How Debt & Taxes Make the Rich Richer and the Poor Poorer

How Debt & Taxes Make the Rich Richer and the Poor Poorer

3 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Experience
Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Press
Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Accreditations
Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

Follow
Dave’s LinkedIn
PPR on LinkedIn
PPR on Facebook
Twitter @DAVIDAVANHORN

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In a previous article, “The 20-Something’s Guide to Financial Stability,” I discussed some of the common financial mistakes that are often made by young folks. But it is true that you can be broke at any age.

For me personally, I’ve been both rich and poor. I was raised on government assistance by a working, single mom with six kids, and today, I’m considered an accredited investor.

What I didn’t go very far into in the previous article is the impact of debt and taxes, especially on one’s ability to access capital or build wealth.

Access to Capital

One thing that I recognize is that income inequality and the wealth gap between the rich and poor are growing in this country, while the middle class is shrinking. If I were to narrow it down to one of the biggest reasons for this, it would be one’s access to capital.

Related: Americans: If You Can’t Build Wealth Today, You Should Be Scared. Here’s Why.

The difference is that poor folks don’t have very much access. Just think about when you try to get a loan; it’s often based on your credit, income, and assets. Also, the poor often have to work for or earn all of their money, and then they’re usually taxed the most (as a percentage of earned income).

Maybe the real struggle is getting out ahead of these things. I remember listening to Jim Rohn tell the story about how you can be a good guy, work really hard, and still never get ahead.

It wasn’t until I understood the different types of money and how they’re taxed, along with the various tax breaks available, that I realized the true path to wealth.

As much as debt and taxes made poor folks poorer, it also made rich people wealthier. So, why is that?

male showing empty pockets implying moneyless

How the Rich Utilize Taxes to Build Wealth

When I was young, an old real estate developer I was working for pounded into my head, “It’s not what you make; it’s what you keep.” It’s so true.

Even if you’re a high income earner, like a doctor, you’re probably taxed the highest. In Pennsylvania, you could be handing over close to half of your earned income, and I’m sure in California it’s much higher.

But as a real estate investor, if I had $1 million of rental income, my taxes would be much lower, especially with all the write-offs made available in the tax code. A wealthy real estate investor could then turn around and use the earned $1 million to purchase a $4 million apartment building (utilizing debt, leverage, and tax breaks).

This investor would come out much further ahead, especially since passive income (and portfolio income) is much more favorably taxed than earned income.

Most less well-off individuals just don’t have many deductions, and on top of that, they have the most highly taxed type of income. All the government tax breaks seem to be given to those who benefit society more by providing jobs, housing, or by running things like nonprofits.

How the Wealthy Use Debt

When it comes to using debt, I also see a big difference. Wealthier folks are using things like private equity, government grants, and bank loans. They also have the best attorneys, accountants, and entity structures, as they are always considering the tax implications of everything they do.

For example, if the $4 million apartment building I mentioned before appreciates in value to $5 million, the investor might borrow against that new equity via an Equity Line of Credit and then use that capital to buy a cash-flowing asset or invest at a higher rate than their interest payment. This access to capital is also tax-free, because it’s a loan.

The lower income folks often fall prey to using bad types of debt. By this, I mean debt used to purchase something that goes down in value or doesn’t throw off any additional cash flow.

They often spend more money than they make, and they pay excessive rates and fees for things like insurance, bank loans, and credit cards due to poor credit or because they are considered a higher risk.

The poor and middle class may need more student loans than wealthier students, too.

woman in living room sitting on carpeted floor in front of dark gray couch looking worried, distraught, afraid

Related: Personal Finance Software: 7 Top-Notch Tools to Help You Grow Wealth

I remember my early struggles when attending a more affordable state college. I was commuting for the first two years since I couldn’t afford to live on campus, and I was working four to five nights a week. While my wealthier friends had more time to study or have fun, most of my free time was spent commuting and working. It was much harder to get good grades with all of the financial stress.

At the end of the day, it was and still is all about access to capital.

As the wealth gap and income inequality continue to grow, just be sure to think about how you’re making your money, how it’s taxed, how much you get to keep, what your plan for the money is, and how that use of capital will be taxed.

Today, I’m living proof that it’s not about what you make, but what you keep.

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What do YOU think? Are debt and taxes big contributors to the wealth gap?


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