The Game with Alex Hormozi - How the rich avoid paying taxes...MY strategy - Part 1 | Ep 311

Episode Date: June 24, 2021

Don’t think rich, think wealthy! Today, Alex (@AlexHormozi) talks about the tax strategies that the ultra-wealthy do to maintain their wealth, and get you to change your perspective so you can not only make big changes in your life but also become one of them in the future!Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:08) - Plan where you live for tax advantages.(4:55) - Increase overall net worth strategically.(8:18) - Use assets and loans for wealth growth.(9:52) - Ultra-wealthy understand and play the game differently.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Do think about them because all the friends that I have that are worth 300 million, 500 million, a billion plus, they think about it differently. And so if I can change your perspective around it, you'll realize that most of the things that most people obsess about actually don't matter. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. In this video, I want to talk to you about the tax strategies of the ultra wealthy. And I want to make this because as somebody who is ultra wealthy, I look at a lot of the videos that I see that are propagating around YouTube. from people who are not ultra wealthy describing ultra wealthy strategies despite not being so and doing it based on what they believe they're doing rather than what people are actually doing.

And so I want to use this video as a way to at least break your beliefs around tax strategies overall rather than give you the individual tax things that may change over time. Little tax, you know, hacks. But instead, if you can shift the way that you're thinking about taxes and shift the way to the ultra wealthy do think about them because all the friends that I have that are worth 300 million, 500 million, a billion plus, they think about it differently. And so if I can change your perspective around it, you'll realize that most of the things

that most people obsess about actually don't matter. Cool. So the first thing right off the bat is where you live. So where you live is going to affect your tax strategy simply because, at least for U.S. residents, the state that you live in has a certain tax rate and the country itself at a federal level has a certain tax rate. So number one strategy right off the top is live in a tax-efficient state.

All right. And so I would recommend, I think there's seven or eight states that are zero income tax. You should live in those states. Right. Now, the next level below that is, is getting out of the United States. And so there's only two ways to avoid taxes in the U.S. One is that you stop being a U.S. resident, meaning you become an expatriate. You renounce your citizenship, which obviously has some ramifications. You actually have to pay taxes on everything you own at that point, as though you had sold all your belongings. So, you basically pay capital gains on everything you own that day. So for example, for me, if I were to expatriate, I would have to pay taxes on the worth of all of my companies despite not having sold those companies. And so it's like if I have to still think about it. Like if you're in, most of like my net worth, for example, is in my companies. And so I would have to pay the taxes on all of the value of all of the companies I have, uh, with the liquid assets that I have available to me, um, which would be, you know, almost bankrupt me. Uh, so without the money, right? So I could probably raise debt or do some sort of thing, but anyways, they do it on purpose that way because

they don't want people doing it. But if you don't have a lot of net worth and you want to grow outside, you can do that. So that is totally a strategy. The second and only other strategy besides that is living on an island. So Puerto Rico has a 4% tax rate. You can, if you choose to live in Puerto Rico for six months or more of the year, and you source services outside of the United, of Puerto Rico, you can pay a 4% tax rate at a federal level. That also works in USVI, I use Virgin Islands. There's a lot more hoops you have to jump through. You have to become a professor there. You have to have at least 10 people who work for you in the island that are originals from the island. It can't be people who you transplanted over there. And they do that because

they want to boost those economies. They want to make attractive for people who have money to go there. All right. So those are the only two strategies. But you might be thinking, okay, well, you know, Alex, why are you not in Puerto Rico if you wouldn't have to pay income tax? And for perspective, I paid $18 million in income tax the last three years. So like, It hurts. But the thing is, I've had so many conversations with the internet entrepreneurs of the world who are like, man, I'm moving to Puerto Rico. Why aren't you moving to Puerto Rico? And I think that, you know, decreasing your tax liability, it makes sense a little bit in the beginning of your career.

But it quickly stops making sense because most of us, at least for me, I wanted to make money to live where I wanted to live and have the freedoms that money provides. And so I think what it sometimes does is puts the cart before the horse and says, I want to make money so that I can have freedom. And yet now I'm going to become a prisoner to my money by not by relinquishing my freedom to live where I want to live so that I can have more money. And so in some ways it kind of becomes a backwards equation and we make money the objective rather than the things that money gives us because in and of itself, money has no value. Money only has value in that we exchange it for other things.

And so if I want to exchange freedom for freedom, why would I exchange freedom for money? So think about that for a second. And so that's for me why I'm not moving to Puerto Rico, at least any time soon. I don't think I am unless I'll make a video if I do. And I change my mind. I'll tell you why. But that has been my reasoning around that. Now, if you're below, you know, three, four, five million dollars, it does make sense.

But the thing is, it very quickly stops making sense because once you have, quote, enough money, enough passive revenue that's coming into you, then it doesn't make sense to give up your freedom in order to, or like, continue to give up your freedom of living where you want to live. live. Now, if you like love islands or at least you've convinced yourself that you love islands because you actually like money more, then that's fine. You know what I mean? But that is, that is the first tax strategy around this. Now, the reason that I say this doesn't matter is because if you plug in your wealth into like a retirement calculator and you say, I want to retire at X amount of money, right? If you plug it in, what it'll show you is how much you've contributed to the amount of money that you grow over time. And then how much of the, you net worth that you have at the end of your life or by XD is going to be based on growth.

Here's what's interesting. Given the amount of money I have now, I have a lot of money, right? And despite that, when I plug what I have into the calculator, with me contributing millions of dollars a year to it, the vast majority of the growth still comes from compound interest. It comes from growth of the assets itself, from the wealth itself growing. So here's what's interesting. This is what the wealthy realize. They realize that all of their net worth is going to come from this, not from this.

And so this grows tax-free. So it doesn't matter. Because where you're going to make your money is how you use the money and what you buy. So if I buy something that's worth $100 and I buy it for $30, then I instantly tripled my money. Right. But here's the cool part. That tripling of my money, I don't pay taxes on. And that's where the vast majority of this growth comes from.

It comes from tax-free growth. And it comes from not thinking short-sighted and thinking I have to buy and flip and flip and flip, which is short-term. right the wealthiest people in the world think on on on multiple decades horizons they don't think in these in these months six month one year type type horizons even five year horizons are short for the vast majority very wealthy people that i know real quick guys if you can think about how you found this podcast somebody probably tweeted it told you about it shared it on instagram or something like that the only way this grows is through word of mouth and so i don't run ads i don't do sponsorships i don't sell anything my only ask is that you continue to pay it forward

to whoever showed you or however you found out about this podcast that you do the exact same thing. So if it was a review, if it was a post, if you do that, it would mean the world to me and you'll throw some good karma out there for another entrepreneur. And so that kind of leads me naturally to the third bullet here, which is how slash if you sell. The only reason, you know, capital gains and these other things will affect you is if you sell. But if you buy with the intention of holding for a very long period of time or holding until you die, then you aren't affected by any of these tax things, right? And that's the thing is that everyone thinks so short term.

The people who have the most money in the world realize that life is long and realize that if they just continue to do the game, compound interest becomes an asset. Time becomes an asset instead of a liability. Right. And the tax structure is built for this. Right. So the goal is that you can plow is to decrease how much you spend and how much you live. Plow as much as you can into things that are where you buy, blow what it's worth, and then let it continue to grow and never sell it. And here's what's cool about this.

He's kind of the fourth piece, is the fancy stuff. And there's tons of little things. You know, there's 1031 exchanges. Who knows how long that's going to be around, which is basically you can buy a piece of real estate and then sell it and then take the gains from that and put it to another piece of real estate that's the same without paying taxes.

Candidly, I think it's a complete farce. It's ridiculous that they let people do that. But, I mean, we'll obviously take advantage of it as long as they do. But I can't sell my business and then take my money and put it into another business and not pay taxes. It's just this weird loophole for one thing, which definitely was lobbyists doing their jobs, I guess. But the other thing that ultra-worthy people realize is that you can create these assets, right? And then you can take loans against the assets, and loans are tax-free. And loans that you get against assets are secured loans.

They are not unsecured loans. So a secured loan, you can typically get very, very, very low interest rates on. So, like, for me, I can get loans against my assets for about one to one-and-a-half percent, which is crazy law, right? It's essentially free money. And so that's exactly what it is. And so I can continue to plow my money into these things. They grow at a disproportionate rate tax free. And then I can take loans against those things to live on. Right. And that is what the ultra wealthy friends that I know. They don't sell their things. They take loans against them as they've grown. And so if your assets grow by, let's say, 10% a year and you have $10 million in assets, you don't sell the assets to fund

your lifestyle. You take a loan against the assets and you use the loan money. And that is how you live. And so the tax strategies of the ultra wealthy are realizing that the little hacks and stuff are not the game, right? The game is understanding that you're going to buy things below what they're worth and then you're not going to sell them because they're going to grow tax free as long as you don't sell them. And that becomes the strategy. Sure, if you have something like if you're good in real estate and you can do the 1031 exchanges, absolutely use it. You know what I mean? But you can also buy something, hold it, and then you can refinance it and suck the money back out and buy something else. again, tax free.

And so that's kind of the big picture perspective that I think most people don't understand about the ultra-althy is that they're just not even playing the game that people think they are. Everyone's thinking that they're playing put-put with these six-inch things and doing all these little hacks of captive insurance and easements and things like that. And honestly, sure, some of those things are a little sketchy. They get flipped back and forth by the IRS. A good friend of mine was like, hey, you should do this captive thing with me. I looked at it and I was like, I don't know.

I mean, I guess it makes sense on paper, but it smelled fishy. And guess what? The IRS audited everyone who worked with that company. It's just not worth it to me, right? And so if you can think in the big buckets, all of the net worth of the wealthiest people in the world comes from here. Here. It's not because they're fancy with their tax strategies. It's because they're understanding that they're not even playing the tax game.

And so if you give up, and this is one that I heard from a couple buddies of mine who are doing Puerto Rico thing and there's nothing wrong with that is that they're like hey man 40% you know adds up when you compounds well yeah but so does also the other 60% that is compounding you know what I mean and so no matter what you do the extra 40% is like the it's just 40% more so if I if I die and I never lived in Puerto Rico and I die and I have a billion dollar net worth I could have had a 1.8 billion dollar net worth if I had lived in Puerto Rico because 100% of that money that I would have saved over that time but it's not like you're going to 10x your net worth because of that. You will increase your net worth by the proportion

that the tax saved you, which is 40%. And so that is the idea. And so just big picture, like, if you look at your own income, and again, I said in the beginning, this makes sense because the difference between having $4 million and $10 million is significant. The difference between, you know, $30 million and $60 million or a difference between $100 and $200 million basically makes no difference. And so for me, I'm not willing to sacrifice where I want to live in the freedoms that. that I supposedly started this journey for, which is the freedoms to do X, Y, and Z. But I will tell you this as my freedom journey

has continued to evolve. Now that I have the freedom to do all of X, Y, Z things, I think the best thing that I've thought of recently, and this came from a book that I just read, is that it shifts to freedom from. Because at the end of the day, money can only solve money problems. And most of the problems that we suffer as humans are not money problems.

So as much as I tell you all of these things, I do that with the intention that you get to the point that you realize that it really won't change your life very much. It'll just solve the problems that money can solve. And then you'll be left with all the problems that money doesn't solve, which is two-thirds of the problems in life, which are usually health and happiness. And so, anyhow, hope that, I hope you got value from that. Keep being awesome. Maybe I'll do a breakdown of kind of our wealth strategy and the stuff that we do. There's some cool whole life things that you can put in here where you can contribute money into something that has guaranteed income, that you can take loans against, kind of that fancy stuff.

and I'll do that in another video. But hope you found value from this, subscribe, and I'll see you next video.