Some people think that rich people know all the business secrets. That may or may not be true, but this is one of those business secrets that can really pad your pocket if you know what to do with it. Carried interest is not taxed the same as regular income. What is carried interest?

It comes from private equity funds

Private equity funds are owned by a single person or entity. The fund’s owner gets investment money from private investors. Next, that money is invested in specific types of businesses.

These funds look for businesses that are struggling financially. Through investments, they offer the cold hard cash the business needs to thrive, and they often help the business by helping it to right the wrongs that have caused it to lose income. In return, the private equity fund takes ownership of the business.

What’s next?

If all goes well, the business will eventually become profitable again. Then, the private equity fund sells the business either outright or by selling shares on the stock market. The private investors who have given the equity fund money to be able to do all this get a return on their investments from the profit made from selling the business.

Each private equity fund sets a percentage of profit that must be made from the sale of a business for investors to get paid from the sale. If the business doesn’t sell for more than that threshold, investors don’t get paid.

How can you make money without being taxed?

The return on investment that private investors receive is called carried interest. Since investors aren’t being directly paid for work, this is considered a capital gain rather than income.

Investors only have to pay about 24% of their carried interest in taxes.