Transcription
[Music] Welcome to part one in a special two-part video series about taxes and the ramifications for paying taxes and even tax strategy, specifically for people who wholesale and flip houses. Remember, it's not about how much money you make; it's about how much money you keep that matters. So, if you plan on being even mildly successful as a real estate wholesaler and flipper, this is a video series you don't want to miss.
Coming up, go to eightweekacademy.com to claim your free copy of Jerry Norton's most popular training. In it, he reveals his blueprint for making a hundred thousand dollars per year with real estate.
If you're new here, I'm Jerry Norton. I went from dead broke to millionaire flipping houses, and after doing a thousand deals, I created this channel to help you master the art of wholesaling and flipping real estate so you can live your dream life. Be sure to subscribe and click the bell icon to get notified when new videos are released.
This is going to be difficult for me to talk about. Taxes, that is. For the tax year 2020, I paid a combined total of 1.4 million dollars in taxes—income tax—1.4 million dollars. No, no, I'm okay. I'm okay. Tyler, hand me my bat. How many? My back. Thank you, Tyler. I feel a lot better. Okay.
There's a lot I wanted to talk about, to cover on this topic, and it's something for me that is front and center in my life and business. It's also something that you should be aware of, plan for, and strategize about in your own life and business. Now, since there was so much that I wanted to cover, I decided to create a two-part video series to really give this topic the justice it deserves. But I am by no means a tax expert. Now you're gonna learn my perspective and my views and my strategies, which may not necessarily be right for you or your family or your situation. Only you can decide that. So I highly recommend you seek competent legal professional advice before making financial decisions.
Having said that, you come to my channel for advice on flipping, and so I'm gonna give it to you unfiltered. One of the most common questions I'm asked is, "How much should I set aside for taxes when I wholesale or flip a house?" Now maybe you've wondered that too. To properly answer that question, you have to understand the IRS tax system. So let me try to explain this in its simplest form.
I want you to think about the money you earn going into a big bucket. Now the IRS is going to treat that money a little differently based on how it was earned. So, for example, money from a W-2 employment or interest, dividends, royalties, or self-employment—whether it's in the form of services, money, or property—is considered ordinary income and is taxed at the highest rate. So income earned from wholesaling houses is taxed as ordinary income. However, income that derives from the sale or exchange of an asset, such as real estate, is taxed as capital gains, which, if you held the asset for more than one year, it's considered long-term capital gains and is taxed at a lower rate. So if you flip a house in less than a year, it's considered short-term capital gains and is treated the same as ordinary income. At any rate, for simplicity, whether it's W-2 income from a job or income from flipping a house, it all goes into the income bucket, and at the end of the year, the IRS adds up all the total money you made. We'll call that the gross income you earned in that income bucket as a starting point.
Now, for illustration purposes, let's say that your income bucket has a nice round amount of a hundred. Now the hundred could represent ten thousand, a hundred thousand, one million, ten million—you decide what the hundred represents. The point is, you start with a hundred, but a hundred is not your taxable income because the IRS gives incentives that, if you qualify for, will lower your taxable income. Now these incentives come in the forms of deductions, credits, exemptions, and deferrals. For example, the IRS allows you to deduct for all kinds of things like your mortgage interest as an incentive to buy a house, and you can deduct charitable contributions as an incentive to donate. You even get a deduction for each dependent that lives with you because the government feels sorry for how much that kid eats every week, and trust me, I know how much kids eat—I have ten kids. And if you have an entity set up in the form of an LLC, an S corp, or a C corp, you can take advantage of specific business deductions such as a home office, the car you drive, you know, paying Jerry for advanced coaching and training, even business-related meals and entertainment, and so on. There are all kinds of deductions that you can qualify for depending on the entity structure, so make sure you have a good CPA to help you decide what's best for you.
So let's say that all of those deductions come to 30. That means, as far as the IRS is concerned, even though your gross income in your bucket started at 100, after legitimate, legal deductions, you lowered your taxable income to 70. So now you owe taxes on 70 and not a hundred. But wait, that's not all. The IRS tax code allows you to defer taxes under certain circumstances for purchasing assets. I'll explain, but real estate offers some of the best tax deferments, which is why 80% of millionaires are involved in real estate in some form or another. Now more on that later. But once you've maximized all of your qualifying deductions, you now owe federal and state, depending on your state, income tax. And it's not a level playing field. The U.S. has a progressive tax system—lower-income individuals are taxed at lower rates, and higher-income individual taxpayers are taxed at higher rates because those with higher incomes have a greater ability to pay more. That means as your taxable income goes up, you move into higher tax brackets. That's why there is no correct way to answer the question, "If you flip a house, how much do you owe in taxes?" It depends on your tax bracket. For example, if you wholesale a house for ten thousand dollars and it's the only income that you report for the whole year, then after deductions, you probably aren't going to have to pay any taxes. If I wholesale a house for ten thousand dollars and I'm in the highest tax bracket, I'm gonna owe approximately half of that ten thousand dollars in tax. Tyler, my bat. Okay.
So to give you an idea of the different tax brackets, as of this recording, here's a look at the current progressive tax code if you're married filing jointly. Okay, the lowest is 10% if your taxable income is less than 19,750, and the highest is 37% if your taxable income is over 622,000. And that is just federal tax. You may also owe state tax based on your taxable income. I live in Arizona, and Arizona just increased the wealth tax bracket to 9%, which, of course, I qualify for. So again, as you can see in this chart, the highest tax bracket is 37%, which I easily exceed, but the new Biden administration is stating that it's going to increase the top federal rate from 37% to 48%, which, based on the way that they're currently writing policy, I'm convinced it's going to happen. So for me, that will put my combined federal and state taxable income rate at almost 60%. Tyler, why are you handing me my bat? I just—I thought you would need it. No, I don't need my bat. I'm good. I'm good. Thanks.
And for you watching this right now, whether you're new in this journey, my hope and prayer for you is that you will not just be mildly successful but wildly successful flipping houses. Now I started in real estate dead broke, paycheck to paycheck, going nowhere in life, and I started wholesaling houses, and now 17 years later, my life has been completely transformed, and I want the same for you. Which means at some point, I hope you're going to be facing the same situation as me, where you're in the highest tax bracket, and that's why I'm sharing this video series with you so that hopefully it's relevant to you.
Now I'm going to take a minute here and go on a little rant because, well, it's my channel, I can do what I want, but mostly because what I'm about to say is extremely significant to tax strategy, as you'll see why. So keep watching. Now the idea of paying 60% in taxes is extremely discouraging. I mean, I'm really good at what I do, but I work hard, I create jobs, I improve the economy, and to do so, I put my neck on the line and I take huge risks, and for contributing to society and for contributing to the economy, I get penalized by the IRS. Not only is that ethically and morally wrong, as far as I'm concerned, but it goes against the entire backbone of what this country was founded on and that it has historically made this country the greatest country in the world—the privilege to reap what you sow, to keep what you earn. Take that away, and what's left? Now don't get me wrong, I'm all for making money, and I'm all for paying taxes. I'd rather make money and pay taxes than not make money and not pay taxes, but come on, 60 percent? Are you freaking kidding me? Okay, I need my bat, Tyler. You know, at least this is the last country in the world, as far as I'm concerned, where you can become wealthy honestly. And most countries, only organized crime with friends in high places can become wealthy. So for that, I'm extremely grateful. Okay, rant over.
Back to taxes. Here's the thing, guys. Even though the tax code is biased where the more you earn, the higher percentage you pay, it's still designed for working and middle-class America. It's designed for W-2 income earners and even self-employed and even most business people. But the wealthy, the real wealthy, they learn how to take advantage of additional tax benefits in the form of deferred taxes, and if done correctly, it can wipe out your tax completely. The reason why Donald Trump is a billionaire and doesn't pay any taxes is because he understands the legal IRS tax code for owning assets that allow for deferred taxes. Now like him or hate him, he's the smartest man in the room if he knows how to legally make billions of dollars and keep his wealth instead of giving most of it to the IRS. And while I'm certainly not a billionaire like Donald Trump, my taxable income is in the one percent of the one percent, and up until now, I have intentionally chosen not to participate in tax-deferred benefits. Like I said, in 2020, my combined federal and state income tax was 1.4 million dollars—not my taxable income. No, no, no. My total taxes I paid was 1.4 million dollars. Tyler, my bat again. The worst part is, I know what the wealthy people do to not pay taxes, and I could do the same thing, but up until now, I've chosen not to and instead gave the government 1.4 million of my hard-earned income in 2020. Now I'm good, Tyler. Thank you.
If you're questioning how that could possibly be a smart move and why I willingly paid that tax, leave a comment and say, "Jerry, you might be a flipping genius, but maybe not so much a tax-saving genius." Now I actually do have a compelling reason, maybe, that I'm gonna share with you on video part two, so stay tuned on that video. I'm gonna explain in detail how to defer taxes, even indefinitely, by acquiring certain types of assets to the point of possibly not paying any tax at all, and why I've personally chosen to not take advantage of those tax breaks, and also I believe you should not attempt to do the same either, at least not in the beginning.
As far as this video, no matter where you're at in your journey to become a real estate investor and especially a wholesaler and a flipper, first and foremost, you need to maximize as many deductions as you possibly can. If you don't have an entity set up, you need to do that as soon as possible. It's not mandatory to start doing deals, but as I've explained, you want to be able to create as many deductions as possible to lower your taxable income as you build your flipping business, and there's no reason to wait to set up your entity. I did a video where I show how to do it quickly and how to set up your entity for almost free—really cheap. So I'll put the link to that video in the description below, and you can watch it later. And even better, I'll share with you my tax advisor. Now he specializes in real estate investors, and if I were you, I would call his office, schedule a free consultation call. They'll assess your current financial situation and they'll advise you on the best next steps for you. I'll put his contact info in the description box below as well.
But in all honesty, tax strategy is step number two in your financial journey. Step number one is to learn how to make a crap load of money. So if you want to have all of the stress and worry about how to not pay seven figures in taxes because you make so much freaking money, then check out my advanced mentor and partner program called Fast Track. Fast Track is how to first create a six-figure income flipping houses and then a seven-figure income. So to learn more, I want to invite you to register for a free training to get all the details. Just go to fasttrackwithjerry.com for the next step. So again, be on the lookout for video part two. I'll put that right there for you to watch once it comes out. And if you haven't yet, be sure to subscribe to my channel. This is the number one channel on YouTube for all things wholesale and flipping, and I'll see you on the next video.