Grant Cardone: Your Goal Should Be To ‘Earn No Income’ — Here’s Why

Grant Cardone is a popular investor, speaker and author who is most famous for his “10x Rule.” The real estate investor and equity fund manager with $4 billion in assets under management is very outspoken about steps investors need to take to build wealth . Part of Cardone’s popularity comes from his emphasis that even everyday Americans can take pages out of the playbook of the wealthy and invest in a similar fashion. At a recent conference, Cardone stated that “the goal of the wealthy — earn no income.”

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Here’s what he means by that.

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Income Is Taxable — at Potentially High Rates

When it comes to generating long-term wealth, what’s most important is what you keep in your pocket, not necessarily how much you earn. This is because regular earnings are fully taxable, at the federal, state and sometimes local levels. Top earners face a federal income tax rate of 37%, and they can end up forking over more than 50% of their total income when state and local taxes in high-tax locales are considered. This is what Cardone means when he said that your goal should be to “earn no income.” His point is not that you shouldn’t make any money, but that you should keep a close eye on how your money is taxed and how much you’ll end up with in your pocket.

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Famous Billionaires With Relatively Low Incomes

Cardone emphasized his point by referencing how many famous billionaires actually have very low incomes. Warren Buffett, for example, has maintained the same $100,000 salary since the 1980s, while the salary for Jeff Bezos has remained more or less the same $81,840 since 1998. Mark Zuckerberg earns a salary of just $1 annually.

So, where do these billionaires — and many others who take a $1 salary — get their wealth? Primarily, from their stock and investments. By minimizing the amount they earn in taxable salary, they limit the amount of tax they have to pay. Imagine if Jeff Bezos, for example, took a $10 million salary. He’d likely lose roughly half of that to taxes. But by having the bulk of their wealth in stocks, they not only avoid immediate taxation, they pay a lower tax rate when they sell their stocks and they participate in the long-term growth of their companies.

Ways To Build Wealth While Generating Low Levels of Taxable Income

If you’re not familiar with how taxation in America works, you might not understand that there’s a big difference in how much you’ll pay on various types of income. While wages and salaries are always taxed as “ordinary income” — which generally triggers the highest rates — many other forms carry lower tax rates. In some cases, these can be as low as 0%. Read on to learn more.

Harvest Capital Gains

Capital gains are profits on the sale of capital assets, which include everything from stocks and bonds to ETFs, mutual funds and nearly anything you can buy in the investment world.

Tax on capital gains is divided into two categories, short term and long term. Short-term capital gains are those held for one year or less, while long-term capital gains have a holding period of longer than one year. The distinction is important because while short-term capital gains are fully taxable as ordinary income — the same as wages or salaries — long-term capital gains have their own special tax rate.

Specifically, long-term capital gains are taxed at between 0% and 20%, with most taxpayers paying a 15% rate. The 0% rate applies to those with incomes below these thresholds:

• $44,625 for single and married filing separately;
• $89,250 for married filing jointly and qualifying surviving spouse; and
• $59,750 for head of household

The 15% rate applies to taxpayers with incomes in these ranges:

• more than $44,625 but less than or equal to $492,300 for single;
• more than $44,625 but less than or equal to $276,900 for married filing separately;
• more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
• more than $59,750 but less than or equal to $523,050 for head of household

The top 20% rate applies to those with incomes above these limits.

In rare cases, a higher capital gains tax rate may apply. For example, collectibles and section 1202 qualified small business stock is taxed at a rate of 28%, and any unrecaptured section 1250 gain from selling 1250 real property has a maximum tax rate of 25%.

Put it all together and you can see that in most cases, capital gains are taxed at far lower levels than ordinary income, making them the preferred choice for wealthy individuals.

Leverage Real Estate Tax Benefits

Cardone recommended real estate as a great way to invest and save on taxes. When properties appreciate, you can sell them and pay the lower capital gains rate if you hold them for longer than one year. But you can also take advantage of provisions like a Section 1031 exchange in which you roll over your real estate gains into a new property, deferring any taxation on your profits.

Investment real estate also offers a wide variety of tax deductions that can lower your overall tax bill. For example, you may be able to deduct your mortgage payments, property taxes, insurance, HOA fees and maintenance and repair work on your investment properties.

When Cardone said you should “earn no income,” he doesn’t mean you should live a life of poverty. Rather, he encourages everyday Americans to use the tools that billionaires leverage to build their wealth even further. In short, using tax-advantaged investments, rather than relying on a salary, is the best way to keep more of what you earn.

This article originally appeared on GOBankingRates.com : Grant Cardone: Your Goal Should Be To ‘Earn No Income’ — Here’s Why