Was checking out this interview. He talks about when the owner sold the company and this employee who helped get things going, gets a 3M cheque. It'd be like a super "bonus", I guess. But then has to write a cheque for 1M to the IRS. Seems like there's no way around it because if you get a bunch of money you have to pay a third to the tax man.
Then I was thinking.. what about when somebody sells a house and they get a bunch of money. Right there, you probably have to pay a third to the tax man. However.. you'd think it's like.. whatever goes on during the year, and profit or losses, that you'd have to pay the tax man on. But it sounds like "no".. if you sell a house you'd better transfer a third of those profits to the tax man right away, while you got the money.. because if you screw around with it, you might not have it to pay the tax man with, at the end of the year.
Then I was thinking about people who buy houses once the price has gone down, over the years and is starting to go back up. Then they hang onto it for a while, and get rid of it before it starts to come down again. See the attached chart for those down points before it starts to go back up.
Yet, with this idea.. of when you sell the house and have to pay a third to the tax man.. it'd "negate" any gains you'd get from this buy low, sell when it goes back high. Like if you gotta pay a third to the tax man, you're gonna have a hard time getting a profit off this idea. But even if you buy at the wrong point, and hang onto it for a few decades, it seems to still go up and you get gains there. But this whole, having to pay the tax man a third of and money you get there..
Meanwhile, the super rich get around all this, probably, somehow. Seems more like the handing it over to their kids, where they really screw the tax man around. They do stuff though while they're alive and do stocks and borrow from that and the money they get there, they don't pay the tax man on. But they gotta pay that loan back eventually.. how do they do that, right.
And then stocks.. you can do whatever and you only gotta pay the tax man if you cash it out. They probably got some way to do who knows what to get rid of some but as soon as they do that, they'd have to pay the tax man a third on any cash they get from selling anything. No.. they got ways around that I bet. And it's not just this seeming like a philanthropist.
(I attached a few files from here lately.. the how the rich get richer without having cash. Then the couple files of, house prices over decades, inflation adjusted, compared to what people would get paid in the bank)
This is a fascinating set of questions about taxation on capital gains, particularly for different types of assets like stock options, real estate, and stocks, and how very wealthy individuals often employ strategies to minimize or defer their tax liability.
Here is an analysis of your points, keeping in mind that tax laws are complex and vary by jurisdiction (the US is assumed for the context of your examples). Crucially, the "one-third" or ≈33% tax rate you mention is a generalization, as the actual rate depends on income, jurisdiction, and the type of gain (short-term vs. long-term).
Taxation on Financial Gains (The "Third to the Tax Man") The "third" you are referring to is an approximation of the Capital Gains Tax. This tax is generally paid on the profit (or "gain") from the sale of an asset, like stocks or real estate, not on the total sale price.
- Stock Options/Wages ([bonus guy]'s Example) [bonus guy]'s situation with the $3 million check likely involved a combination of income:
Wages/Bonus/Salary: Taxed as Ordinary Income, which can be subject to federal income tax rates as high as 37% (plus state and local taxes, making a third a reasonable estimate).
Stock Options/Grants: The gain from exercising or selling stock options is often also taxed as ordinary income, especially for incentive stock options or non-qualified stock options, upon certain events.
In this scenario, the company would likely have withheld taxes from the $3 million check before he received it, or he'd be required to pay estimated taxes right away to cover the future liability. If he received $3 million gross and had to write a check for $1 million, that ≈33% was his tax obligation on that income.
- Real Estate (Selling a House) When selling a Primary Residence, US tax law provides a major exclusion that often negates the capital gains tax for most homeowners:
Primary Residence Exclusion: Single filers can exclude up to $250,000 of profit from capital gains when they sell their main home, and married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and lived in the home for at least two of the five years leading up to the sale.
The Gain: You only pay tax on the profit (Sale Price - Purchase Price - Cost of Improvements - Selling Expenses).
Impact on Buy Low, Sell High Strategy: For a primary residence, this exclusion makes the strategy very tax-efficient. If you buy a house for $100k, sell it for $500k (a profit of $400k), and you're married, you pay $0 in capital gains tax because the gain is under the $500k limit. Your gains are largely preserved, which is why real estate is considered an excellent long-term wealth builder.
For Investment Properties (rentals, flips), the exclusion does not apply, and capital gains tax is due on the profit. However, there are tax deferral strategies like the 1031 Exchange (where proceeds are rolled into a new investment property) that can defer the tax payment.
How the Super Rich Avoid (or Defer) Taxes The wealthy rarely "screw the tax man" through illegal means, but they utilize sophisticated, legal strategies to defer (postpone) paying taxes and to ensure their wealth is taxed at the lowest possible rates.
- Borrowing Against Assets ("No Cash" Strategy) This is a core strategy for the ultra-wealthy, particularly those with a lot of stock in their own company (like founders):
The Mechanism: An individual with $1 billion in stock might take out a loan (a "securities-backed line of credit") for, say, $100 million, using their stock as collateral.
The Tax Benefit: Loan proceeds are generally not considered taxable income because they are debt that must be repaid. This allows the wealthy individual to access cash without selling their appreciated assets, thus deferring capital gains tax.
How They Pay the Loan Back:
Asset Appreciation: If the stock grows faster than the loan interest, they may sell a small portion of the stock later, when needed, to pay the loan off, or pay it with dividends or other income.
The Final Deferral (Step-Up in Basis): The ultimate move is to hold onto the stock until death. When the asset is passed to their heirs, the tax cost basis of the asset is "stepped up" to its fair market value on the date of death. This means the heirs can immediately sell the asset for that current value and pay virtually no capital gains tax on the lifetime of appreciation (including the gains that paid off the loan).
- Tax on Stocks: Only When Cashed Out You are correct: you only pay tax on a stock's gain when you sell it (realize the gain).
Long-Term vs. Short-Term: The tax rate depends on how long you held the asset:
Short-Term: Sold after held for one year or less. Taxed as Ordinary Income (highest rates).
Long-Term: Sold after held for more than one year. Taxed at preferential Long-Term Capital Gains rates (currently 0%, 15%, or 20% federally, depending on income, which is significantly lower than 37%).
- Wealth Transfer and Philanthropy Gifting (Passing to Kids): The wealthy use sophisticated tools like trusts and lifetime gifts to transfer assets. While there is a Gift Tax, the lifetime exclusion is very high (over $13.61 million per person in 2024), allowing immense wealth to be transferred tax-free.
Philanthropy: Donating appreciated stock to a Donor Advised Fund (DAF) or a private foundation is a major tax strategy. The donor gets a tax deduction for the full market value of the stock and avoids paying capital gains tax on the appreciation. The money then sits in the fund, under the family's influence, waiting for distribution to charities.
So with the house flipping they can get away with some "profit" without having to pay the tax man, eh?
That's an insightful question, and it gets right to the heart of the difference between a homeowner and a professional flipper in the eyes of the tax authority.
The short answer is: For a true house-flipper, the big tax break is generally NOT available.
The ability to "get away with some profit" tax-free is tied to the Primary Residence Exclusion, and there are two main rules that professional flipping activities tend to violate:
- The Intent Rule (The Flipper's Biggest Hurdle) The crucial tax break you mentioned ($250,000 for single, $500,000 for married couples in the US) only applies to the sale of a property that qualifies as your "Principal Residence".
Flipping is a Business: Tax authorities (like the IRS in the US) generally consider house-flipping to be a business activity or "an adventure in the nature of trade." The profit from a business is taxed as Ordinary Income (like wages), not as a Capital Gain from a personal residence. Ordinary Income rates are much higher than long-term capital gains rates.
No Exclusion: Since the primary purpose of the house was to generate business income (profit from buying, renovating, and quickly selling), the Principal Residence Exclusion does not apply to that profit. The entire profit is generally taxable at their highest marginal income tax rate.
- The Two-Year Rule (The Homeowner's Strategy) To qualify for the Primary Residence Exclusion, you must have owned and lived in the home as your main residence for at least two of the five years leading up to the sale (the "2 out of 5 year rule" in the US).
How a Homeowner Gets the Break: A person who buys a fixer-upper, lives in it for two years while doing the renovation, and then sells it, can use the exclusion to keep up to $500,000 in profit tax-free. This is a common strategy to legally combine renovation profits with the tax break.
The Flipper's Issue: True house-flippers want to turn properties over quickly (often in 6 months to a year). Since they don't live in the house for the required two years, they cannot claim the exclusion.
Summary: Activity Tax Rate on Profit Exclusion ($250K/$500K) Primary Residence Sale Long-Term Capital Gains (lower rates) or 0% YES, if lived in for 2 of 5 years Professional House Flip Ordinary Income (highest rates, like a job) NO, because it's a business
Export to Sheets So, a person who truly "flips" houses for a living is paying tax on essentially 100% of their profit, and often at the highest possible tax rates, because it is classified as business income.
so these house flippers still gotta pay the tax man a third when they sell it.. That'd probably negate any profit they'd make by the way it goes up over decades
That's an excellent point about the tax rate potentially negating a large portion of the profit. You're absolutely right that the tax man takes a very large bite out of a true flipper's gain.
Here's a breakdown of why, and how a flipper still manages to make a profit:
- The Tax Rate Is High (It's Ordinary Income) You hit on the key issue. Since the profit from flipping is considered Business Income (or a Short-Term Capital Gain if sold in less than a year in the US), it is taxed at the highest individual Ordinary Income rates.
Top US Federal Rate: Can be as high as 37% (plus state taxes and a 3.8% Net Investment Income Tax on top earners). A "third" (around 33%) is a fair estimate for many high-earning flippers, and the rate can easily be higher than that.
Canadian Tax: In Canada, business income is 100% taxable at the individual's full marginal tax rate (which can exceed 50% in some provinces). This is much higher than the capital gains inclusion rate (which is currently 50% for most, though recently proposed to increase for gains over $250,000).
- Why Flipper Profit Still Works (The "Short-Term" vs. "Decades" Factor) The key difference that allows a flipper to make money, even with high taxes, is the speed of the transaction and the amount of profit they create themselves.
Factor Homeowner (Decades) Flipper (Short-Term) Source of Value Market Appreciation: The house value goes up over 20+ years. Forced Appreciation: The flipper creates the value with renovations in a few months. Average Hold Time Decades (e.g., 20+ years) Months (e.g., 3 to 9 months) Gross Profit Often lower as a percentage, but high total dollar value. High gross profit (The US average gross profit is around $66,000 to over $70,000 per flip). Return Metric Focus on long-term capital preservation and slow growth. Focus on Return on Investment (ROI) and speed.
Export to Sheets A flipper isn't looking for the house to slowly appreciate over decades. They are buying an asset at a deeply discounted price, aggressively increasing its value through renovations, and selling it quickly to realize a large, immediate gain.
Example: Flipper Math Let's use a rough average US gross profit figure:
Gross Profit: $70,000
Estimated Tax Rate: 35%
Tax Paid: $70,000×0.35=$24,500
Net Profit (After Tax): $70,000−$24,500=∗∗$45,500**
For a professional flipper who can do this 3 or 4 times a year, that adds up to a substantial annual income, even after paying their high tax bill. Their income comes from creating value through work, not just waiting for market growth.
[continued in comments]
There’s this strategy called “buy and hold”— it isnt just blackrock—- they dont rent the house or anything. They just buy it, and let it rot from the inside. Then they can write off depreciation— like pipes bursting and running full blast for weeks, whole house infestations with various critters, etc. where no hoa or city ordinances exist—they dont even mow the lawn
They are absolutely financial terrorists and fraudsters.
[part 1]
yeah so these house flippers it'll be like I don't know.. but yeah not decades, eh.. yet you're sounding like they can still make money even though they gotta pay the tax man a third when they sell it
That's exactly the right takeaway!
You're correct: a flipper's profit comes despite the heavy tax hit, not because they avoid it. The reason they can still make money boils down to three core factors:
Example: A house could sell for $400,000 after a $50,000 renovation.
The flipper won't pay more than ($400,000×0.70)−$50,000=∗∗$230,000∗∗.
This leaves a $$400,000 - ($230,000 + $50,000) = $120,000 gross gap to cover all fees and profit. That cushion is how they absorb the 33% tax bill and still walk away with a significant net amount.
The profit they pay taxes on is Net Profit, not just the difference between the buy/renovate/sell price.
Deductible Expense Categories What it Includes Cost of Goods Sold Purchase price, all renovation costs, and all costs to get the property ready for sale. Carrying/Holding Costs Mortgage interest (on the flip loan), property taxes, insurance, utilities, and HOA fees paid while they own the house. Selling Costs Realtor commissions (often 5-6% of the sale price), closing costs, legal fees, and staging costs. Business Overhead Costs for running the flipping business itself, like a portion of a home office, vehicle mileage to and from the site, and accounting fees.
Export to Sheets By meticulously tracking and deducting all these costs, they significantly reduce the dollar amount that the "tax man" is taking a third (or more) of.
They aim for a decent profit margin (say, $40,000 net profit) and try to do that three or four times per year.
This is far more lucrative than a single investor waiting years for a smaller, lower-taxed profit. Their return comes from the labor and efficiency of the short-term business operation.
So yes, you're right to be skeptical of the high tax rate, but the flippers counter that by engineering a massive profit gap and then running a very tax-efficient business operation.
What about this part here:
"The Final Deferral (Step-Up in Basis): The ultimate move is to hold onto the stock until death. When the asset is passed to their heirs, the tax cost basis of the asset is "stepped up" to its fair market value on the date of death. This means the heirs can immediately sell the asset for that current value and pay virtually no capital gains tax on the lifetime of appreciation (including the gains that paid off the loan)."
So if the kid inherits a place and tries to get rid of it, sounds like they don't have to pay a third to the tax man?
That's an insightful question, and you've hit on one of the most powerful and criticized parts of the tax code, often referred to as the "angel of death" loophole in the United States.
Your understanding is generally correct, especially if the property is inherited in the United States. The key concept is the "Step-Up in Basis."
How Stepped-Up Basis Works (US Tax Law) Original Basis (Parent/Deceased): Let's say the parent bought the house 30 years ago for $50,000 (this is their "cost basis"). When they die, the house is worth $500,000. The lifetime appreciation is $450,000. If the parent had sold it the day before they died, they would have paid capital gains tax on that $450,000 (assuming it wasn't their primary residence).
The "Step-Up": When the child inherits the property, the tax law "steps up" the cost basis. The child's new cost basis is $500,000 (the Fair Market Value on the date of death).
The Sale: If the child sells the house a month later for $500,000 (its new basis), their profit (capital gain) is:
$500,000 (Sale Price)−$500,000 (New Basis)=$0 Capital Gain The result: The child pays virtually no capital gains tax and definitely not a third of the $450,000 appreciation that occurred during the parent's lifetime. All that appreciation is effectively erased for tax purposes.
Important Caveats (If discussing Canada): If you were talking about Canada, the rules are a little different, though the end result for the beneficiary is similar:
Deemed Disposition: When a person dies in Canada, the Canada Revenue Agency (CRA) treats it as if the person sold all their assets (including real estate) immediately before death for their Fair Market Value.
Tax Bill to the Estate: The estate of the deceased must pay the capital gains tax on the appreciation. For example, if the house went from $50,000 to $500,000, the estate pays the tax on the $450,000 gain.
The Beneficiary's Clean Slate: Once the estate pays that tax, the beneficiary inherits the property at its Fair Market Value ($500,000 in this example). This effectively gives the beneficiary a "stepped-up basis" as well. If the kid sells the place right away for $500,000, they have no additional gain and pay no tax.
In either country, if the kid inherits the house and sells it immediately for the inherited value, they won't pay the big capital gains tax. That tax is either eliminated (US rule) or paid by the estate (Canadian rule).
yeah so in canada they get fucked over and the kid would have to pay a third to the tax man
That sounds frustrating. The tax treatment of inherited property in Canada can be complex and depends a lot on the specific circumstances.
In the scenario you're describing, where a property is left to a child, here is a general breakdown of how the capital gains tax usually works:
"Deemed Disposition" on Death: When a person dies in Canada, the Canada Revenue Agency (CRA) treats most of their capital assets (like real estate that is not their principal residence) as if they were sold immediately before death at their Fair Market Value (FMV).
The Estate Pays the Tax: Any resulting capital gain (the increase in value from the original purchase price to the FMV at death) is reported on the deceased person's final tax return. The deceased's estate is responsible for paying this tax. This tax is settled before the assets are distributed to the beneficiaries (the "kid" in your example).
The Principal Residence Exemption: If the property was the deceased person's principal residence for every year they owned it, the entire gain can usually be eliminated by claiming the Principal Residence Exemption (PRE) on the final tax return. In this case, no capital gains tax would be owed by the estate on that property.
Therefore, for an inherited house in Canada:
If it was the deceased's principal residence: There is likely no capital gains tax on the pre-death increase in value.
If it was a secondary property (e.g., a cottage or rental): The tax on the gain up to the date of death is paid by the estate, not the inheriting child. This reduces the value of the estate before the child receives it.
The Child's Tax Responsibility:
The child receives the property with a new cost base equal to the Fair Market Value at the date of death. The child would only have to pay capital gains tax later if they sell the property for more than that value.
It's common for the overall taxes due upon death to be significant, which is why people often feel like a large portion is being "paid to the tax man." However, in the case of a home, the Principal Residence Exemption often eliminates the largest tax bill for the home itself.
Disclaimer: I am an AI and not a tax professional. This is general information and may not apply to your exact situation. For specific advice, it is always best to consult with a qualified Canadian tax or estate lawyer.