How to become a billionaire and pay little taxes
According to Forbes magazine, President Donald Trump has a net worth of $2.5 billion. According to the New York Times, Trump paid $750 total in federal income tax in both 2016 and 2017.
How does a multibillionaire pay $750 in federal income taxes?
First off, there is a difference between income and wealth. A billionaire could bury his or her money in a coffee can and earn nothing. Nothing earned. Nothing owed.
A billionaire could have his or her money invested in company stock which does not pay a dividend. Warren Buffett, whose net worth Forbes pegs at $80 billion, famously pays himself a salary of $100,000 per year. The rest of his money comes from the increasing value of his stock in Berkshire Hathaway.
A billionaire could have his or her money invested in assets which lose money even as they increase in value. Sports teams are notorious money pits. As scarce playthings for the megawealthy, buyers don’t care whether teams pay off as an investment. Ego-tripping buyers pay higher prices to get in the game.
The question is less about Trump avoiding taxes. The question is how he became a billionaire without making money in the first place.
The likely answer: Inheritance and loans also known as “OPM” or other people’s money.
To take a mundane example, suppose I buy a $1 million rental property in Santa Cruz. I use a $500,000 inheritance for the down payment and borrow the rest. I rent the house for $4,000 per month. My daughter the rental agent takes 10% which leaves me with $43,200 per year. I pay $11,000 in property taxes. I pay $16,000 per year in interest. I take $12,000 per year in depreciation. Insurance, upkeep and other expenses come to $4,200.
Voila. No income. No taxes.
Fast forward and the property is worth $1.5 million. I do a cash- out refi and pocket $500,000. I use that $500,000 to buy another property with similar economics.
Both properties go up in value and I do two cash- out refis. I buy two more properties. Now I have four properties. Rinse, lather, repeat. If I inherited $400 million instead of $500,000, I might eventually own office buildings, luxury apartment towers and golf courses without generating taxable income.
In fact, I might pay so much for my properties that they generate losses. I could use these losses to offset income I might have from TV appearances or licensing my name or writing books. I might also have losses from investments gone bad in casinos or getrich- quick seminars.
There is nothing per se illegal about a billionaire paying little or nothing in federal income tax. Of course, there is nothing per se legal about a billionaire paying little or nothing, either. From Trump’s alleged
$72 million write- off currently under IRS audit to $70,000 of business expenses for hair styling, the Times report raises troubling questions about tax rules, compliance and enforcement.