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Family employment
Another tactic the wealthy often use to shield their income from taxes is to get their family involved. If you run a business, you can also use this strategy to your advantage by hiring your spouse and/or children and paying them a salary. The IRS even says, “One of the benefits of running your own business is that you can hire your family members.” So how exactly does this help? “Your business is deductible,” Dulin explains. “And [your spouse or child] “You can also put your money in tax-deferred accounts, which may further protect your money from taxes.” Just be sure to follow the rules, like withholding required payroll taxes. Also, check out the weird secrets of the world's biggest companies.
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Holiday Homes
Brian Vance, real estate agent and founder of Bucks & Cents, says vacation homes are another way for the wealthy to protect their cash from the U.S. government. “Because of recent increases in the standard deduction, many homeowners stop listing common items like mortgage interest on their primary residence,” Vance explains. If you itemize, state and local income and property taxes are limited to $10,000. “But that's not the case for a vacation home where you're hosting other people,” Vance says. If you rent out your vacation home less than 14 days a year, the rent you earn is generally tax-free. If you rent it out more than 14 days a year, you can deduct expenses (mortgage interest, property taxes, maintenance, depreciation, etc.).
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Real estate tax deferral
When wealthy individuals sell investment properties, such as vacation homes, they sometimes use another tool to reduce the amount of tax they owe the IRS. Jim Wang, founder of Best Wallet Hacks, explains that a 1031 Exchange can help them defer paying capital gains taxes when selling an investment property. “You can defer capital gains from the sale of an investment property if you purchase a 'like-kind' property,” Wang says. “The logic behind this deferral is that because you're exchanging one investment for another, the IRS will allow you to defer the gain.”
If you want to defer gains and postpone paying taxes, you'll need to complete a 1031 Exchange. “Eventually, you'll need to realize those gains, but until then, you can keep exchanging and growing your real estate portfolio without paying pesky taxes every time you sell,” Wang points out. Currently, there's no limit to the number of times you can take advantage of this special tax deferral.
