That's dangerous.
00:26:32.120 | And it's not tax-free either.
00:26:36.440 | If you have debt that's discharged
00:26:39.120 | in a debt settlement of some kind,
00:26:40.880 | you'll receive a 1099 for the amount of the debt
00:26:43.120 | that's discharged.
00:26:44.200 | So don't think, oh, I'm gonna go out
00:26:45.600 | and I'm gonna borrow $100,000 on credit cards.
00:26:47.720 | Then I'm gonna just stop paying
00:26:49.480 | and then I'll pay it back later at $15,000
00:26:52.040 | because that debt, you'll be taxed on it
00:26:54.200 | due to the forgiveness of debts.
00:26:55.960 | So they're onto that one.
00:26:57.320 | But if you can find the right set of assets
00:26:59.520 | or the right time, the right situation,
00:27:02.720 | you can genuinely put these strategies together
00:27:05.880 | and it can be useful for you in a tax planning context.
00:27:10.160 | There are some other minor strategies
00:27:12.360 | that we can talk about,
00:27:13.200 | but here's what you need to know about US income taxes.
00:27:16.280 | Pretty much all the good loopholes have been closed.
00:27:18.880 | You know, years ago,
00:27:21.560 | if you watch online arguments about taxation,
00:27:24.360 | generally what people will do
00:27:26.440 | is they'll put up the marginal tax brackets of years past.
00:27:29.760 | Marginal tax brackets in the United States
00:27:31.240 | have reached as high as, oh, is it 90 something percent?
00:27:34.000 | Just insane numbers.
00:27:36.160 | And so they'll say, well, look,
00:27:38.400 | we had 80% taxation before and we did fine
00:27:41.320 | and we can do that again.
00:27:42.840 | But what's often unrecognized
00:27:44.360 | is how many loopholes have been closed since then
00:27:47.520 | of deductions, of exempt income,
00:27:49.960 | of all kinds of different things.
00:27:51.800 | And so in today's world, I've looked for years.
00:27:55.320 | I've looked for years.
00:27:56.600 | And you can find all these little ideas,
00:27:58.720 | but basically it's mostly just piecemeal stuff.
00:28:01.760 | Other than what I've just described,
00:28:04.040 | there's no big idea
00:28:05.800 | that allows you to have millions of dollars.
00:28:07.600 | And you can see the limited applicability
00:28:10.640 | of the ideas that I've just outlined.
00:28:12.640 | You can see that if I wanted to actually spend
00:28:15.800 | a lot of money, I would need so much money.
00:28:17.520 | And how did I create the money in the first place?
00:28:19.560 | How did I actually do it in the first place?
00:28:21.840 | You have to be a very skillful person.
00:28:24.320 | And so there's virtually no way
00:28:27.680 | living in the United States
00:28:29.160 | to actually live income tax-free.
00:28:32.000 | There are ways to manage it.
00:28:33.680 | It's not the worst place in the world,
00:28:35.440 | but there's no way to genuinely live income tax-free.
00:28:38.600 | And so that's why I so often talk about going somewhere else
00:28:42.480 | because you can genuinely live income tax-free
00:28:45.120 | in many parts of the world,
00:28:46.320 | and you're welcomed with open arms.
00:28:48.960 | But if you wanna live income tax-free
00:28:50.680 | in the United States,
00:28:51.840 | always remember, borrowed money is not income.
00:28:56.360 | That's all for today's show.
00:28:58.840 | I remind you that until March 31,
00:29:00.520 | you could save 50%.
00:29:02.160 | In this case, I don't 1099 you for the savings.
00:29:04.880 | That's one good thing.
00:29:05.720 | A borrowing, sorry, buying things on sale,
00:29:08.120 | you don't, you need less income.
00:29:09.720 | So you have to recognize less income,
00:29:11.520 | but you don't get charged tax on money
00:29:13.960 | that you save on sales, or at least not yet.
00:29:16.000 | But you can save 50% through March 31st
00:29:18.400 | on all of my courses that are available
00:29:20.040 | at radicalpersonalfinance.com/store.
00:29:22.320 | That sale ends on March 31,
00:29:23.920 | but more importantly, those courses disappear on March 31.
00:29:27.320 | In order to save, go to use coupon code changing platforms.
00:29:30.120 | I'm removing those courses from the marketplace.
00:29:32.840 | Gonna be adjusting them, reshooting them,
00:29:34.840 | coming out with some more ones
00:29:36.040 | and some new ones in the future.
00:29:37.320 | And so they are really good.
00:29:38.800 | All the information is still current.
00:29:40.400 | I'm still active there.
00:29:41.400 | We're doing a series of Q&A calls.
00:29:43.320 | And I would encourage you highly,
00:29:45.040 | if you've thought, if you heard me talk
00:29:46.400 | about some of these ideas,
00:29:47.640 | go to radicalpersonalfinance.com/store.
00:29:49.800 | I'd say probably the biggest deal there
00:29:51.800 | is probably that credit card course,
00:29:53.440 | because I never charged what I should have for that course.
00:29:55.960 | And now it's 50% off.
00:29:58.160 | When it comes back out,
00:29:59.280 | it's probably gonna be tripled or quadrupled in price
00:30:01.160 | because I'm gonna add a whole bunch to it.
00:30:03.280 | But that credit card course is phenomenal.
00:30:05.600 | And I've had several people that have used it
00:30:08.080 | to do what we're talking about today,
00:30:10.120 | to use now credit cards as a form of bridge financing
00:30:12.480 | so they could retire early,
00:30:13.480 | not incur early retirement distribution penalties, et cetera.
00:30:17.920 | And so I'd highly recommend that to you.
00:30:19.320 | You can find that at radicalpersonalfinance.com/store.
00:30:22.240 | And I will be back with you very soon.
00:30:24.960 | - The holidays start here at Ralph's
00:30:26.720 | with a variety of options
00:30:28.040 | to celebrate traditions, old and new.
00:30:30.400 | Whether you're making a traditional roasted turkey
00:30:32.920 | or spicy turkey tacos,
00:30:34.760 | your go-to shrimp cocktail,
00:30:36.560 | or your first Cajun risotto,
00:30:38.440 | Ralph's has all the freshest ingredients
00:30:40.880 | to embrace your traditions.
00:30:42.440 | Ralph's, fresh for everyone.
00:30:44.520 | - We've locked in low prices
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00:30:47.920 | Look for the locked in low prices tags
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00:30:51.960 | Ralph's, fresh for everyone.