S3E10 – Noah Rosenfarb – How to reduce capital gains tax to 0%

Key Timecodes

• (00:40) – Show intro and background history
• (01:24) – Deeper into his background and business as a financial planner
• (03:35) – Understanding his strategies to avoid paying high taxes
• (05:33) – How does he set up businesses in foreign countries to avoid taxes
• (06:49) – How to establish SAAS businesses working with remote teams as a strategy
• (07:51) – How money flows between countries in this type of business
• (08:56) – Understanding his philosophy as a financial adviser
• (11:34) – Deeper into his real estate investing strategies
• (15:46) – The importance of a great team and leadership skills for success as an entrepreneur
• (18:26) – What business model is the most attractive to build and sell?
• (20:23) – A major key takeaway from the guest
• (23:42) – The worst advice he ever received
• (24:09) – The best advice he ever received
• (25:33) – Guest contacts

Transcription

[00:00:04.090] – Intro

Hey, this is Sean Tepper, the host of Payback Time and Approachable and Transparent podcast on business investing in finance. I’d like to bring on guests to hear authentic stories while giving you actionable takeaways you can use today. Let’s go. If you’re looking to build and sell a business and want to avoid a big tax payout, it all starts in the planning phase. My next guest as a CPA with some creative strategies that help entrepreneurs reduce and even avoid corporate tax and capital gains tax. If you’re looking to build and sell a business, this episode is perfect for you. Please welcome Noah Rosenfarp. Noah, welcome to the show.  

[00:00:41.890] – Sean

Thanks for having me.  

[00:00:43.220] – Sean

Well, first off, could you tell us about your background?  

[00:00:46.890] – Noah

Sure. I’m a third generation CPA, got started working in my dad’s accounting firm, helped him scale it from twelve people when I joined to 70 when I left. Sold it to a top 20 accounting firm and I started a family office for affluent divorced women. Sold that business in 2014, was semi retired for a number of years doing some private equity investing, investing in real estate. And then in 2020, I opened a family office for entrepreneurs, basically to serve my own family. And we opened it up to other families as well. And that’s what I’m doing now.  

[00:01:24.720] – Sean

Nice. Let’s talk about this business right away. So you’re a financial planner, right?  

[00:01:29.950] – Noah

Yeah, I don’t have a designation of a financial planner anymore, but I used to in the past.  

[00:01:35.140] – Sean

Okay, got it. Okay, so why don’t you tell us about what are the types of products or investments your customers can get involved with?  

[00:01:43.440] – Noah

Sure. So everything we do starts with planning. So we charge a planning fee, which is not necessarily common in our industry, but in addition, we make asset management fees. We manage money stock and bond, publicly traded stock and bond portfolios for which we charge a fee. In addition, we are licensed to sell insurance, so we collect commissions on that. We buy a lot of real estate. We own 6000 units of multifamily housing around the country. And when we put those deals together, we get promoted fees. We make money when our investors make money. We’ve got a couple of private funds, private debt fund, and then we have like kind of an exploratory alternative fund where clients just follow my capital into deals that I’m investing in and I get a bit of a carry on their investment as well. And then one of the really unique things we do is we help entrepreneurs develop their tax strategy and some of the strategies that we implement, we get success based fees. A pretty cool and unique differentiator let’s dive into that.  

[00:02:45.810] – Sean

Success based fees? How does that work?  

[00:02:47.960] – Noah

So I was just coming off a call with a client claiming to sell his business for 50 million later this year. Two partners and then the employees own about 20% phantom equity so each owner would get about 20 million gross in the transaction. And they’re trying to figure out, well, what do we do? One of the structures that we leverage is designed in such a way that in addition to many benefits like asset protection, like estate planning, there’s also a capital gains tax benefit where the client essentially pays no capital gains tax on the transaction. So as a result of completing that transaction, in his case, individually, he might save $5 million. We might receive a success base of about a million dollars.  

[00:03:35.410] – Sean

Okay, let’s talk about that because we have a lot of entrepreneurs in our audience and people are looking to build and sell a business. And one of the biggest fears there is the tax payout. Uncle Sam, especially here in the states, is going to want his cut when you pay taxes. So how do you shelter the tax? How do you avoid paying that tax?  

[00:03:54.410] – Noah

I think it’s all about planning to avoid the tax and using structures that make sense. It depends on your individual set of circumstances. I’ll share like a structure that I’ve used because I think it’s pretty novel and unique. I started a business and I formed that business in Puerto Rico. Now one of the things that American taxpayers have the opportunity to do is start their business in Puerto Rico and apply for a special 4% tax rate. Have you ever heard of that?  

[00:04:21.730] – Sean

Okay, so I have to be honest, when I hear of things like this, I think of FTX.  

[00:04:26.400] – Noah

Okay, so this is an incentive program set up by the Commonwealth of Puerto Rico because they’re looking to attract businesses onto the island. The islands had its share economic challenges, and so in 2012, they released a new section of their tax code. Because they’re a commonwealth, the residents of Puerto Rico don’t pay the IRS taxes. They don’t pay any federal tax. They just pay Puerto Rico tax. So Puerto Rico said, hey, we want rich Americans, mainlanders to come to our island. So we’ll give them no capital gains tax, no dividend tax, no interest income tax. If they move here as an individual and retire here, or even if they want to have their day trading business here as an example. And in addition, that was called act 22. They had another act called act 20, which was if you bring your business here, you form a C corporation in Puerto Rico will only charge you 4% in corporate taxes versus I live in Florida. The corporate taxes 5%. The IRS charges an extra 21%. So instead of 26, I pay four in Puerto Rico. So that’s just a bit of the story.  

[00:05:34.280] – Sean

Yes, one of my friends did move to Puerto Rico, him and his wife, and they wanted to get down there because of tax benefits. So that does make sense. But you’re actually setting up a business. Now. Do you need a PO? Box equivalent or some kind of physical address down there.  

[00:05:52.220] – Noah

You need more than that. You need to source your income to Puerto Rico. So I mentioned I live here in Florida. I didn’t want to move to Puerto Rico, so I engaged my brother to become my business partner to run that new business in Puerto Rico. And so he owns part of the business because he’s a Puerto Rico resident. When he gets a dividend from that decoration, he doesn’t have to pay any taxes. Again, rate tax laws down there. And then me, I wanted to continue to live in Florida. I wanted to take advantage of that 4% rate. But just like if Microsoft or Google or Apple or any number of companies paid a dividend, you’d have to pay a dividend tax. I didn’t want to pay that tax. And so what I did is I set up my business ownership inside of a Roth 401 plan. So now when that company issues dividends, I don’t pay any taxes. I get to invest that for growth tax rate. And eventually, when I take that money out, I’ll take it out. Tax rate.  

[00:06:48.050] – Sean

Sure. Right on. Okay. With the establishment, because I’m thinking through, like, there’s a lot of entrepreneurs out there that have online businesses, whether it’s a SaaS business, kind of like what I have my team and I have at least there’s also a lot of ecommerce entrepreneurs in our community. What about setting up that type of business where you can literally be remote anywhere in the world?  

[00:07:10.550] – Noah

Yeah. So one of the things I’ve done is I’ve set up all of my labor. That doesn’t have to be US. Labor. I have an office in the Philippines. Different people have remote teams based in different locations. But what we do is we often set up that Puerto Rico business to hire all of those subcontractors to help source that income through Puerto Rico. So you may have a US. Taxpayer that’s based in any number of states, but then they also own this C corporation in Puerto Rico. They have one employee there that’s coordinating the activities of all of these outsourced service providers, and as a result, they’re sourcing that income through Puerto Rico.  

[00:07:51.260] – Sean

Got it. Let’s get into the flow of money here. So the money has to flow to Puerto Rico in a bank in Puerto Rico. Is that correct?  

[00:07:58.190] – Noah

Correct. Yeah.  

[00:07:59.150] – Sean

Got it. And then from there, it can be dispersed to the other partners or employees in the company.  

[00:08:04.460] – Noah

Yeah. The banking laws are modeled after Delaware, so there’s nothing too unique there.  

[00:08:10.700] – Sean

Sure. I have to ask this question. Any major branches, like bank branches I would be familiar with?  

[00:08:18.770] – Noah

No. They have, like, four main banks on the island. None of them are that good for us to make a wire takes a day and a half for my brother to go into the branch and wait on the line. The services are miserable, but it’s the cost of getting this benefit.  

[00:08:37.110] – Sean

Got it.  

[00:08:37.750] – Noah

Okay.  

[00:08:38.060] – Sean

So that’s the trade off. If you want the low taxes, the con, there would be the service timing.  

[00:08:45.950] – Noah

If you want to live there. Right. So not everyone wants to live on a Caribbean island, but there’s certainly lots of benefits to living on a Caribbean island too.  

[00:08:55.400] – Sean

Sure. Interesting strategy. Well, just to zoom out a little bit, just so I’m clear your business, you offer like, people can come to you and invest in stocks, ETFs, index funds, is that correct?  

[00:09:08.830] – Noah

Yeah, but they don’t come to us directly for investing. What they come to us for is sophisticated financial advice on their broader picture, and even more specifically, to align with our philosophy of becoming rich beyond money. So we help predominantly entrepreneurs that are earning seven figures have a net worth of eight figures. So these are people that by almost all standards are already rich. And the idea for us is to help them utilize the resources they have to live a meaningful life. A life that they’re proud of, a life that is really inspirational to others, and where they’re able to become what we call rich beyond money.  

[00:09:50.720] – Sean

Got it. Okay. Yeah. So with the Tykr community, I’m talking about something that is kind of new, but I’ll be introducing it more to a community, which is the four pillars of money management. Pillar one would be removal of debt. Pillar two is increased income. Pillar three would be building wealth. Pillar four would be protecting wealth. So it sounds like you’re placing a lot of emphasis there. A lot of people already have money. How do we protect it? How do we pay less to taxes? Yes.  

[00:10:22.790] – Noah

Part of protecting your wealth is making sure you’re focused on the right things. And so we help people figure out what is it that they really want to use this money for? Because if all we do is invest in the FMP 500, it’s not really creating that much as well created.  

[00:10:40.890] – Sean

No, we definitely talk about that in our community. If you want to build wealth through investing, you have to go into individual stocks. If you’re playing the slow and steady game, that’s wealth protection, you’ve already arrived. If you’re going into index funds, ETFs and mutual funds, you’re pretty much saying, yes, I already have enough now I just want to protect what I have and keep it where it’s at. Yeah. We get people who are like, well, I want to go into mutual funds, but I want to be a millionaire in three years. Okay.  

[00:11:08.550] – Noah

We have a bit of a mantra that whether we double a client’s portfolio in five years or ten years really has no relevance on the life that they’re going to live. But if we cut that portfolio in half over five years or ten years, it’s going to make a big difference. So we tend to have broad diversification in our investment and asset allocation. For the clients because you diversify and protect and you concentrate to create as you kind of alluded to.  

[00:11:33.980] – Sean

Got it. So we talked about a strategy of protecting your wealth, paying less taxes, incorporating in Puerto Rico. Let’s talk about your real estate portfolio. Did you say earlier you add 6000 units, is that correct?  

[00:11:47.240] – Noah

Yeah. The numbers changing because we’re exiting a lot of assets right now. In 2022, we only acquired 130 units. We had thought we’d have a lot more activity, but the market didn’t cooperate, so we were taking a pause and we were just about to close on another 200 unit deal, but they’ve been hard to find.  

[00:12:08.520] – Sean

Now do you operate this like a syndication? Like an investor can come to you and say, hey, we want to invest 50 grand or 100 grand and then with the expectation they’re going to get some kind of return?  

[00:12:20.050] – Noah

Typically.  

[00:12:20.630] – Sean

Just so you know, on the podcast we’ve had other syndication investors and they say you’re usually getting 8910 percent per year.  

[00:12:28.660] – Noah

Yeah.  

[00:12:29.180] – Sean

Is your fund similar?  

[00:12:30.700] – Noah

It’s similar to that. We’re syndicating our last eight realized transactions. Our average IR was just under 27%, but that’s been a really good time frame to measure. So I don’t think the forward looking returns are going to be as healthy as the last number of years. But yeah, you can just go to if anybody wanted to talk about real estate with us, you go to talk about re and you could download one of my free e books called how My Family Invests in Apartments for Infinite Returns. And you’ll get some information about me, the investing we’ve done. Take a look at the types of deals we do and you can schedule a call with my partner to walk you through a deal.  

[00:13:09.810] – Sean

Sure. And where are these properties? Are they all over the state?  

[00:13:13.260] – Noah

All over the state. Concentration in the southeast, predominantly.  

[00:13:18.010] – Sean

Got it, okay. And newer, would these be like multi unit complexes? We’re talking like 5200 plus units, correct?  

[00:13:25.980] – Noah

Yeah. In some cases 400, 500.  

[00:13:28.720] – Sean

Got you.  

[00:13:29.330] – Noah

Okay.  

[00:13:29.570] – Sean

When I think of Florida, you probably a lot of condo complexes, a lot of apartments maybe serving those who have since retired or recently retired.  

[00:13:38.650] – Noah

Yeah. And we don’t have any age restricted housing in any of our locations, but you tend to attract a certain type of tenant and that’s usually based on your marketing strategy. So depending on where we acquire the asset and then how we’re marketing that asset, usually we’re looking for a certain demographic because a lot of our properties, let’s say, have common amenities, gyms, pools. You want people to build community, so you want people to have something where commonality, to want to keep them there.  

[00:14:09.940] – Sean

Got it.  

[00:14:10.580] – Noah

Okay.  

[00:14:10.960] – Sean

And to get involved with your real estate investments, do you need to be accredited?  

[00:14:15.800] – Noah

Correct. An accredited investor.  

[00:14:17.900] – Sean

Got it. So that’s the real estate side. But if somebody wants to work with you on the financial planning side. No accreditation needed. It’s just a service fee, it sounds like.  

[00:14:29.940] – Noah

Yeah. Although I would say if you’re not accredited, we’re probably not the right fit as a firm. I have a little tagline that we’re financial advisors to the half percent. So usually when people are coming to us, it’s because they started making a million bucks or more probably recently, where they have that $10 million net worth, where they’ve got complexity in their life that that needs a group like ours. We’re a team of accountants, lawyers, and financial planners, and we’re heavily experienced, heavily credentialed, and so we tend to skew a little bit upmarket.  

[00:15:02.130] – Sean

Got it. Let’s take a quick commercial break. Have you ever lost money in the stock market? Maybe you heard or saw a comment on YouTube, TikTok Reddit, or another social platform, or maybe you just received bad advice from a friend. Yeah, I think we’ve all been there. Most people lose money in the stock market because they make decisions based on emotions. What if you could remove emotions from investing? What if you could make consistent returns in the stock market based solely on logic? And what if there’s a software that could handle that logic for you? Introducing Tykr, a platform that helps you manage your investments with confidence. Get started today with a free trial. Visit Tykr.com. That’s tykr.com again, Tykr.com. All right, back to the show. This is an interesting question for you. So with the customers you have, are there any common denominators of the types of business models or revenue streams that have been created to accelerate people to that million dollar a year income level?  

[00:16:03.350] – Noah

I don’t think it’s the business model as much as the people. And one of the unique aspects of successful entrepreneurs is that they have a team that can often accomplish significantly more without the entrepreneurs day to day involvement than, you know, the entrepreneur could ever do. If they work 80 hours a week or 100 hours a week, I would say that’s probably the biggest distinction between our clients and maybe the general entrepreneurial population is that they can take a two week vacation and not check their email because they have a team behind them.  

[00:16:40.350] – Sean

So regardless if it’s a service or product business, I’m thinking of some great qualities, great leadership skills to motivate people right. And then the ability to put systems in place. I always think of, like, standard in the corporate world, standard operating procedures. Like, this is how we do X-Y-Z and just rinse and repeat.  

[00:17:03.670] – Noah

And they had the confidence in themselves to pay someone a big salary to come in and be their president, chief operating officer. Integrator. There’s some title where they really took that money out of their pocket to try and find someone who could lead and manage that business better than they can.  

[00:17:24.510] – Sean

Interesting. So you’re seeing that level where not just somebody who’s in the business leading as, let’s say a president. But they’re at a point where, you know what, we’ve got the systems in place, I’ve got everything documented. I don’t need to be here. I just need somebody to come in so I can go travel or enjoy more in life. They’re actually in that position?  

[00:17:46.450] – Noah

Yeah, mostly you’d see them involved in big relationships with big sales. Recruitment is often something that they’re doing and then ideating and how we’re going to improve the business. What’s the strategy for the company?  

[00:18:00.010] – Sean

How old are these businesses typically? Are we talking like five years, seven years, ten years or older?  

[00:18:06.450] – Noah

They run the gamut. I think it’s more based on me. I’m 47, so I tend to attract clients that are probably ten years older and ten years younger in that bandwidth. And then as a result of that, you get newer companies on the younger side and then some more mature companies on the older side.  

[00:18:25.280] – Sean

Sure. Got you. Can you share with us? You don’t have to give a business name, but any particular business or business model you’ve seen with some serious exponential growth that you were able to work with?  

[00:18:39.270] – Noah

I would say SaaS model. The SaaS business model is the most attractive model for a build and sell methodology because the multiples in SAS are so high. So we see a lot of our clients in that staff world having fairly large exits. But a lot of times to get to that large exit, there’s not a lot of cash flow in a lot of those early years because they have to continue reinvesting in the product through labor. So it’s not necessarily the best business. If you want to have a lavish lifestyle from the day you find creating.  

[00:19:19.410] – Sean

Well, you’re preaching to the choir on that one. I mean, building Tykr is we’re in year two and a half year live and it’s been very much bootstrapped strategy and we’re starting to turn that corner. But yeah, it’s been work but exciting nonetheless. Yeah, you’re right. There’s other businesses, like a service business or maybe like a SAS mixed with a consulting service where you can get off the ground running with a few clients and you can start making some decent money. Exponential growth won’t be as fast, but you can still get to some serious free cash flow.  

[00:19:56.980] – Noah

Yeah, I think it really depends on what your goals and objectives are. If you want to make a nice living and hopefully send your kids to college and you can pay for it on their behalf and maybe you’ll get a chance to have a second home or retire comfortably, you could do that with a lot of different business models. But if you want to have a $10 million net worth like the clients that we work with, you probably have to build something substantial and meaningful right now.  

[00:20:24.310] – Sean

This is good to know before we jump to the Rapid fire round. Is there one major key takeaway our investor and entrepreneur audience could use today.  

[00:20:36.090] – Noah

One key takeaway. I talked about taxes at the top. That’s kind of how we got started. And I would say to look at the math, run the numbers and say, what is the difference in my wealth? If I were to compound tax free five times from $1 in a tax free environment, I go one to two, two to four, four to eight, eight to 1616 to 32. Now, that’s in a tax free environment. If instead I had just a 25% tax and I doubled my money from $1 to dollar 75 to the government came and took that quarter of my profit, then I doubled it again to 350, but the government came and took a quarter of my profit. I do that five times, I’m only left with $16. And so what many investors don’t realize is that taxes are eroding their ability to generate wealth far beyond the 2020 5% taxes that you’re paying for long term cap gains rates. So pay attention and figure out how to leverage the tax code to make your investments nontaxable by using retirement plans, by using insurance, by using creative structuring to put you in a better position.  

[00:21:47.940] – Sean

Right. Great advice. What I’d like to do is just follow up with that for our audience here. So if you’re building a business, you want to keep your taxes in mind, depending where you’re at. Maybe you want to start a business, go through your business here, Noah, and get something established in Puerto Rico. That’s a great foundation. But then on the investment side, because we invest in a lot of publicly traded companies going through the stock markets, a lot of people are thinking about selling. They’re always thinking about selling and selling as much as buying. Whereas we like to use the phrase that Motley Fool uses, which is we need to be net buyers. We’re buying a lot more than selling. If you’re selling, you got to be thinking about, okay, I’m going to pay some kind of taxes on that event.  

[00:22:34.980] – Noah

Yeah.  

[00:22:36.610] – Sean

All right, let’s transition to the rapid fire round. This is the part of the episode where we get to find out who Noah really is. If you can, try to answer each question in 15 seconds or less. You ready?  

[00:22:46.810] – Noah

Let’s do it.  

[00:22:47.770] – Sean

All right, what is your favorite podcast?  

[00:22:49.900] – Noah

This one, I would say the one that I probably have listened to for the longest is Tim Ferriss’s podcast. But the one I like most now is Alex hormones the game.  

[00:23:02.720] – Sean

Okay. Yeah. Somebody else has mentioned that, too. All right, what is the recent book you read and would recommend?  

[00:23:10.270] – Noah

Recent book I’ve read? I try and read about a book a week and one that comes to mind that I recommend that I read recently. I would say the Speed of Trust by Stephen Cubby. That’s a good one. That a lot of people haven’t read. It’s an old book that’s been around a while, but it’s Stephen Covey’s son. Stephen Cubby.  

[00:23:29.550] – Sean

Got it. All right, movie question. What is your favorite movie?  

[00:23:33.160] – Noah

Big fat Greek wedding. Love it. My big fat Greek wedding.  

[00:23:37.130] – Sean

Oh, okay.  

[00:23:38.710] – Noah

Great movie.  

[00:23:40.310] – Sean

That’s a new one for the podcast. Nice.  

[00:23:42.340] – Noah

Yeah.  

[00:23:43.080] – Sean

All right, we got a few business questions here. What is the worst advice you ever received?  

[00:23:49.530] – Noah

My grandfather, when I decided to leave my father’s CPA firm, was really telling me I should stay. I have certainty. I have a family business that has consistency. And he really was encouraging me to say, I’m glad I didn’t listen.  

[00:24:08.190] – Sean

Nice. All right, let’s flip that equation here. What is the best advice you ever received?  

[00:24:14.830] – Noah

Best advice, I guess, is from my father’s. He always said, if you do what you love, you never work a day in your life. So I’ve tried to follow that model.  

[00:24:23.240] – Sean

Yes. Very motivating. All right, the last question here is the time machine question. If you could go back in time to give your younger self advice, what age would you visit and what would you say?  

[00:24:33.030] – Noah

I’d probably go back to when I was 24. I had just closed up a start up that I had invested a million dollars into, like, a friends and family round. We were on the way to raising 2 million when I guess it was end of 99, we had that.com meltdown, and so we couldn’t raise money. In March of 2000, business had a close, and I decided to go back into my dad’s accounting firm to become the COO and re engineer all of his processes. And I think if I went back and said, Noah, go buy a business, I think I probably would have had an even more fun and rewarding journey. The challenge is I’m in such a great place without really having any negative impact along the way that it’s hard to say go back and change a thing. But that’s one thing that I think had I done it sooner, I probably would have had a different career trajectory.  

[00:25:31.470] – Sean

Sure. Awesome backstory. All right, where can the audience reach you best?  

[00:25:37.840] – Noah

Lisa finally is on LinkedIn or Facebook? LinkedIn is probably better if we don’t have a lot of friends in common on Facebook. I’m probably not going to accept your request, but LinkedIn, I’ll say yes to everybody. And if you had some information that you wanted to share with us, if you go to talk to Noah, N-O-A-H talk to Noah, you’ll get a chance to complete a little form and then get on a call with our team.  

[00:26:02.290] – Sean

Awesome. All right, Noah, thanks so much for your time. I appreciate it.  

[00:26:05.640] – Noah

Excellent. I appreciate it.  

[00:26:06.770] – Sean

All right, we’ll see you. Hey, I’d like to say thank you for checking out this podcast. I know there’s a lot of other podcasts you could be listening to, so thanks for spending some time with me. Also, if you have a moment, could you please head over to Apple podcast and leave a review? The more reviews we get, the more Apple will share this podcast with the world. So thanks for doing that. And last thing, if you do hear any stocks mentioned on this podcast, please keep in mind this podcast is for entertainment purposes only. Please do not make a buy or sell decision based solely on what you hear. All right, thanks for your time. Talk to you later. See ya.