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TRUMP UNIVERSITY WEALTH BUILDING 101

your income and how to build wealth. Now let’s take a closer look at these
different types of income.
Earned income is income you earn for your personal services and is
subject to both income tax and self-employment tax (Social Security and
Medicare). The most common type of earned income is W-2 wages. Net
income from a self-employed business (filed on Schedule C) is also consid-

ered earned income. You want to minimize or avoid earned income as much
as possible because it is taxed most heavily.
Passive income is income that you generate from something other than
personal services. Passive income is subject to income tax, but not self-
employment tax. The most common type of passive income is rental property
because the income generates from the value of your property, not the value
of your personal services. You can also generate passive income from your
personal involvement, or lack thereof, in your business. Certain business
entities such as limited partnerships can create passive income. We’ll talk
more about these a little later.
Portfolio income is income you earn on your investments. This type of
income includes interest, dividends, and capital gains. This type of income
is subject to income tax, but not self-employment tax and, in this way, is
similar to passive income. There’s one big difference, though, between pas-
sive and portfolio income: you pay less tax on portfolio income when
you generate capital gains, which currently are taxed at a maximum rate of
15 percent.
Sooner or later, I believe this preferential rate will expire, so take advan-
tage of it now. High-end taxpayers understand this, and won’t let this break
pass without taking full advantage of it. You shouldn’t either. If there’s an
investment you’ve been holding onto, but were afraid to sell because of high
capital gains taxes, now might be the time to sell if you can maximize your
overall return.
Deferred income is income on which you don’t currently pay tax, but will
at some point in the future. Retirement plans are an easy way to set up
deferred income; you take a current deduction today for the amount you
contribute to your retirement plan, but pay tax when you withdraw money at
retirement. Hopefully, that will be many years from now, when you may be in
an even lower tax bracket than you are currently.
A Section 1031, or similar, exchange is another way to generate tax-
deferred income. You can sell a piece of property at a gain, but defer the tax
by acquiring another investment property. There are certain parameters you
must meet, and tax-savvy investors are smart to study all the ins and outs of
Section 1031 exchanges.

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