Chapter Four
Lesson 4: The History of Taxes and the Power of Corporations
- Originally there were no taxes, except the occasional tax in times of war
- In Britain against Napolean 1799-1816
- In America during the Civil War 1861-1865
- 1874 Britain made income tax permanent
- 1913, an income tax became permanent in the US with adoption of the 16th Amendment
- 16th Amendment, ratified Feb 3,1913: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
- Initially levied only on the rich
- Average Americans today work four to five months for the government just to cover taxes
- 1031 Exchange is technically section 1031 of the Internal Revenue Code
- Allows a seller to delay paying taxes on a piece of real estate that is sold for a capital gain through an exchange for a more expensive piece of real estate
- For a primary resident the exemptions are also favorable
- 250,000 of capital gains are exempt for a single person
- 500,000 of capital gains are exempt for a couple
Here’s an example of how an employee is taxed vs a corporation. The key takeaway is that employees are taxed on their gross income where as a corporation is taxed on their net. Imagine if you deducted your gym membership through a business expense… Or a car… Could potentially save a lot in taxes 🙂
Financial IQ made from 4 things:
- Accounting
- Investing
- Understanding Markets
- Law
My Thoughts
While I’m fully aware of the 1031 exchange I sometimes forget the real power of it and think that I should really start utilizing it. Just think of the huge advantage of real estate over stocks when it comes to paying capital gains. If I want to switch over my shares of Microsoft for Amazon I need to sell my Microsoft first and this could potentially trigger a capital gain and then I have to pay taxes on that gain. This leaves me less money to buy shares of Amazon. In real estate there seem to be more exemptions, and as long as you’re shifting into another piece of real estate, one is able to defer tax. In other words, potential uninhibited compounding.