\n<\/p>\n
Everyone wonders how the rich <\/strong>avoid taxes<\/strong><\/a>. To most Americans, it seems like there is some big loophole<\/strong> that only the mega-wealthy know about, leaving average workers strapped with a large tax bill. Are the ultra-wealthy cheating the tax code, or are they onto something that everyday Americans simply don\u2019t know about? Tom Wheelwright<\/strong>, author of Tax-Free Wealth<\/em> and Rich Dad\u2019s (Robert Kiyosaki) CPA i<\/strong>s here to tell you how to take advantage of these big tax deductions that mystify small-time investors.<\/p>\n If you\u2019re already investing in real estate<\/strong>, you\u2019ll know that the tax deductions can be plentiful. You get mortgage interest, depreciation<\/strong><\/a>, maintenance, and insurance write-offs<\/strong>. But, even bigger than those, are bonus depreciation<\/strong> and cost segregation<\/strong><\/a>, which aren\u2019t complicated tax strategies and can help almost any investor reduce their tax bill significantly. So what can an average investor like you do to get started saving on taxes?<\/strong><\/p>\n Tom walks through the 2022 tax deductions<\/strong> that are decreasing this year, which to take advantage of immediately, how to find the right CPA for you, and which write-offs you may be missing<\/strong>. These tips could reduce your taxes by a significant amount, freeing up much more of your capital for future real estate deals!<\/p>\n David: Tom: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Dave: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Tom: Dave: Tom: David: Tom: Dave: Tom: Dave: Tom: Dave: Tom: David: Tom: Dave: Tom: Dave: Tom: Dave: Tom: Dave: Tom: Dave: Tom: David: Tom: David: Tom: David: Tom: David: Tom: David: Dave: David: Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n
This is the BiggerPockets podcast, show 631.<\/p>\n
As long as we\u2019re building the asset and liability side of our financial statement, the balance sheet is where our focus should be and the cash flow statement, not the income statement. The income statement could really well be zero, and for a lot of people, it is. But for a lot of professional real estate investors, that income statement show zero because their expenses completely offset their income. But their balance sheet keeps increasing, their net worth keeps increasing, and their cash flow keeps increasing.<\/p>\n
What\u2019s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with my co-host on the BiggerNews episode, Dave Meyer. Dave, how are you doing today?<\/p>\n
I am doing great, David. It is a pleasure as always to be back. Thanks for having me.<\/p>\n
Yeah. I met one of your biggest fans ever yesterday. I was in Long Beach, California, doing a meetup and we did a client appreciation event for the people that have bought houses with my team in Southern California, and I met a young man named Christian who works for Activision. He\u2019s probably geeking out here in his name right now.
He does analytics for that company where he helps basically the executives decide where they should be allocating resources and money based on how well the different products or the different things that they have implemented have performed, and he would not stop talking about you. I think he just wanted to get to me in order to get to you, because he\u2019s such a big fan of you as the VP of data analytics, and as a data scientist, he was in love with you.<\/p>\n
Well, it worked, right? You mentioned him on the BiggerPockets podcast now. That probably worked better than his wildest dreams. But thank you, Christian. I really appreciate that. Yeah, hopefully people are learning about being a data-driven real estate investor to hoping \u2026 Obviously, David, you\u2019re very analytical person as well, but hopefully our brains combined are helping people understand how to run the numbers and use some more advanced analytics to fuel their investing and to feel confident in their decision making.<\/p>\n
Yeah. That\u2019s what Christian came to me and said that he liked about my books was that they were basically built on systems and data. This is how you take information and use it to make decisions, and then this is how you create a pattern out of that, which is all that a system really is. I thought, \u201cYeah.\u201d It\u2019s funny to me that I forget some people don\u2019t think that way because we just naturally do it.
In today\u2019s show, Dave and I combine our data brains and create a huge data transformer that will vanquish the foe of poverty and financial slavery. I really hope that you like it. All right, I\u2019m going to do today\u2019s quick tip, and I was trying to think about how can I do this in an Optimus Prime voice, but I realize I cannot replicate a robot in the same way that I can replicate Batman\u2019s.<\/p>\n
Please try. Come on.<\/p>\n
Today\u2019s quick tip will be delivered to you by Dave Meyer.<\/p>\n
I\u2019ll just give you a regular old, good old quick tip. You should check out all the free stuff we are giving away, and by we, I mean all of the BiggerPockets podcast. I know last week Brandon was back on and gave away an awesome masterclass on building your social brand. An example of great free information that you should be taking advantage of on my show, On The Market, we\u2019ve been giving away all sorts of data. We have data drops spreadsheets you can use.
Most recently we have a calculator you can do to analyze house hacking versus buying versus owning. I know all the other shows are giving away stuff too, and it\u2019s 100% free. Don\u2019t be silly. Go download these things right now. They\u2019re on the BiggerPockets\u2019 website. Just go to BiggerPockets.com\/podcasts, and there is a page there for each of the BiggerPockets\u2019 podcasts that you know and love and you can find amazing free stuff there. Go check it out.<\/p>\n
Yes. The website has so much more to offer than just this podcast. I think about BiggerPockets like this podcast is how \u2026 When I first found out about it, it\u2019s just like when I signed up to work at a gym. I just saw that they had weights and that\u2019s all I would use, and then one day I realized, \u201cOh my God, this gym has a masseuse, they have a physical therapist, they have a sauna, they have a pool. They have all of these other things that will supplement my fitness journey that I never even use because I didn\u2019t bother looking outside of the one thing.\u201d
Well, that\u2019s what the website is. We\u2019ve got tools, we\u2019ve got calculators, we\u2019ve got blogs, we\u2019ve got an agent finder to get you connected to the people that you need. We have all kinds of stuff to open your mind and broaden your horizons. Get on the website and see everything that we have to offer. Mr. Dave Meyer, what has the On The Market research team been up to this month?<\/p>\n
One thing that I personally have been looking into and we actually show that just came out yesterday with Ken Johnson, who\u2019s a professor at Florida Atlantic University is rent verses buy. This is a time tested debate. I\u2019m sure you\u2019ve had this conversation with people a million times. But usually, there\u2019s at least a clear option, and right now with rent going up so quickly, and we\u2019re seeing home prices go up as well, they\u2019re both at all-times high, it brings up a very reasonable question of, what is the right living situation for people right now?
Even if you\u2019re not an investor yet, have you run into this at all, or are any of your clients running into the situation where they\u2019re saying, \u201cOh, it\u2019s actually probably better to rent right now than to buy just where we are in the market cycle?\u201d<\/p>\n
I\u2019m hearing people say that they believe the market\u2019s going to continue to go down. People who think that prices are on the way down, yes, they\u2019re saying, \u201cI\u2019m going to rent because I\u2019m waiting. I think that I\u2019m going to have more opportunity later.\u201d But I still haven\u2019t seen anybody where renting is cheaper than buying if they buy right. If you\u2019re trying to buy a luxury property, a really nice, comfortable home, renting is usually cheaper.
But what I\u2019ve learned about real estate is that we often look at it in terms of money, but money is very difficult to tie down because the value of it changes so quickly. It\u2019s often better to look at in terms of time. If you look at how rents are increasing, many times people will find that by year three, four or five, buying is cheaper than renting, and then for the rest of the time you own that house, it becomes exponentially more cheap to own than rent.
That\u2019s before you include a strategy like house hacking. A lot of people can go out there and buy a property, rent out part of it. They\u2019re not living for free, but they\u2019re living for less than what their rent would\u2019ve been, particularly in the more expensive markets like Denver and in the Bay Area. Any market where you\u2019re seeing a lot of appreciation, the rents are going up as well.<\/p>\n
Totally. I think that a lot of the media, or people who just aren\u2019t as familiar with real estate investing, put up this false dichotomy. It\u2019s buy or rent.<\/p>\n
Yes.<\/p>\n
As real estate investors, we know there are other options, right? Like you just said, house hacking is a great option. Actually, the first investment I bought, I was going to house hack, and then I found a cheaper apartment and then never wound up house hacking it and just renting it out and continuing to rent myself because it was a better financial decision. I think it\u2019s a good question and it is worth. I think people really \u2026
The question is good because people should be examining what the cheapest way for them to live is because it\u2019s such a big expense that if house hacking or if renting and reinvesting the money into something else is a good option for you, that can free up a lot of cash with which you can invest or improve your financial position. I do think it\u2019s worth people examining, but the dichotomy of just renting versus buying is too simple.
Listen, we had this guy, Ken, come on the show and you should listen to the show, it\u2019s great. But he was talking about how renting is better in a lot of cities if, and only if, all the money you would put down to buy a house, you reinvested into the stock market. That\u2019s cool, right? But realistically, do you know yourself, if you had that extra money lying around, would you actually invest 100% of it or would you have some lifestyle creep?
There\u2019s so many variables here. But what I think we\u2019re trying to show in On The Market is that there are gray areas and there are other ways to analyze this. Actually on the show, I also give out a calculator. It\u2019s really cool. If you listen to the show, you can get it for free. It\u2019s a buy hold house hack calculator. Because you see on these financial websites, they have these ways for you to analyze buy or hold.
But we want to come up with a way that people can analyze the investing element of that too and weigh that in their living arrangement situation. That\u2019s what we\u2019ve been working on. We\u2019re going to be dropping a lot of data about it. I encourage everyone to check that out and see for themselves what the best living situation for them is to optimize their financial position.<\/p>\n
Yeah. My philosophy is if you are trying to win at the money game by depriving yourself of X amount of lattes per week to save money, you\u2019re already doing it wrong. Saving money on $5 drinks is not the way that you get ahead in life, and I\u2019m not a coffee drinker. This isn\u2019t coming from a place of I love my coffee. Your housing expense is such a bigger chunk of where your money\u2019s going, that putting all of or most of your energy towards that is way more fruitful than looking at how you can save on really tiny things.<\/p>\n
Totally. If you make a bad decision \u2026 It\u2019s not bad, whatever. A financially stretched decision about your housing situation, it really becomes almost futile to try and save money on things like coffee, like you\u2019re saying. Because you\u2019re spending \u2026 The difference between spending 1,500 bucks on rent and 2,000 bucks on rent, that\u2019s 500 bucks. That\u2019s $15 a day on coffee. No one spends that much.
You can\u2019t cut that out on simple things. That\u2019s why Scott Trench and his Set for Life book talks a lot about this, and he explains it more articulately than I. But I think it\u2019s with good reason. This is why you should be thinking about your housing as the best way to cut costs and to reconsider where your budget is going.<\/p>\n
I just got an analogy for this.<\/p>\n
Oh, I can\u2019t wait.<\/p>\n
Having a comfortable living situation that takes up all your money and then trying to save on the coffee you\u2019re drinking is like buying a Hummer instead of a Prius and saying, \u201cWell, I\u2019m just never going to roll the windows down so that my gas mileage is better.\u201d<\/p>\n
Oh yeah. That will definitely work. They make a lecture covers now though. You could get the lecture cover, I think. You can [inaudible 00:10:30] have it all, David.<\/p>\n
Yeah. At some point I\u2019m not going to be able to use any form of gas mileage analogy, which is a bummer because it works so good for everything related to savings.<\/p>\n
Yeah. It really does. But I get what you\u2019re saying, right? It\u2019s like you\u2019ve already made the decision and you\u2019ve already committed so much money to such a large expense. It doesn\u2019t really matter what else you do, the damage is already done.<\/p>\n
Yes.<\/p>\n
Listen, some people want to live in a comfortable home. Totally get it. But I think it\u2019s really worth analyzing this. You have to weigh these things, right? If you want to live in a comfortable home, you can do that, but it will probably decrease your ability to invest in real estate and you can make those decisions, and there\u2019s probably a comfortable middle ground. Doing the analysis, thinking about the math behind this, it\u2019s not so simple.
I\u2019ll just say that\u2019s not so simple as looking at what your mortgage payment would be and your rent payment would be. That\u2019s not what it is. You have to think about what you would be doing with your excess income. How much is the market likely going to appreciate? Given the topic of what we\u2019re about to talk with Tom, are you getting the tax benefits of home ownership? It\u2019s not a simple question, and I think worthwhile taking the time to look into the data, and that\u2019s what we\u2019re trying to do over here at On The Market.<\/p>\n
Especially when you look at the price of rents over time. I\u2019ll wrap up with. This nine years ago I bought a fourplex in Manteca, California, which is not known for having incredibly high rents. It\u2019s not like the Bay Area. When I bought it, the rents were at $700 a unit. I just put one up for rent this month at 1,850. Whoever that tenant was was paying $700 and that same person is now paying 1,850. For them, if they were like, \u201cWell, I could go buy a house, my payment would be 1100, but I could rent for 700, renting is cheaper,\u201d how much different is that when your rent is 1,850 and you can no longer buy a house with a mortgage of 1,100 that\u2019s locked in place?
At the same time where you\u2019re saving money in rent by owning real estate, it doubles its value because you\u2019re also making money off other people that are paying rent. It\u2019s not just that you\u2019re saving money when you buy investment property, you\u2019re also increasing the amount you collect every single year. Like you were saying Dave, many times and you just look at right off the bat year one, renting verse owning, renting appears to be cheaper. When you give a time horizon, that gets crushed as far as the efficiency of owning real estate.<\/p>\n
Totally. I rent right now. For those of you listening who don\u2019t know this, I live in Amsterdam. I moved here about two and a half years ago. We just wanted to move into something furnished, make it easy moving internationally, and it\u2019s been fine, it\u2019s been great, it\u2019s been really interesting experience being a renter again. But I will say what drives me nuts is my lease is coming up at the end of the year and the market\u2019s totally changed, and I have no idea what my landlord is going to raise my rent to.
I\u2019m usually on the other side of this, and I\u2019m someone who likes to plan financially, figure out how much money I\u2019m going to invest next year, how much I\u2019m going to allocate to this asset class and this asset class, and I have no idea what my expenses are going to be. Even though that renting might be a better financial situation for me, I\u2019ve been kicking myself for not buying a few years ago, just for the predictability of it, and knowing what my own housing expenses are going to be is really valuable to me.<\/p>\n
That is a great point. If people are interested in saving money, they are in for a treat because we are about to transition into bringing in today\u2019s guest who makes his money in life by teaching other people how to save money in taxes. Taxes are usually the biggest expense that any of us has in life or in business, and decreasing that is much like decreasing your housing expense, which is the biggest expense that you have in your personal budget. Buckle your seat belt, strap yourself in and get ready for a wild ride as we bring in Tom Wheelwright. Tom Wheelwright, welcome back to the BiggerPockets podcast. How are you today, my friend?<\/p>\n
I am good. So good to be with you guys.<\/p>\n
Yeah. The last time that we met, we spoke about the economy in general. We talked about how important it is to save in taxes, and I think most importantly, in our conversation, we revealed the relationship between investors or citizens and the government. Like it or not, or maybe you love it, you have a relationship with your government and you are all about teaching people how to make that relationship mutually beneficial, or at minimum, beneficial for us as opposed to just the government.
In a default state, the government\u2019s benefiting much more than we are. When we\u2019re in a W-2 position, they\u2019re taking our taxes right out of our check. We don\u2019t have write-offs. Could you share a little bit about your philosophy on this topic?<\/p>\n
Yeah. Actually, it\u2019s interesting. I actually think the government benefits more when you\u2019re an active partner than when you\u2019re a silent partner. First, we establish we\u2019re all partners with government, right? You know that the minute you look at your pay stub and it says FICO withholding, et cetera, and it\u2019s a deal where you don\u2019t get to not be a partner with the government. Period. You are a partner with the government.
The question is silent partner, active partner. The government actually \u2026 While you think about, \u201cWell, do they really care,\u201d they actually make more money with active partners than they do with silent partners. Actually, that\u2019s a big topic in my new book, The Win-Win Wealth Strategy, is that I actually looked at seven different investments and six of them, okay? Which one of them is real estate. Six of them, the government wins more with active partners than it does if it just takes money out of your paycheck, because \u2026
Remember, the government\u2019s giving a relatively small incentive and they\u2019re getting huge impacts in the economy. This is not just, oh, well, the government allows it. This is actually the government encourages it, and I think that\u2019s a big mind shift that we need to get to in society where this is not something where the \u2026 It doesn\u2019t matter. I\u2019m sorry, but it doesn\u2019t matter who the administration is. Right? This administration uses tax incentives and wants tax incentives just as much as the last one.
They just want different tax incentives. The key is just understand you\u2019re a partner with the government, you get to be either silent or active, and the reality is that the active partners actually do more for the government than the silent partners who are paying high taxes.<\/p>\n
I think part of fixing some of these misconceptions has to do with the language that we use when we talk about the tax code. I was thinking when you were talking, there\u2019s a lot of guys that\u2019ll complain, \u201cOh, my wife\u2019s making me do a date night with her,\u201d as if this is a terrible thing, right? I think a date night with your wife, that strengthens your relationship, that makes you happier, that makes her happier, that lowers your likelihood of having divorce or big, bad fights that decrease your work performance.
It\u2019s good to have date nights, right? Don\u2019t say, \u201cI have to do it.\u201d Part of the language with the tactical is we call them loopholes, which there is this projected meaning behind that that you\u2019re cheating, that you\u2019re getting away with something, that you\u2019re exploiting the tax code. But when you talk about it, Tom, you often portray it in a way like, no, they\u2019re there because the government wants you to use them. They are incentivizing you to do this because it\u2019s better for the economy as a whole.<\/p>\n
Yeah. Loopholes are unintended consequences of the tax line, and are they there? Absolutely. Are there people who take advantage of them? For sure. But when we\u2019re talking about how the government really works, these are incentives, these are on purpose and the government benefits from them financially as well as socially. It\u2019s not just the government\u2019s promoting the economy or promoting social causes or promoting clean energy or whatever. The government actually makes money on this.
I actually took examples in Win-Win Wealth Strategy and I just took examples, I said, \u201cWell, look, here\u2019s what the government gets, here\u2019s what the taxpayer gets.\u201d Well, why have the \u2026 I agree with you, David, that the challenge is we\u2019ve got this idea that the wealthy don\u2019t pay tax because they\u2019re cheating and that\u2019s \u2026 By the way, I find that a complete affront, and all CPAs find that as an affront because that means that the CPA profession is complicit in that cheating because all rich people have CPAs.
Right? I actually find that very offensive. The reality is that it\u2019s not the rich peeler cheating. I\u2019ll tell you who cheats, and if you look at the IRS numbers, it\u2019s people making a $100 to $200,000 a year, it\u2019s the contractor who comes to your house and says, \u201cIt\u2019s $120, but if you give me cash, it\u2019s only $100.\u201d Right? Those are the cheats. Cheaters have this idea that it\u2019s a zero sum game, that either the government wins or I win.
The idea behind what most of the tax law is it\u2019s a win-win. The government wins and you win. Now, can you lose and the government wins? Absolutely. The government always wins. That\u2019s the point. The government-<\/p>\n
Yes.<\/p>\n
\u2026 always wins. The question is, are you going to win as well, or is it just the government who wins?<\/p>\n
That\u2019s a better way of stating what I meant in the beginning when I was saying sometimes the government wins more. It\u2019s more just the government is winning and you\u2019re not. That\u2019s the default state that most people listening to this that are just working a job. The government\u2019s getting their taxes out of your check, you don\u2019t get a say in it. It\u2019s going to come out before. You don\u2019t always get a say in where that money goes.
When you\u2019re working with the government, both of you are winning. I like how you restated that. The government\u2019s going to win, how do you make sure that you win also? I also love that point about the people who are cheating in the tax code are the ones that are getting paid under the table, not reporting their income. Right? Doing some of that work on the side. That doesn\u2019t get talked about a lot. I\u2019ll throw this in as a caveat to the few people listening to this going, \u201cYeah, but I save a lot in taxes.\u201d
It always seems like a good idea until you want to invest in real estate and you need a loan, and then all of that comes crashing down when you realize, \u201cWait a minute, I\u2019ve got all this money. Look, I\u2019m showing it to you,\u201d and we\u2019re like, \u201cWhat\u2019s on your taxes?\u201d \u201cWell, why do you need those? What does that matter?\u201d That\u2019s what every single lender is required to use if you\u2019re getting a conventional loan and you can lose a lot of money not investing because you tried to save in taxes.<\/p>\n
Yeah. Let\u2019s talk about that for a second, because what\u2019s really going on is how big a game are you playing, right? Why is the bank asking for that information? It\u2019s because most people at those lower levels of borrowing don\u2019t have real financial statements. Most of them, the only financial statement they have is their tax return. If you go to a big real estate developer, they\u2019re not looking at their personal tax returns. I guarantee it. I have a lot of clients in that business.
They do not look at their personal tax returns. They\u2019re looking at the cash flow from the property, they\u2019re looking at what\u2019s the real money here? What\u2019s the real risk here? The challenge is that because people never overstate their income on the tax return, they\u2019re going, \u201cWell, most conservative view of a person\u2019s finances is going to be their tax return.\u201d That is true. It is the most conservative view. But it doesn\u2019t mean you can\u2019t overcome that.
But you\u2019re absolutely right, David, that \u2026 I get that question a lot. Okay. Wait a minute. I reduced my taxes to zero, which means I reduced my taxable income to zero, and now the bank\u2019s saying, \u201cI\u2019m not going to give you a loan.\u201d Are there ways to deal with that? There absolutely are. But you do have to be thinking about how big of a game am I playing here?<\/p>\n
Oh, I really like that idea. You got my brain going. The size of the game we decide we\u2019re going to play determines the strategies we\u2019re going to use. You can feel like you\u2019re outsmarting someone getting paid under the table when you\u2019re playing a small game. Minute you\u2019re starting to look at a bigger game, you\u2019re like, \u201cWhat was the benefit of saving $9,000 in what my taxes would\u2019ve been to miss out on building six figures of wealth many times over investing in real estate over a long term period?\u201d
As I have had more financial success, particularly in the last couple years, I\u2019ve seen an exponential growth. Taxes used to be mildly annoying, like a mosquito bite, and now they\u2019re like a shark bite. They will take you out of the entire game completely if you can\u2019t manage them, or it\u2019ll remove all your incentive to work hard when you get to where you\u2019re paying so much of that money in taxes.
That\u2019s something that you\u2019re passionate about, is helping people save money in taxes. I have been forced to learn how to \u2026 I don\u2019t want to say avoid paying taxes. It\u2019s more, how do I build wealth in the way where I don\u2019t have to pay taxes? Right? It\u2019s just shifting the way that I\u2019m playing the game or the size I\u2019m playing the game. What\u2019s your thoughts on when people should start making that mindset shift?<\/p>\n
Well, it\u2019s when do you want to start playing the bigger game? That\u2019s really the question, right? I have noticed over the years that this is not the smaller pockets podcast, this is the BiggerPockets podcast, and you guys are all about let\u2019s get bigger pockets, let\u2019s play a bigger game. What happens is that people, when you don\u2019t understand how the game is played, then you try to take shortcuts and that\u2019s what gets you into trouble, frankly. It gets you into trouble with your lenders, it gets you in trouble with the government. The reality is that the more income you make, the more taxes you pay. But the more wealth you build, the less taxes you pay.<\/p>\n
That\u2019s good.<\/p>\n
That\u2019s actually, to me, the big distinction. I don\u2019t ever say that the rich don\u2019t pay taxes, because a lot of what we think of as rich people, people have high income, pay a [inaudible 00:24:21] lot of taxes.<\/p>\n
Doctors, lawyers.<\/p>\n
Doctors, lawyers, entertainers, football, professional athletes. They pay tons of taxes. But wealthy people do not, and that\u2019s the difference.<\/p>\n
How are we defining-<\/p>\n
Wealth is measured in terms of assets and it\u2019s not high income, it\u2019s high wealth.<\/p>\n
Is it safe to say your definition of wealth, and probably the definition I go off as well, is more your net worth and owning assets that are producing income so that your income is coming in a way that\u2019s more desirable? It\u2019s different than trading time for money. Riches would be your yearly income, and maybe \u2026 Yeah, I guess it would be that simple. Right?<\/p>\n
Yeah. I go through a very simple analysis. Of course, I\u2019m an accountant, so I look at income statement balance sheet, right? If I look at an expense, I\u2019m going, \u201cWhy am I spending this money in my business?\u201d It\u2019s probably to make money, right? That\u2019s why I\u2019m spending the money. When I look at an asset, why am I buying this asset? It should be to increase my cash flow, right? It should be to increase my income.
Then I look at the debt side, I\u2019m going, \u201cWhat\u2019s the purpose of the debt? The purpose of the debt is to buy the asset.\u201d What really comes down to is, as long as we\u2019re building the asset and liability side of our financial statements, the balance sheet is where our focus should be, and the cash flow statement, not the income statement. The income statement could really well be zero, and for a lot of people, it is.
But for a lot of professional real estate investors, that income statement shows zero, because their expenses completely offset their income. But their balance sheet keeps increasing, their net worth keeps increasing, and their cash flow keeps increasing. It\u2019s really about cash flow. It\u2019s really all about cash flow, as you know. As long as your \u2026 If your cashflow is increasing, how much faster does your cashflow increase if you\u2019re not paying taxes? It\u2019s exponential.<\/p>\n
One of the ways that, probably at least in my experience, the most popular and most efficient way of saving in taxes while also increasing cash flow is buying real estate and then using cost segregation studies to accelerate your depreciation. Could you briefly describe what I just said, and then talk to us about how the tax code is changing in regards to how we execute that strategy?<\/p>\n
Yeah. Absolutely. Basically, here\u2019s what the tax law says, is that when you buy a piece of property, you\u2019re really buying four different subsets of the asset. You\u2019re buying the land, the building, the land improvements and the contents of the building. They\u2019re saying, \u201cLook, land doesn\u2019t wear out. We\u2019re not going to give you a depreciation deduction. Depreciation\u2019s for wear and tear. There\u2019s no wear and tear on land. The building wears out, but it wears out over a long period of time. If it\u2019s residential, it\u2019s probably in the 25 to 30 year range, and if it\u2019s a commercial building, it\u2019s probably a lot less, maybe 40 years.\u201d
That is true, by the way. I\u2019ve owned both, and let me tell you, commercial buildings, wear out not nearly as fast as residential buildings. Residents tend to be much harder on the building. Then you have the improvements, land improvements, like landscaping and fencing and all that kind of stuff. How long does that wear out? Well, typically the law says 15 years, and for the contents, they say, \u201cWell, that wears out really fast, probably over five to seven years.\u201d
What happened in 2017 though under the Trump tax act was the five year and the 15 year, rather than depreciating over five and 15 years, those parts of the purchase get depreciated day one. In other words, 100% write-off day one. Well, if you think about it, typically \u2026 By the way, I\u2019m using estimates here, okay? Please do not use these numbers on your tax return. But typically, the purchase price of the content\u2019s going to be somewhere between 15% to 20% of the purchase price of the project and the land improvements are going to be somewhere between 5% and 10%.
In total, you could have 20% to 30% of the purchase price that\u2019s deductible. Well, okay, let\u2019s say buy a million dollar property, that means that you might have as much as $250,000 to $300,000 deduction in year one, and you only have to place that in service by the end of the year. You don\u2019t even have to place that in service that\u2019s not over the year. That\u2019s in year one, the minute you place it in service. Well, that\u2019s been a huge motivator for people to get into real estate over the last few years.
It\u2019s one of the reasons that real estate market has been pumped up quite frankly, is that big, what we call bonus appreciation, which is really just a first year deduction for the contents and the land improvements. Remember, you do have to do a professional cost segregation. Please do not try to do this on your own. This is something you need to hire professional. The IRS says, \u201cYou know what? This is totally allowable. It is actually technically required in the law, but you do need to do a professional cost segregation.\u201d Don\u2019t let your accountant say, \u201cWell, we\u2019re just going to do some quick and dirty allocation.\u201d That\u2019s going to get you into trouble,<\/p>\n
Tom, I want to get into the bonus depreciation, because I understand that there is some changes coming up to that over the next couple of years that I do want to get into. But could you tell us and our listeners a little bit more about some of the other, as you call it, win-win situations and win-win strategies that real estate investors could be thinking about in 2022 to reduce their tax burden this year?<\/p>\n
First one is debt. Okay? Think about this. Take that million dollar property. You could put down a million dollars and get a $250,000 deduction, or you could put down $200,000 and get a $250,000 deduction. That\u2019s a big difference. What that means is if I had a million dollars to invest, instead of getting a $250,000 deduction, I could literally get a million, $250,000 deduction. Right? Because I\u2019m getting it on every single \u2026
I could do five times as much, right? I can do five times as many acquisitions, five times as much property. The point of the balance sheet is not \u2026 You don\u2019t want to just increase your assets. Frankly, you also want to increase your liabilities. The government really does incentivize debt because you\u2019re creating \u2026 As we all know, at least here we know, that debt actually produces money supply, right? Te government wants that money supply to increase and they do that through debt.
That\u2019s the reason that the Fed is putting the interest rate higher is to try to reduce the money supply, at least limit the money supply, but they\u2019re continuing to incentivize through debt. Debt is really \u2026 Number one\u2019s bonus depreciation, which starts phasing out next year to 80% and then down to 60% the year after that. Number two would be debt. Number three is probably \u2026 Well, actually before that is even business. One of the things I always tell our clients is that, \u201cLook, you really need to treat your real estate like a business.\u201d
When it\u2019s really treated as business, business gets the most deductions. You\u2019ve got business deductions, you\u2019ve got real estate deductions. The third thing that is a really big one for real estate investors is solar. Solar has, this year, a 20 \u2026 Let\u2019s say you take and you put $100,000 of solar panels on your rental property that you\u2019re renting out. Okay? You get a $26,000 credit, that\u2019s dollar for dollar, plus an $87,000 deduction. You\u2019re basically paying a third of the cost of the solar.
Well, people say, well, I hear this all the time, \u201cWell, solar\u2019s not a really good investment.\u201d I\u2019m going, \u201cWell, not if you\u2019re paying 100% of it. But if you\u2019re up only paying a third of it, it actually turns out to be a really good investment if you\u2019ve got a lot of sunshine, if you\u2019re in the right location.\u201d Like I am in Arizona or people in Colorado or some other places in the Midwest, you get enough sunlight. Solar can actually be a really good investment.<\/p>\n
Well, that\u2019s a really good topic to point out, is that when you start getting tax incentives, it changes the structure of the investment that you\u2019re making. Like you were just describing, if you buy a million dollar property, let\u2019s say you get a $300,000 write-off, let\u2019s say that turns into a $100,000 of tax savings in that case, and you\u2019re going to put 20% down on this property. Your competition has to put $200,000 down to buy it. Maybe their ROI is 8% on that.
Well, you only have to put $100,000 down because you\u2019re saving $100,000 in taxes, which now doubles the ROI to 16%. That asset is now much more desirable for you than it would\u2019ve been to someone who doesn\u2019t get that same tax benefit, or if you bought it without the tax benefit. This is one of the ways that the people that structure the way that they build wealth put themselves at a competitive advantage because they\u2019re increasing the desirability of the same asset that somebody else could be buying.
The same happens when you utilize things like 1031 exchanges, right? I see this a lot where someone will say, \u201cHow on earth is that guy going to pay this much money for that fourplex in San Jose? It\u2019s not worth it. He\u2019s going to make it 2% return.\u201d Well, he\u2019s saving $800,000 in taxes to put that money there. It\u2019s much higher than a 2% return for that person. This is one of the reasons that I\u2019ve been doing a better job of telling people, \u201cYou need to get a good CPA. Not a CPA.\u201d
It\u2019s not just, \u201cHey, stop doing turbo tax and actually hire someone.\u201d Right? It\u2019s get one who understands this stuff and be flexible with the way that you go about building your wealth. There\u2019s a difference between working more hours at your W-2 job, which I foolishly did as a cop forever. I would work 100-hour weeks, and then I would turn around and give up 40% of my money in taxes.
It was like I was barely making more than the guy who was just working his regular job, because I was getting hammered in taxes so bad. You start to see momentum getting built. You mentioned, Tom, that bonus segregation is like \u2026 There\u2019s some scheduled changes for that. Can you give us a definition of what bonus depreciation is and then what we should expect in the future?<\/p>\n
Right. Again, bonus depreciation is first year, getting to deduct first year the contents of the building and the land improvements. Right now, that\u2019s 100%. It\u2019s been 100% since late 2017. That percentage is going to go down to 80% in 2023 and down to 60% in 2024 and to 50% in 2025. What that means is that you\u2019ve got a window of opportunity here to get faster depreciation. Now, why do we want faster depreciation? Because we\u2019re going to take that tax savings, you talk about that $100,000 tax savings.
We\u2019re going to take that, we\u2019re going to buy another property, right? We\u2019re going to use that cash for investing and using that \u2026 We want our money now. We don\u2019t want to wait to get our money over 27 and a half years. We want to get our money now, because it just multiplies that rate of return so exponentially by getting the money now and be able to put that money to use rather than give it to the government.
Frankly, that\u2019s why the government gives the incentives because they want the money back into the market. Remember, you pay tax when you spend money or when you save money. You don\u2019t pay tax when you invest money. Okay? If you spend it personally or you save it, you\u2019re going to pay tax. But if you invest it back into the economy, back into your business, back into real estate, you\u2019re not going to pay tax.<\/p>\n
Tom, I think a lot of beginning real estate investors listen to this and think that this strategy makes sense, but it might not necessarily be for them given maybe they\u2019re just starting out. Are these strategies for everyone, or at what point and what level of cash flow and wealth do you recommend people start pursuing these strategies?<\/p>\n
Well, my question would be, at what point do you want to stop paying taxes?<\/p>\n
I just think-<\/p>\n
That\u2019s the question.<\/p>\n
I don\u2019t know, David, maybe [inaudible 00:36:40] say, but for me, when I first started, I was like, \u201cI have so much to learn, and I was trying to learn about cash flow and property management and running my business. I was like, \u201cOh, at a certain point, I\u2019ll learn more about taxes because that\u2019s a champagne worry because I\u2019ve already made it and I\u2019m making money.\u201d Or at least that was my opinion back then. I guess it\u2019s a question of priority, right?
Where does this fall in terms of your priority, and is it worthwhile for someone who maybe just has one property or two properties, are they really going to see the benefits in wealth or cash flow that they get maybe from \u2026 Is it worth it to spend the money on either professional cost segregation or a good high quality CPA?<\/p>\n
The cost segregations are not that expensive. They\u2019re not. Because if you got one or two properties, you\u2019re talking about smaller properties. Takes less time to do the cost segregation. I have found on any property, certainly any property of $100,000 or more, it\u2019s worthwhile. Okay? It\u2019s going to be worthwhile easily on $100,000 or more. The question about hiring a good CPA is a question of how big\u2019s your game, right?
Are you talking about, \u201cWell, I just want to have one or two properties. I\u2019m going to pay cash for them. I\u2019m following the Dave Ramsey schedule of investing?\u201d I\u2019m going, \u201cTax, probably not a big deal to you, right? Because you\u2019re really playing a very small, slow game.\u201d If you\u2019re going, \u201cYou know what? I\u2019d really like to not have to work. I like my work, but I don\u2019t want to have to. I\u2019d really like to have more time to spend with my kids, my grandkids,\u201d for me, it\u2019s grandkids, more time to do what I want to do, just realize that taxes are probably your single biggest expense.
Probably your single biggest expense. The question is, which expense do I spend time on? Do I spend time on my business expenses or do I spend time on my tax expenses, which is going to be more productive? It\u2019s really easy to reduce your taxes. It is really fast and really easy. Once you get the concepts. When I write books, I write them for the average person. I don\u2019t write them for the CPAs. I find that complete waste of time because a lot of CPAs think they know everything anyway.
What I do instead is I write them for the entrepreneur, the beginning investor, and I want to make sure that at least you\u2019ve got the concepts and that you can say, \u201cOkay, whoever my CPA is, whoever my tax advisor is, do you understand these concepts? Do you follow things?\u201d I literally had a \u2026 My wife\u2019s a CPA. She sent me a note. She goes, \u201cBy the way, your name came up in the online form at the Arizona Society of CPAs.\u201d I said, \u201cReally? What\u2019d they say?\u201d
They said, \u201cWell, one of the prospects \u2026\u201d Some entrepreneur was saying, \u201cI\u2019d like to know if anybody follows Tax-Free Wealth,\u201d my first book, \u201cand Tom Wheelwright and if they do things the way Tom talks about them.\u201d The question was, is this a scam? I\u2019m going, \u201cWell, maybe I\u2019d just read the book and see what you think, see if you think it\u2019s a scam,\u201d because the reality is that I\u2019ve actually \u2026 Tax-Free Wealth has been out 10 years now, and I\u2019ve never had any accountants say this is aggressive or this is wrong. Not even one. That\u2019s with over 3,000 five-star reviews on Amazon. Taxes just aren\u2019t that hard. To understand the basics and building a team is what investing is all about. It\u2019s a team sport.<\/p>\n
With the changes in the tax code, what\u2019s your opinion on why those are going away and what people can do about it?<\/p>\n
Well, they were scheduled to go away, right? Bonus appreciation, unless we get a new administration 20 \u2026 Certainly nothing\u2019s going to happen before 2025. That\u2019s the soonest anything\u2019s going to happen because the current administration is just going to let them phase out. I guess if you had an override available in Congress and the Republicans took over Congress by boatloads, could they override a veto and do a \u2026 I don\u2019t think there\u2019s a big push for that. I think right now the one thing that \u2026
The solar\u2019s phasing out. Solar is at 26 now. It used to be at 30. It\u2019s going down to 22 and then it goes way down. I think that\u2019s something that you could literally write your congressperson about. You could literally write your senator about. I think there\u2019s a lot of people who would like to see that. They just don\u2019t want to see the tax, the revenue offsets on the other side of it. Right? I do think that that\u2019s possible, is to actually see some changes on the solar side. I don\u2019t think the depreciation\u2019s not going to change before 2025.<\/p>\n
Do you think that people \u2026 It sounds like if people are interested in solar, now would be a good time to do it, if they\u2019re waiting around for that.<\/p>\n
Here\u2019s the problem, Dave, is that we\u2019ve got a big shortage of solar panels and a lot of this is the whole China thing, right? If you\u2019re going to get them installed by the end of the year, you\u2019d better act right now, because otherwise, you\u2019re not going to have them installed. You\u2019re not going to get that \u2026 You\u2019re going to lose 4% of that tax credit. It\u2019s going to go from 26 to 22 before you can get them installed. The solar is something you need to act on right away, and it\u2019s \u2026
Again, the numbers can be big. If you\u2019ve got multi-family, you can basically have your own little private utility, and then basically charge your tenants for the utilities, and that\u2019s actually a pretty decent money maker if you set that up, but it\u2019s going to take you four or five months to get that done. There is urgency for sure on the solar side.<\/p>\n
That\u2019s a great point. I\u2019m thinking about it for a short term rental. I\u2019ve always thought about doing it, and unfortunately with short-term rentals, it\u2019s not one of the investments \u2026 At least I\u2019ve never heard of someone passing along utility cost to a short-term renter, prorating it based on what they use for a weekend or something like that. You\u2019re usually stuck with that.<\/p>\n
But you\u2019re paying the utilities on that, right?<\/p>\n
That\u2019s what I mean. Yeah.<\/p>\n
If you\u2019re paying the utilities, you get the benefit right away.<\/p>\n
Yeah, exactly. You can get the tax benefit. I think electrical on some of these nicer short-term rentals, maybe I have an electric hot tub, for example, it\u2019s a huge expense. If you can offset that-<\/p>\n
Sure.<\/p>\n
\u2026 especially in Colorado, there\u2019s abundant sun, that could be a really good investment. Tom, I wanted to ask you, you\u2019re talking about some of these tax incentives that have been planned to phase out, and I know this is probably nearly impossible to quantify, but do you believe that the way these tax incentives have been structured has led to an increase in real estate activity over the last few years? Do you see your clients and people acting and being more active than they might normally be because of these tax incentives? Is that playing into the appreciation we\u2019re seeing in the housing market?<\/p>\n
Oh, no question. I don\u2019t think there\u2019s any question at all that they played a huge part. Anecdotally, I have clients that they were not investing until they heard about the tax benefits and these guys do a lot of real estate, and yet they weren\u2019t really motivated to do it until I said, \u201cWell, wait a minute. Look at the cost, the cost benefit analysis to doing the real estate yourself instead of just being tagging onto somebody else\u2019s real estate.\u201d
There\u2019s no question, and no question it\u2019s helped push prices up, there\u2019s no question that it\u2019s helped increase the number of rentals that are out there. The whole goal, right? For the government from a social standpoint is we need housing. We\u2019re still short a lot of housing units. I think it\u2019s been very successful. I haven\u2019t done any studies in that regard. I can just tell you, anecdotally, my clients, definitely, it\u2019s had a big impact.<\/p>\n
When it comes to this game of taxes and there\u2019s different ways that we can partner with the government, what are some of the common ones that if someone\u2019s trying to figure out where they could jump in, that they should start off considering?<\/p>\n
Well, you always start with the education. Start with my book, The Win-Win Wealth Strategy. Actually goes through seven investments the government will literally pay you to make. The last chapter is how to get the government to pay for your Ferrari, which actually use a real life example. While the government\u2019s not trying to encourage you to buy Ferraris, they are encouraging you enough that the benefits can be so high that you could afford to buy a Ferrari with the savings from the tax savings.
There are huge opportunities, but the first thing you have to understand, we\u2019ve got to change this \u2026 Just what you started with, David. We\u2019ve got to shift our mind from these are loopholes, to these are intentional tax benefits and this is something the government actually wants us to do. We\u2019re not being bad people. We\u2019re actually being good people. I will tell everybody, if you\u2019re paying high taxes, you\u2019re not nearly as patriotic as somebody who\u2019s actually using these incentives and doing what the government wants done, the way the government wants them done, being an active partner with the government.
The government makes way more money, and I show that in Win-Win Wealth. The government makes way more money with active investors than they do with the silent investors. I think we\u2019ve got to change our mind shift first. I do think we need to have a team, because I think that team is critical. The tax lie is very complicated. Don\u2019t get me wrong. The concepts are very simple. The tax law itself, lots of details, you do need a team around you. You need that lending team, you need the finding team, you need the selling team, you need the advisory team, right?
You need all of these team members and investing as the team is much more \u2026 Frankly, it\u2019s a lot more fun and a lot easier than investing yourself. I think it\u2019s a waste of time to do things yourself that somebody else can do better than you. Those are really the keys to me. It\u2019s less choosing which investment. I think for me, it\u2019s \u2026 Choose one that you like doing. If you like Airbnb, do Airbnb. If you like single family home, long-term rentals, do that. If you like industrial, do that. If you like triple net lease, do that. Whatever it is you really enjoy doing, do that.<\/p>\n
Yeah. I think that\u2019s a good point. It can be addicting in our space where there\u2019s so much information to consume all the time. You could never get through all the videos in YouTube, even on one asset class in your entire life.<\/p>\n
Of course.<\/p>\n
You\u2019re learning, you\u2019re learning, you\u2019re learning. Your mind\u2019s exploding with possibility. You get this feeling of progress and it\u2019s like the dopamine is getting released as you\u2019re, \u201cI could do this and I could do that.\u201d You start envisioning this life you want to live. Then you\u2019re like, \u201cAll right, I got to learn it all,\u201d and it\u2019s like trying to download 700 movies on your computer at the same time. You never even get one of them actually finished.
What I\u2019ve learned as I\u2019ve progressed is I need to learn just enough to get the basic idea, then find the team member that already knows how it works. I will have people that will message us here on BiggerPockets or submit a question that\u2019s a very nuanced and detailed question about a loan. I was like, \u201cYou don\u2019t need to ask me that. That\u2019s a question for your loan officer. They know that immediately, and that\u2019s not hard for them, and it\u2019s silly for you to even be trying to figure that out.\u201d
It\u2019s like, I need to go learn how cars work before I drop it off at the mechanic\u2019s office. No. You know there\u2019s a problem, you know you trust the mechanic. Let them figure out what it is. Same is true with taxes, right? I would just definitely second the opinion that once you find a person that you trust, you get a solid referral, you go to the professional and you say, \u201cHere\u2019s my problem. How would you solve it?\u201d
That\u2019s one of the litmus tests that I have when I\u2019m picking a team member. \u201cHey, this is my hurdle with getting a loan. How would you solve it? Hey, I need to find a property that looks like this to a real estate agent. How would you solve it?\u201d What advice do you have for what people should be asking when they\u2019re trying to find their team member to handle their taxes?<\/p>\n
I actually think one of the most important things is, tell me what the system is you use for doing this. Because I don\u2019t want everything to be a new decision. I don\u2019t want you to have to handle everything as a new decision. I don\u2019t want you to have to look everything up. I want to make sure that you\u2019ve got a system that you use and you use the same system over [inaudible 00:49:25] Yeah, I get every taxpayer\u2019s different to some extent, but you\u2019re following a systematic approach to it.
It\u2019s those few CPAs that have a systematic approach and there are very few of them, frankly. It\u2019s that systematic approach that makes a big difference. Until I really understood the patterns of the tax law \u2026 20 years, ago I was doing it like everybody else. Right? Give me a question. I\u2019ll try to figure out the answer, until I figured out, you know what? There\u2019s patterns here, and once you have patterns, then now you can actually predict what the tax savings are going to be.
You can predict what the result\u2019s going to be, because you identified the patterns and you\u2019ve set up a system, and now I\u2019m just going to take you through that system. We talked about this before, David, but I find that the difference between a professional investor and amateur investor is an amateur investor makes a new decision on every investment, and a professional investor makes a single decision and just applies that decision over and over again. The same\u2019s true with a professional advisor, by the way.
A professional advisor makes a single decision and say, \u201cThis is how this works, and I\u2019m just going to apply this over and over again.\u201d Right? As opposed to looking at every single question as unique. We need to look at every question as, okay, here\u2019s the pattern, I understand the pattern, and so this is likely what\u2019s going to happen. Now, am I going to research to make sure I\u2019m right? Absolutely. But I better have a pretty good idea going in what I think the answer\u2019s going to be coming out.<\/p>\n
Tom, for those that are intrigued by what we\u2019re talking about, what can they expect if they get your book and where can they find it?<\/p>\n
Well, first of all, the book title is The Win-Win Wealth Strategy: 7 Investments The Government Will Pay You to Make. You can get it Barnes & Noble, you can get it Amazon, you can get it anywhere books are sold, or you can get it at our website, winwinwealthstrategy.com. You\u2019re welcome to get it there too. Wherever you want to get it. What you\u2019re going to get is a whole different viewpoint, and I think you\u2019re going to be able to \u2026 It\u2019s going to help you get comfortable with your ability to reduce your taxes.
It\u2019s not just an instruction guide for you to reduce your taxes. It\u2019s actually \u2026 A little bit of it is for you to know that what you\u2019re doing is a good thing, that you\u2019re actually contributing to society. You\u2019re contributing to the housing market. You\u2019re contributing to the commercial market. You\u2019re contributing to the industrial market. You\u2019re contributing to the energy resources. You are actually making a positive contribution to society.
I think that that mind shift is so important because now we\u2019re not so hesitant. We all have glass ceilings that we put on ourselves, right? The glass ceiling is, \u201cWell, I\u2019m not a good person if I make more than this much money,\u201d or, \u201cI\u2019m not a good person if I only pay this much tax.\u201d I think we need \u2026 One of the goals in investing is to get rid of those ceilings and take that ceiling off, and at that point, now the sky\u2019s the limit. But until we take those ceilings off, I think we\u2019re always going to be doing self-limiting behaviors.<\/p>\n
That is awesome. I love it. Before I get us out of here, Dave, did you have any last words that you wanted to leave people with? You\u2019ve been a fly on the wall and I could just see the wheels turning in that smart brain of yours.<\/p>\n
No. This has been super helpful, Tom. As I said, I\u2019m a novice when it comes to taxes. I\u2019m trying to learn a bit more and I\u2019m looking forward to reading your book and I\u2019m definitely going to think about how I can apply some of the things I\u2019ve learned here today before the end of the year to try and produce my own taxes next year.<\/p>\n
All right. Well, thank you very much, Tom. This has been fantastic. I really appreciate when you come and share your knowledge with us all. We\u2019re all better for it. This is David Greene for Dave, The Champagne Strategist, Meyer. Signing out.<\/p>\n<\/div>\n