Two Ways that the 3 Types of Income Are Taxed with Josh Cantwell – EP 363

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One thing that many real estate investors have in common is they have multiple income streams. Whether it’s W-2 income, businesses they own, stock, or real estate, however you’re making money, you need to understand the two types of taxes.

Here’s the thing: our tax code is set up to benefit the elite. It punishes employees and employers alike–and is designed to work this way.

In today’s episode, I’ll explain why people like Bill Gates and Elon Musk would choose to take home a salary of $1 (spoiler alert: it’s not because they’re feeling charitable or selfless!), why the elite are playing a completely different game when it comes to taxes, and why true passive income gives you the power to turn a profit while reporting a loss.

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Key Takeaways with Josh Cantwell

  • Why business owners, the wealthy, and the super-rich never want to take a W-2.
  • The key difference between W-2 and capital gains income–and what makes capital gains better.
  • Why true passive income comes to you tax-free and can even help you achieve a negative K-1 on positive cash flow.

Josh Cantwell Tweetables

“The United States tax code has essentially set itself up in such a way that you're penalized for being an employee. You're actually given benefits by starting your own business.”

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Josh Cantwell: So, hey, guys, listen, welcome back to Accelerated Investor. Hey, it’s Josh. And today I wanted to talk to you about the three different types of income and the two different types of taxes. That’s what we’re going to talk about today on today’s podcast. Here we go.




Josh Cantwell: All right. So, guys, we’re back. Listen, I’m excited today to be with you and I know I’ve been talking with a ton of our investors lately, people who invest with us, people who have hundreds of thousands, millions of dollars with us in our multifamily deals. And I often talk to them about the different types of income, the different types of income that they make, whether it’s from their job, whether it’s from their company, whether it’s from their stock options, whether it’s from their real estate investments. So, I think it’s worth spending a few minutes here talking to all of you about the different types of income and the two different types of taxes. Ready. So, here we go.


So, if you think about it, the first type of income is what most people are used to. That is when they have a job. It’s W-2 income. And if you think about that W-2 income, how much does that income get taxed? Well, it gets taxed at the highest rate. Not only does it get taxed as income from the federal government but also you end up having to pay state taxes. You have to pay Social Security tax that often you’ll contribute to your 401(k) and then pay for your health insurance. And so, by the time all that is done, you’ve gotten whacked for probably 50% of your income or 40% of your income is gone. If you think about the different types of CEOs that you may have heard of, the CEOs like Elon Musk or Steve Jobs, we always hear in the news that they’re working for these companies and they’re working for these companies making a $1 of income. Now, why is that? Why do you think that they would bother to work at a company and make a $1 of income? You ever think about that? Why would they do that? Well, the reason why is because they know that the W-2 income is where you pay the absolute highest amount of taxes. So, they don’t want any W-2 income.


And if you think about owners, the wealthy, the elite, the rich, they never take a W-2. Okay. Again, most CEOs never take a W-2. It’s not because they’re charitable. It’s not because they want to be charitable to their business and work for free. It’s actually the opposite. They would rather just work for equity and cash flow that they don’t have to pay taxes on. They don’t have to pay the federal government, the state government, and then, of course, Social Security income. So, the W-2 income is taxed the most. It’s taxed heavily. And so, the United States tax code has essentially set itself up in such a way that you’re penalized for being an employee. You’re actually given benefits by starting your own business. So, the first type of income is earned income. It gets taxed at the highest rate. Maybe you’re a computer programmer, a salesperson, a doctor, a lawyer, professional athlete. You’re making a million bucks a year. The government takes half of that. That’s the first type of income.


The second type of income is the capital gain income or portfolio income. This involves buying and selling companies, buying and selling stocks or real estate. It’s your portfolio that you own. It’s about, you know, I’m worth whatever you’re worth. It’s my real estate portfolio, my stock portfolio. I own maybe a series of different companies, e-commerce businesses. You buy it, you own it, you own it for at least a year, and then you sell it. And in that portfolio income, you’re going to pay capital gains taxes, probably somewhere between 15% to 20%. A lot of guys, again, that will start a business or buy a piece of real estate or buy a stock will try to hold it for at least 12 months and a day. And if they hold it for 12 months and one day, then it goes from earned income to portfolio income or capital gains taxes. And so, that type of portfolio income, that capital gains tax, the rich, if they play that game, they don’t play the W-2 game. They play that game. They’re playing a different game than you are.


And so, the last type of income, which you pay no tax on is what’s called true passive income. True passive income is income that you make from the cash flow of your business or the cash flow of your real estate. And because the government allows you to depreciate that asset that you buy, it offsets the rental income so that you never pay taxes. And not only that, but you often get a negative K-1. We often talk with my investors about them getting a negative K-1, a K-1 where they’re actually going to show a loss even though they’ve gotten passive cash flow.


And so, let me ask you a question. So, which type of income would you rather have, W-2, portfolio or capital gains income, or passive income? Which type of tax would you rather pay? Would you rather pay taxes on earned income, which is the highest rate? Would you rather pay taxes on capital gains tax on portfolio income? Or would you rather pay no tax ever on passive income? You see, the rich never take a W-2. They would rather work for equity. That’s why you need to own assets, assets like real estate, apartments, businesses where you can build equity and you can make profits but you get income from cash flow now, cash flow that you can live on or you can build an amazing life all while you’re paying the government $0 in taxes.


I probably pay out every year somewhere it’s millions of dollars a year, millions of dollars a year to our limited partners and we made distributions every quarter. And then at the end of the year because it’s passive income, it’s passive cash flow, they get a K-1, and that K-1 includes depreciation. And so, they end up getting cash flow. Let’s say it’s a 6% pref return or 8% pref return or 10% pref return or we’ve refinanced. They’re no longer getting their profit because they’ve got all their equity back and now they’re just getting their quarterly distribution from the income that comes from the real estate. So, let’s say they own 2% of a building and the building is making $400,000 a year. They’re making $8,000 a year. They have zero money in the deal. They’re making $8,000 a year but they get a K-1. Because of the depreciation, they actually show a loss. We call that a negative K-1. So, it’s more important than ever. It’s more important to me. It should be more important to you. It’s more important than ever to my limited partners to have passive cash flow right now to pay your operating expenses, the operating expenses of your house, the operating expenses of your family but to live a full, a fun life, and a life full of joy and have incredible experiences with your family and to stop worrying.


I mean, who cares about interest rates and inflation and taxes if you have true forever passive income? If you have true forever passive income and you’re getting income with no tax, then do you really care about interest rates? Do you really care about inflation that much? You certainly don’t care about your tax bracket because you’re not paying taxes. So, it’s very important that you understand that that’s the game that the federal government wants you to play. They’ve set up the tax code for the rich. Earned income? Eeh, don’t do it. Portfolio income? Okay. You’re only paying capital gains but that’s only when you sell the asset. So, if you hold the asset, you never pay portfolio income, you never pay capital gains. But the passive income that you make from your business or from rents and you could offset by depreciation of your assets is the absolute best income to make.


Now, if all this sounds good, these three different types of income, these two different kind of taxes, the one taxed, obviously, you never pay any taxes then I want you to consider coming to our event that we put together. I put together a special event just for you. The event will focus on commercial apartment investing techniques that you can incorporate without changing what you’re currently doing and without disrupting your current income. So, if you’re making a W-2 income, great. I don’t want you to stop. I don’t want you to quit doing that, like just keep doing what you’re doing to make that income but just tack on these additional techniques, right? Expand into apartments, create cash flow, reduce or eliminate your taxes legally. And at our Forever Passive Income events, you’ll learn how to acquire these properties, how to structure joint ventures, raise millions of dollars of private capital, and how to have multiple exit strategies. Of course, we like to hold our buildings for the long term because the longer you sell them, then you never pay the capital gains income, you never pay the portfolio income.


So, at this event, you’re going to learn exactly how to create more cash flow in equity in one year, investing in apartments than you could have created in ten years in a W-2 or ten years if you’re doing residential investing. If that sounds like you’re ready to jump into that and have forever passive income and pay way less in taxes or no taxes at all, visit us online at There you can get a discounted ticket for our upcoming Forever Passive Income Live. Listen, the event is virtual, alright? You can do it right from your home computer or even right from your phone. You download Zoom. You can listen right from your phone. So, jump into this special opportunity to get the discounted pricing. You got to learn these different types of income and how to pivot from earned income, from W-2 income in the true passive income and pay no tax. If you’re interested in that, join me at All right. We’ll see you then. Take care.


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