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Real Estate: How to AVOID Paying Taxes

Welcome to the Real Estate Strategies podcast. A place for conversations that matter in order to obtain infinite wealth. I’m your host, Ken McElroy. This show is meant to keep you updated on what is going on in real estate while getting you on track to have infinite wealth and financial freedom.

Real Estate: How to AVOID Paying Taxes (Legally) (with Tom Wheelwright)

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Let’s dive in to today’s episode.

Hey, everybody, it’s Ken here. And I’m here with my friend Tom Wheelwright, author of Tax Free Wealth, the owner of Wealth Ability dot com.

And he is Kim and Robert Kiyosaki is personal accountants, has enormous amount of information around tax. And one of the things this, by the way, this is episode is all about tax. But one of the things that always intrigued me every time we’re together, like what is how much you love the tax code?

Like, first of all, total nerd. Secondly. Well, what you say is which I actually it was really interesting. I’ve actually repeated this to other people. You said that tax code is literally a book that tells you how to save tax or something along that line, right?

No, it does. Actually, there’s one line in the tax law that says all incomes tax bonus. We say it isn’t. There’s another line that says nothing’s deductible unless we say it is. And pretty much the rest of the six thousand pages of tax code is an instruction guide to reduce your taxes.

The most important thing to remember about the tax law, Ken, is that the tax law is the primary tool of the government to manipulate the economy. OK, so that’s why we’re never going to get a flat tax, because that would take away their primary tool.

And it’s a bigger tool than the Fed, quite frankly, to manipulate the economy. And so what they do is, is years and years ago, back in the 60s, they first discovered how successful it is. So, yeah, one little bit of tax benefit and get a lot of activity as a result.

Start and start with the investment tax credit in your business in the low income housing credit has been around for many, many, many years. And I’ve actually seen people say, you know, that focusing on low income housing, that that is the primary driver of low income housing is that credit.

So there are just enormous amounts of tax benefits in the law. You just have to just have to know where they are. Well, I always remember like like, you know, like the alternative fuel tax, you know, all that stuff.

Like when the IRS comes out with something like low income housing, tax credit money flows there, guys. Right. And that’s what you opened my eyes, is that you could if you really want to see what the government wants.

Just look at the policies. Right. Is it that you want to elaborate a little more on that? Well, I mean, really, most that most government fiscal policy, most government policy, economic policy is really found in the tax on it doesn’t matter where you are, it doesn’t matter what country you’re in.

Again, you and I have traveled all over the world. And so it doesn’t matter if you’re in Estonia, you know, if you’re in Kazakhstan, I mean, it doesn’t matter where you are. Like maybe Kazakhstan, they have a very low tax because they have lots of oil.

OK, but but seriously, even Russia. Right. I mean, even Russia. We’re Russia. And, you know, you might still be there, but fortunately, you’re not anymore. We’re we’re in Russia. And the whole discussion. I remember the whole discussion at the at the dinner was all about tax.

Right. And my favorite quote from a Russian is that and you remember this from Barcelona. We actually met this Russian in Barcelona. He said, well, you know, in in Russia, we kind of look at laws as suggestions. Yeah.

And Ilient literally my favorite quote about tax laws. But they are I mean, they’re the same everywhere and they’re the primary mechanism for the government to deal with the economy. Yeah. You guys think about it, they use that money to pay for stuff.

And so and they get it all kinds of ways that might be in the airport. It might be a through a rental car, might through be through a hotel room, might be through property tax. It might be through taxing real estate.

It might be whatever. And so every country has those things and every country has them a little bit differently. And so I know from traveling with you that we might have different laws around depreciation, but the preciation is still an issue.

Yeah, well, no matter where we’ve. Ben, right. Right. It doesn’t matter, in fact, most countries have until the twenty seventeen law change in the U.S.. Most countries have better depreciation rules than we did. Most countries allow you to write off equipment the minute you buy it.

So it’s immediately deducted. We just adopted that in twenty seventeen. So we’re a little late to the party on that one. But you’re right, I mean, and some of them call it something different. Cost recovery. Capital expenditure. There are other things that it’s called.

But the reality is the same thing. You’re buying an asset and deducting it instead of spreading that over a long, long period of time. Or your or you’re getting this accelerated write off on something that even the bank might be paying for and you may not even actually have any money into the deal.

The bank and your investors put all the money in the deal and you still get some write off. It’s pretty cool way to do it. All right. So you raise the money, put the deal together, and then you get this massive tax advantage, right?

That’s right. I know. It’s crazy. So, you know, everybody’s worried about a couple things. And so I wanted to kind of end this one on two things. One is the bonus depreciation, depreciation, and the other is carried interest.

So let’s first talk about that, because that’s specifically around the real estate. Investors on this channel are concerned about those things. Obviously, most investors invest for these two reasons. So, you know, what do you have to say about depreciation, about depreciation, and where do you think we’re headed next?

You know, it starts phasing out anyway in twenty twenty three. Right. So we only have two years left on full bonus depreciation. It would be tough for the Biden administration to pass a change to that. It’s possible. But remember, they they normally need 60 votes right.

In the Senate, and they’re not going to get 60 votes in the Senate on anything they do. All right. Almost anything they do, maybe, you know, maybe when they appoint their cabinet, they’ll get their 60 votes. But that’s about all the time.

That’s about the only time you get 60 votes. The only time they can pass it with this simple majority, what we call 50 plus one, 50 plus the vice president is if it’s part of a reconciliate, what they call reconciliation bill, and they only get two shots at it this year and one shot next year.

So they’re looking at this current coalbed stimulus package, which is, by the way, mostly pork. But they’re they’re looking at using it for that. And if they use it for that, the Republicans are standing hard and fast because they want one of those chits to be used on that.

OK. They want them to use that because then they only get one more shot and one more shot. It’s going to be tough for them. There are a couple of very conservative Democratic senators, Joe Manchin from West Virginia and Kyrsten Sinema from Arizona.

They’re both very conservative fiscally. And so pretty tough for them to pass a pass, massive tax changes and to change the bonus depreciation right now, especially, I mean, when I look at I mean, I’m preaching to the choir here because you guys all know how tough it’s going to be once they they take the they eviction moratorium

off. You know, once they start making, you know, putting everything back to normal, then all of a sudden they’re going to take away bonus depreciation that literally would be pulling the rug out from under the real estate community.

And I think that’s a really dangerous place to go. And I am hopeful that cooler heads will prevail on that one. Yeah, I know. I was I always tell people, like it’s getting harder and harder. Be a real estate investor.

I mean, what first they have racketball, which says, OK, you can bring your you can’t increase your income. And then second, they increase your property taxes. So they cap your income. They increase your your expenses through property tax.

And now you can evict. So. Right. Like, man, I tell you what, you really have to be great. Yeah. You better be good at what you’re doing. Better be good at what you’re doing.

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OK, so let’s talk about carried interest, so first, can you kind of explain what it is? Because guys there this is the most exciting piece. If you guys have the knowledge experience and you can put a deal together, you can syndicate it, which is what a lot of people

are doing right now. This has been the raise. This has been the run that everybody’s had for the last 10 years. This is kind of on the chopping block. I know they’ve talked about it before, but this is a big deal, right, Tom?

Now it is a big deal. So so when you think about carrying an interest, it’s an interest that you earn, not because of money you put in, but because of effort you put in. So you put the deal together.

You found the investors. You found the property, you found the bank, the loan, all of that. You put it all together and you take a piece of that deal. OK, for those efforts. OK, now, typically the investors are going to get their money back first, but once they get their money back, typically your carried interest kicks in

, which means that you start to get a portion of the profits, the rants, you get a portion. If you sell the property, you get a portion of the sales proceeds from the property. That’s a carried interest. Now, it’s that sale that we’re really talking about here, because when you sell the property, the very simple question is what

kind of income is that gain? Now, to the investors, it’s really easy. It’s capital gain. OK. No question. And it’s always going to be capital gain. Now, there’s question about what that rate will be, but it will always be capital gain.

There’s no reason that they’re ever going to change that. On the other hand, with the real estate professional, you’ve really earned that money. And normally earned income is taxed at the highest rate. It’s this is the only situation where earned income is taxed at capital gains rates.

So you can see why, you know, Congress may be a little uncomfortable with this. And it’s been on the chopping block, in fact. The interesting thing is, during the 2016 presidential election, both Trump and Clinton talked about getting rid of the carried interest tax benefit.

What was even more interesting to me, though, and to you, too, and I’m sure you’re excited about this, Jan, is that when they did deal with it, they only dealt with it. The Wall Street side, they didn’t deal with that on the real estate side.

And by the way, can that’s actually not just good news now, but it’s also good news for things like bonus depreciation, the step up in basis that that Biden is talking about getting rid of other things like that, because what they did was they separated out capital gains from stocks and they made separate than capital gains from

real estate and business. OK. They made a really clear difference difference there. And so carried interest even now carried interest. If you’re you know from Wall Street, you have to hold it for three years in order to get that capital, long term capital gain, not just one year in a day like you do normally for an investment

real estate. It’s still a year and a day. So then the question is, OK, when they look at carried interest again, which they absolutely will, can I mean, there’s no question they’re going to will they do anything in real estate?

And that is that is a sixty four thousand dollar question, right? Because we don’t know. The good news is that the IRS has been very clear. I questioned when that first, you know, the whole discussion about, well, does it apply to real estate, doesn’t it?

Because in the 2017 tax law and this is where my nerdy niece shows up really, really well, Ken, in that law, they talked about it applying to real estate. And then it looks like they just made a mistake when they drafted.

But then the IRS confirmed that that mistake was intentional. So the IRS actually did something in our favor. Probably the first time in our entire life, Ken, where we’ve seen the IRS take a position in favor of the real estate investor was with the carried interest rule.

So, you know, will they make an ordinary income? I don’t know. Will they just, you know, put a cap on capital gains tax rate like, you know, beins talking about talked about anything over a million dollars gets taxed at ordinary income rates.

Maybe that’s the way they do it. I think that’s that’s the one I’d watch, though. I think that’s an easier sell than getting rid of the bonus depreciation. That’s a big one. Could you? Before we wrap up, could you kind of walk people through the math on that?

Oh, yeah, sure. Let’s say they have one hundred thousand of carried interest income, you know. Right. So the difference is. OK, so real simple. If it’s earned income, if it’s ordinary income, OK, then you’re going to pay for forty thousand dollars in tax.

Roughly, if it’s capital gain, you’re going to pay twenty thousand dollars in tax. So it’s it’s literally half. Of the tax that you’re getting a tax benefit for, you’re only paying half the tax you would pay if it was not carried interest.

So it really is a big deal. The numbers get and you know, then when you get up to five hundred thousand million dollars, I mean, the number get really, really big. It’s one hundred percent increase in tax. It is Rianna.

And that’s a big, big deal. So that’s something that you guys need to watch. That’s almost as much as the tax increase in Arizona this year. Yeah, Prop two eight. Yeah, that was a bad one. Guys, I don’t know if you realize that the stuff’s popping up all over the place and it’s different in every state.

We just had a big one pass in Arizona and now it’s being contested again. I don’t know what’ll happen, but the point is that as these cities, as these states start to lose people and and it’s going to affect their tax base, it’s going to affect and taxes are going to go up.

And so I’m telling you, you guys need to have a good tax professional. You know, call Tom Reed a spark to add tax free wealth, go to wealth ability. I’m telling you, you guys, these are big, big things.

And you should not be filling out your forms on your own, trying to save a few bucks. You really need to engage somebody right now. Wouldn’t you agree, Tom? Oh, there’s no question. If you’re if especially if you’re a real estate syndicator, you’re a syndicator and you’re doing your own taxes or you’re using the same tax person

that you used before you became a syndicator. You are losing probably hundreds of thousands of dollars of tax benefits because it is a very complex, very real estate tax law is a very complex area. It does require a specialty.

I spend hours and hours. Can you ask me a previous time about how much you know, how do you stay up with this? You know, just the Cares Act, for example, was over a thousand pages. The budget reconciliation bill was two or three times that much.

And so, you know, making sure that your tax advisor is up to speed on everything that’s going on. I mean, especially in twenty twenty, you know, for twenty, twenty one and twenty, twenty one when the the laws have changed so much.

And by the way, before we end, can would you like one nice little bonus? Yes, that’d be great meals. 100 percent deductible now. Yeah. So by the way, even carry out as long as there’s a business purpose for it.

So that was that was, by the way, that was Mr. Trump’s addition to that budget reconciliation bill. And we want to make sure that meals were 100 percent deductible for the next two years or so. That’s a little bonus for those of you who are wondering, well, if I go out to eat or if I get carried

out and have a business meeting, do I get to deduct that meal? And the answer is, yeah, probably you do. And guys. And that was not the case very recently, right? Well, it was 50 percent until until January.

It was 50 percent. So began January. It’s a hundred percent. So, you know. I mean, you think about how much money you spend going out or carry out of business meetings. It’s a lot of money. Food is one of people’s biggest expenses.

I mean, just that is a big, big deal. And those are the things I’m talking about, what these laws are changing and they’re changing fast. And, you know, they change so fast, you don’t really understand the ripple effect behind them and telling you guys you really, really need to engage somebody.

If you’ve got some holdings, you’ve got a business, you’ve got some real estate, you really, really need to engage. Because I’m telling you, there is a number of things I’ve seen Tom do it. I’ve seen Tom take people that accumulate stuff over a long period of time and completely unwind it and put it back together the way

it’s supposed to be. And they’re like, thank you. Thank you, thank you. Right. Yeah, we’ve done that more than a more than a few times. You know, for us, I mean, for the tax nerds of the world, this is fun.

The Guinness can, as we now have a whole network of CPAs, tax professionals around the world. We have people in Canada. We have people that’ll handle any state. And don’t forget, when Ken mentions the state taxes, those are becoming a bigger and bigger part of your situation.

And of course, California is you know, I call it the PRC, the People’s Republic of California, because it’s they had their own tax rules and they’re not the same as the federal rules. And, you know, they’ve got a thirteen point three percent top tax rate.

So don’t ignore state taxes while you’re doing that. All the federal planning. Remember, state taxes are bigger and bigger part of your planning as states continue to go for a money grab. Yeah. And Tommy, thank you. And with that, we got to wrap up now, but appreciate all your knowledge.

If you guys again are interested and check on Tom stuff out. Just go take a look at tax free wealth. Go buy it. Go on to wealth ability dot com and Tom will lead you through. He’ll put you with a great tax advisor and can give you an assessment of exactly some of the things he can do

. I know I’ve spent a lot of people there and they have saved a lot of money. So, Tom, thanks for your knowledge. Thanks for reading through those cares. So I don’t have to do it. I appreciate it. Anytime, Ken.

Happy to help. Thanks, buddy. We’ll talk to you soon.

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