5 Semi-Secret Ways Wealthy People Get Even Richer

Some people are born into wealth. Others work hard to build it on their own. Regardless of how millionaires earn their fortune, they must make careful and calculated moves to ensure their wealth grows .

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Ideally, people who possess a lot of money do rigorous financial planning, leverage strategic investments and find tax advantages. The problem is, they may not exactly advertise all the ways in which they generate even more wealth. So, GOBankingRates spoke with Freddie Rappina, financial advisor, consultant and accredited investment fiduciary at Opta Financial , to find out five semi-secret ways wealthy people get even richer .

Money mistakes the super wealthy never make - that you might be doing now.

They Invest in Real Estate

One way that wealthy people get even richer is by investing in real estate, which usually appreciates over time and hedges against inflation. Often they use these properties to generate rental income.

“Say a wealthy investor purchases an apartment building for $5 million. Over time, the property appreciates in value, and the investor benefits from rental income,” Rappina said. “They also use depreciation to reduce their taxable income each year. Later, when the property’s value increases to $8 million, the investor decides to sell.”

But here’s where things get a little complex.

“Instead of paying capital gains taxes, they use a 1031 exchange to reinvest the $8 million into a larger commercial property,” Rappina continued. “This allows them to defer the capital gains tax, continuing to grow their real estate portfolio without immediate tax liabilities. If they just continue to do that until they pass away, the taxes will likely never have to be paid by them or their heirs and the heirs continue the game.”

They Invest in Oil and Gas

Wealthy people also may invest in oil and gas, which is another useful hedge against inflation and a savvy way to get a tax deduction.

“Example: An investor allocates $1 million into an oil drilling project. In the first year, they can deduct let’s say 70% of their investment as intangible drilling costs (IDCs), reducing their taxable income by $700,000,” Rappina said. “As oil is extracted and sold, the investor also benefits from a depletion allowance, which further reduces their taxable income.”

He added, “The combination of high returns from the oil investment and significant tax deductions allows the investor to increase their wealth more efficiently. Turns out, striking oil is striking tax savings gold.”

They Invest in Potentially Profitable Young Companies

Before we get into this one, let’s break down what venture capital (VC) investments are and how the wealthy approach them as vehicles to get richer. VC strategies entail investing in young companies that are not yet profitable, but have strong potential to be.

“Example: A wealthy individual invests $500,000 in a promising tech startup through a venture capital fund,” Rappina said. “After five years, the startup is acquired by a larger company, and the investor’s shares are now worth $5 million.”

Holding on to this investment for more than one year is critical. After that, the profit is taxed as a long-term capital gain at a lower rate than ordinary income.

“This allows the investor to keep a larger portion of their earnings while enjoying substantial returns on their investment,” ​​Rappina said. “It’s like planting a money tree.”

They Borrow Against Assets To Avoid Taxes

Let’s say a wealthy investor holds a large portfolio of stocks valued at around $10 million. Instead of selling the stocks to get a quick cash grab — which would trigger capital gains taxes — the investor borrows $2 million against their stock portfolio, ideally at a low interest rate.

“The loan allows them to access the funds needed for personal or business use without incurring taxes,” Rappina said. “Meanwhile, the stocks remain in their portfolio, continuing to appreciate in value and potentially generating dividends. Why sell the golden goose when you can just get a loan and let it keep laying eggs?”

They Invest in Municipal Bonds

Another way the wealthy get even richer? They invest in municipal bonds. People in the finance industry call them “munis” for short. These are debt securities issued by governmental entities to fund day-to-day obligations and to finance capital projects, according to the U.S. Securities and Exchange Commission.

“By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or ‘principal,'” Rappina said. “A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future.”

Short-term bonds mature in one to three years. Medium or intermediate-term bonds generally reach their maturity date in four to 10 years, and long-term bonds reach their maturity date after a decade. Savvy investors may also receive a tax benefit via municipal bonds.

“The interest from municipal bonds is generally exempt from federal income taxes — and potentially state and local taxes — so the investor receives tax-free income,” Rappina said. “This strategy is particularly beneficial for someone in a high tax bracket, as it provides a reliable income stream without increasing their tax burden. It’s like Uncle Sam patting you on the back for helping your city.”

This article originally appeared on GOBankingRates.com : 5 Semi-Secret Ways Wealthy People Get Even Richer