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Why real estate investors legally get financially ahead of everyone else.
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Real estate is a business.
Every business can deduct a portion of the replacement cost of assets they purchase.
Real estate is an asset heavy business so depreciation costs are very high.
You can also front load this deduction with accelerated depreciation.
Every business can deduct a portion of the replacement cost of assets they purchase.
Real estate is an asset heavy business so depreciation costs are very high.
You can also front load this deduction with accelerated depreciation.
Example
An investor purchases a property for $100k.
Puts $20k down
Finances $80k
Let’s say the property nets $200/month in cash flow.
That’s a solid 12% cash on cash return.
But wait there’s more!
An investor purchases a property for $100k.
Puts $20k down
Finances $80k
Let’s say the property nets $200/month in cash flow.
That’s a solid 12% cash on cash return.
But wait there’s more!
The investor elected to accelerate depreciation on the cost of the house.
In year one the investor can deduct roughly 5% or $5k.
This exceeds the income of the property and flows through to the individual’s tax return if the entity is structured properly.
In year one the investor can deduct roughly 5% or $5k.
This exceeds the income of the property and flows through to the individual’s tax return if the entity is structured properly.
Let’s say the investor has $100k in other active taxable income.
This depreciation expense reduces that investors personal income by $2,600.
This increases the investor’s rate of return in the form of lower taxes.
Robert Kiyosaki calls this Phantom Cash Flow.
This depreciation expense reduces that investors personal income by $2,600.
This increases the investor’s rate of return in the form of lower taxes.
Robert Kiyosaki calls this Phantom Cash Flow.
Let’s say the investor scales this process across 50 more properties.
The investor now has $130k per year in real estate “losses” despite having $120k in positive cash flow.
The investor now has $130k per year in real estate “losses” despite having $120k in positive cash flow.
Let’s review
$100k in active income
$120k in rental cash flow
$220k in total income
But on the tax return there is
$100k in active income
$130k in real estate losses
-$30k in taxable income
With good tax planning and entity structure this investor might receive credits!
$100k in active income
$120k in rental cash flow
$220k in total income
But on the tax return there is
$100k in active income
$130k in real estate losses
-$30k in taxable income
With good tax planning and entity structure this investor might receive credits!
Compare this to the non real estate investor who has $100k in active income and pays $20k in taxes.
$80k in net cash flow for the non real estate investor vs
$220k in net cash flow for the real estate investor.
It’s not even close.
$80k in net cash flow for the non real estate investor vs
$220k in net cash flow for the real estate investor.
It’s not even close.
This is a contrived example but it happens all over the country.
I’ve underwritten loans for millionaire and billionaire real estate investors and it always ends up this way.
No taxes on enormous cash flow.
I’ve underwritten loans for millionaire and billionaire real estate investors and it always ends up this way.
No taxes on enormous cash flow.
This is not advice.
Simply an observation as a commercial real estate analyst who has seen thousands of tax returns.
Consult your tax own advisor.
Simply an observation as a commercial real estate analyst who has seen thousands of tax returns.
Consult your tax own advisor.
Special thanks to @theaffcoach for the thread suggestion.
Dividend stocks have some nice tax benefits too for those that don’t want to own physical real estate directly.
Check it out below. https://gumroad.com/a/790918259
Dividend stocks have some nice tax benefits too for those that don’t want to own physical real estate directly.
Check it out below. https://gumroad.com/a/790918259
