There are some secrets to generating wealth. Of course, working hard and saving for the future are two paths to success. That’s what many people do. Perhaps it’s more accurate to say that’s what most of us do.
The wealthiest people also work hard and save. But their secrets make their money work harder. While we may not be able to duplicate all of their tricks, we can still learn from them to help us on our own path to financial freedom.
To start with, we’ve all seen or heard about wealthy people making extravagant purchases. Those may appear reckless or wasteful to the average person.
But to learn from the rich,
The Advantages of Buying Big
Last month, the NFL approved the sale of the Washington Commanders. Josh Harris and his partners paid $6.05 billion for the team. Earlier this year, a group led by a Walton family member paid $4.65 billion for the Denver Broncos.
It’s not just football. The Phoenix Suns (NBA) and Mercury (WNBA) teams sold for $4 billion. Last year, hedge fund manager Steve Cohen paid $2.4 billion for the New York Mets baseball team.
Do these prices make sense?
If you value a team based on its annual income, probably not. Investors can find better returns in other ventures.
Some believe that sports team ownership boosts the egos of billionaires. Maybe. But they didn’t become billionaires by spending large sums to make themselves feel better.
The real benefit of owning a sports team could come down to taxes. Owners get a significant deduction after they buy the team.
Depreciation at Scale
Small-business owners get a similar tax break. Let’s say you decide to be an Amazon delivery driver. You buy a van and get a contract with Amazon. You deduct expenses from revenue to fund your income. You have regular expenses like uniforms, gas and van maintenance.
You also have depreciation. Maybe your van cost $40,000. The IRS understands that it loses value. Tax rules allow you to recognize part of that loss every year. Maybe you depreciate the van over four years. That means you deduct $10,000 from your income for four years.
Depreciation doesn’t require cash out of pocket today. You will have to replace the van someday. The depreciation deduction can help you save up for that.
Lowering your income by $10,000 reduces your income tax. This can save you $2,500 a year, more or less, on taxes. That is cash in your pocket.
Depreciation is a standard accounting tool. It recognizes the reality that the van might sell for just $5,000 in four years. The business owner lost $35,000 on the sale. But the loss didn’t really occur on the day of the transaction. The van lost a little value every day you owned it. Depreciation accounts for that.
Now, back to Josh Harris. He owns 51% of the Commanders after the recent deal. His stake is worth $3.09 billion. Teams are usually depreciated over 15 years. That’s an annual deduction of about $205 million.
Harris is obviously rich. His income could easily be several hundred million dollars a year. Buying the Commanders just made $205 million of that income tax-free. This might save him more than $100 million a year.
That’s a lot of money. But it’s an even better deal than that.
Unlike the van, an NFL team doesn’t lose a little value every day. They don’t depreciate. Sports teams appreciate in value. When Harris sells, the team may be worth $10 billion. The IRS will recover taxes on the depreciation he claimed. Or maybe not. If Harris owns the team until he dies, his heirs can avoid that tax bill.
I don’t think anyone reading this is going to buy a major league sports team. But it’s just a matter of scale.
You might be in a position to benefit from the purchase of a local, minor-league team. Or you might be able to deduct the costs of sponsoring a youth sports team. Those activities are the kind of thing many of us enjoy.
You don’t need to generate millions of dollars a year to take advantage of certain strategies and tactics that can lead you to greater financial success.
The Path to Endless Income
We can learn several general lessons from the rich. One is that dying can reduce taxes.
Our heirs might have lower tax bills. This means it might make sense to use options to preserve wealth in some assets. Or you may consider borrowing against large gains. This is a complex tax question and your adviser might have some good ideas.
Another lesson is that businesses can have tax benefits. Again, your tax adviser can provide guidance.
Our Money & Markets team can also help you navigate your way to wealth.
The team is getting ready to publish a new book on Tuesday, August 29: Endless Income: 50 Secrets for a Happier, Richer Life.
With this book in hand, you’ll be able to make smart investments that can create real streams of endless income and help banish any fear of running out of money.
Whether you want to collect gold royalties without owning a gold mine … become a lazy landlord and collect income without owning property … or turbocharge your 401(k), or IRA, by being FIRE’d … it’ll all be right at your fingertips.
So set a reminder for Tuesday, August 29. That’s when you’ll be able to get a free copy of Endless Income when you try Green Zone Fortunes risk-free.
Until next time,
Mike Carr
Senior Technical Analyst