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Sure thing.Can you expand on this?
Maybe I’m missing something or maybe I’m just phased out due to income on REI.
As for small businesses, can you explain this further?
There are a couple different ways to look at this.
The traditional viewpoint:
- With a small business, you can put away up to $53,000 a year into a 401k, instead of the employee-max of $18,000 with a regular job.
- For real estate, depreciation shields most of your cash income (which I think this is a false point, you're paying for the basis that is being depreciated, it isn't just some magical deduction the government gives you).
- Advanced: If you're in a high-income bracket (say 35%), consider setting up a C Corp for a business that you can separate out (i.e. your coaching business). Marginal C Corp rates are only 15% up to $50,000 in profit. Keep the money in for a rainy day, or dividend it out when you're having a down year.
The viewpoint I like better is more long term, but requires flexibility.
- For real estate, what if you start with a small building, and keep 1031 exchanging into larger buildings? Say you start with a single 100,000 rental, and by the time you're 70 you have $5 million in apartment buildings. You've never paid tax on the disposals along the way, because you keep utilizing the 1031 exchange rules to kick it down the road. Then you die. Now your kids get the stepped up basis of $5 million, so the taxes on the gains you would have recognized if you sold are never paid. Even better, they can begin depreciation this $5 million dollar basis, even though the properties were depreciated by you before death. Repeat for generations, own the world.
- What if you didn't have to draw a salary from your business? Say you start a C Corp. You bite the bullet and pay tax at the C Corp level, but you decide you don't need a salary. After 5-10 years (or whenever), you decide to sell it. Since you've held the stock long-term, the business sale is a long-term capital gain. This would work for any business structure, but there is some appeal to it not flowing through onto your tax return each year (i.e. you can harvest gains from other accounts, take advantage of tax credits intended for lower incomes, etc).
What if you have no other businesses going on, so you don't have any other income on your tax return? Then you can spread the sale out over years, and keep filling up the 0% capital gains bucket with C Corp stock sale gains.
Even better, if your C Corp is a qualified small business, you can potentially exclude up to $10 million in gains anyway, no need to spread it out over time.