TRP081: 5 Real Estate Tax Deductions to take Advantage of in 2019 with Tom Wheelwright
December 6, 2019
Randy Lawrence: I want to welcome you to today’s episode. Boy, we have got an exciting power packed episode today. You are going to want to strap in for this Tom Wheelwright CPA. I know many of you know him. He needs no introduction, he’s well known, but just kind of giving you some background on Tom. He’s a core CPA, CEO of wealth ability based out of Tempe, Arizona bestselling author of tax free wealth. If you’ve not read that yet, you’ve got to get it. He’s also author of multiple books including why the rich get richer. And then also a rich dad advisor to Robert Kiyosaki and really been a significant part of his team and providing the tax advice and strategies to them as well. And then good Lord, he’s been featured in wall street journal, Washington Post, Forbes, Investor’s Business Daily in every a major network that you can think of.
Randy Lawrence: So again, just the list of accomplishments goes on and on farther than what I could read. Tom we’re grateful to have you here on today’s show. And we’ve got an exciting topic that we’re going to be talking about now. And again, it’s funny, right? A lot of people don’t get excited about taxes, but I do because I know if you can use the laws to your advantage then you’re coming out ahead. And that’s one of the things Tom, I know you’re a master at. And so today we’re going to talk about the five real estate tax deductions. Then a lot of people, not only investors, but even unfortunately maybe the CPAs they work with and accounting firms they work with are not really dialed in to know about. So again, I’m excited about this and listen for you guys and gals that are watching and listening, you make sure you take good notes. You’re going to be able to really get some great things out of this. So, Tom, again, welcome to the show. Glad to have you on board.
Tom Wheelwright: Well, it’s great to be here, Andy. I’m always loved talking to investors and people who are looking at the possibility of real estate especially. The 2017 tax law was very much in favor real estate. I actually remember I was in Washington D C when the 1986 act was passed and real estate got hammered in 1986. That’s where we got the passive loss rules. You know, we had the whole savings and loan tobacco as a result. And in 2017, lo and behold, 30 years later, it is completely the opposite. So unfortunately, like you say, a lot of CPAs do not understand this one. In fact, we train now hundreds and thousands of CPAs so that they do understand that that’s actually the, our mission right now is to train the CPA profession because we found not only do investors not understand that their CPAs aren’t understanding
Randy Lawrence: For sure. Well, you know, it’s, I know when you and I first met Brad Semrock, who’s a friend of mine, you’re his personal tax advisor and of course speak at his events and all like that. And just love the excitement and passion that you have for this. And, you know, that’s really what I was like, man, Tom, I gotta have you on the show just because, you know, we talked with a lot of investors that invest with us and even the folks that are listening, you know, they want to find out more about how we do such great things with our investing strategies. But a lot of times, and that’s exactly the truth. When we talk one on one on the phone and we start talking through some of the benefits of the apartments and the tax depreciation strategies and all of those different things that you’re going to cover a lot of here today they’re unaware of. And then even too, a lot of times is we develop a relationship with that person, their advisory firm. It’s like, Oh, my guy doesn’t, he wasn’t too sure about that. And that’s like, I’m like, okay, well let me just do this. I recommend you’ve got to talk to another firm that knows this stuff. And that’s, you know, that’s, you know, not enough against any of those guys, but it’s just, it’s so true.
Tom Wheelwright: No, you have to, you know, you can’t have to look at the CPA profession like you would the doctor or a lawyer. I mean you wouldn’t go to a, a chiropractor for heart surgery, right? You wouldn’t go to an ER, you wouldn’t go to the neurologist for our surgery there. So what most people think is that they will, a CPA is a CPA. Everybody understands the law the same. And that’s not true. Real estate real estate is a real specialty for him. It’s very complex in the details of it. I mean we’re, we’ll explain the, the basic concepts are not that difficult to understand, but the details they require some really digging. I mean I was in the regulations this morning, I’m looking at opportunities zones and boy that’s an interesting area. There’s one that of course we’ll want to talk about because that’s a big one for real estate and it’s very complex and we don’t have all the rules. So you know, it is something where, you know, sometimes we have to, what we call it upgrade sometimes. Sometimes we have to get an upgrade in our team. And when we upgrade our team, then we upgrade our results.
Randy Lawrence: Oh yeah, you nailed it. I mean, a lot of times I taught with guys and that’s the thing, they’ve outgrown the advisor. They were working with it. It was a good match then, but they’ve grown their business or they’ve grown their medicine or practice or whatever it is, and then now there are things that they’re accomplishing are kind of beyond that level. So. Well, let’s dive in and talk about lights. You know, what’s a, what,
Tom Wheelwright: what do these top five, what does that look like? Well, so, you know, the, the, the biggest thing that happened in the 2017 tax law was the bonus depreciation, right? I mean, this was huge. Here’s why it was so big for real estate previously. It only applied to new equipment. And it didn’t apply too, really didn’t apply to real estate. It didn’t apply to residential real estate at all. So then apply to residential real estate and it didn’t apply to use property. Well, now it applies to both. So now and it’s pretty amazing. I mean, I traveled the world with Robert Kiyosaki and I always look at the tax laws in other countries and we are one of the few countries that allows any depreciation on used property. And not only do we allow appreciation, we allow bonus depreciation. So first of all, we make sure everybody understands what we’re talking about.
Tom Wheelwright: Depreciation is simply the deduction that you get for the wear and tear on your property. That’s really all it is. You don’t get to deduct the entire investment because the building’s going to last. The property is going to last for a long time. So really what the law looks at is they look at, okay, there’s really four basic components or groups of things that you buy when you buy a piece of real estate. You buy the land, you buy the building, but you also buy the land improvements, which includes all of the landscaping and on the driveways and the fencing and the carports and the lightning and all of that kind of stuff, which there’s a lot of, and it also includes all of the contents of the building, which includes the window coverings and the floor coverings on the, you know, you know, lighting and cabinetry and all of those things.
Tom Wheelwright: Okay. And even the washer, dryer hookups, things like that, things that are not really part of the building, they just make life better for those who are there in the building, whether it’s residential or commercial. And so what the, what the tax law does is they say, well, look, some of those things wear out faster than others. So land, I like to joke, even the IRS knows that land doesn’t wear out. No, there’s no depreciation deduction for land. And buildings were out over a long period of time. So the tax law says that they’re going to allow a deduction over 27 and a half years for residential, including multifamily and 39 years for commercial. Yeah. Then Landon promos don’t last a long. We all know now for some of us, a landscaping lasts a lot shorter time than for others because we don’t take care of it.
Tom Wheelwright: We’ll the Arizona made sure that it’s share, you get enough water and you got the right place, right. Oh, you got to have the right plants. Truly landscaping is a big, it’s a big expenditure. It’s a big part of the value of what you buy. And so that’s actually historically depreciated over a much shorter time, 15 years. And then you have the contents that are, that are typically wear out over five to seven years. So what the new loss said was, is it said, look, if it wears out in less than 20 years, we’re going to give you all of the depreciation the first year. Wow. And that’s whether it’s new or used. So that means, I mean consider this. Well, let’s say that you put down 25% on a, on a multifamily building. Yeah. Well let’s use simple numbers. Let’s say it’s just a little fourplex and some million dollars.
Tom Wheelwright: You okay? Well if you put 25% down, you’re only putting down 250,000 yeah, well the building then the property though it is $1 million and you get benefit, you get the tax benefit for the, for the money you borrowed as well as the money that came from your pocket. So you get the whole $9 of purchase price. Basically the, the cost to depreciate. Well, if you look at, if you go in and do what we call a cost segregation, which breaks down all of these different types, you know, components, then what happens is you’re going to typically find that somewhere between 25 and 30% of that property guy you is in the land improvements and the contents. Okay? So if you do the math on that, let’s say it’s 25%, that means that you put down $250,000 and you’ve got a $250,000 deduction in the first year.
Tom Wheelwright: Yeah. Where else can you get a 200 a deduction for your entire investments? But yeah, that’s amazing. And still only investment, right? I mean, yeah, you could spend your money in your business, but then the money’s gone. If you put the money into real estate, the real estate is still there and you still get the deduction and you get not only your portion of the deduction, you get the bank’s portion of the deduction. And this is something I’ll tell you what, last filing season, I was literally on the phone with so many syndicators like yourself, right? So many people who put together deals and they did not understand this, their counts did not understand this. I was seeing the K ones come through depreciation come through where it was like, you know, 10% or 5% or even, you know, small numbers. And I’m going, what is wrong with this picture? So I literally have conversations both with the syndicators because my clients are investors, right? And my clients are investors in these deals and I’m calling, I’m having to do the work.
Tom Wheelwright: I’m not to make sure that this gets done right, because I want my investors get the tax benefit for, it’s just something that I don’t understand why it’s so, you know, poorly understood. But I’ll tell you why. I’m just not seeing a lot of real good comprehension. I’m out there in the, in the commercial marketplace.
Randy Lawrence: Well now you know that even to raises a, another great point too and I see that as well cause so like with all of our properties we’re dialed in and understand that we enter into that cost segregation study. We actually have with a national firm. They just know as soon as we close, bam, it’s already on their list. They’re going out there, they’re doing three of them for us on a complex is here. I think in two weeks I saw on an email that just came through and, and there it really is what you just hit on. There’s people that are in the investment arena and yet though they don’t have the full understanding, and again, that tax component is a big part of it. And to be able to advantage and leverage that for the benefit of investors, like the folks that invest with us, they’re getting, you know, 40, 50, 55% deduction, typically speaking on their K one because of that cost segregation of study versus somebody where they’re getting, like you said, 10% and then now you’ve got to jump in and kind of fix it, you know?
Tom Wheelwright: Yeah. So, so here, so, so I mean, think about how big a piece this is for the investor. You know, the, the first year, I mean, you’re going in and rehabbing the property and et cetera, and they’re not, they’re probably not getting cashflow that very first year. The only cashflow they’re getting is the tax benefit. So, and the tax benefit, I mean, think about that on tour, $50,000 if you’re in a 40% tax bracket, that’s $100,000 tax benefit, which means that’s a 40% return on investment in your wa on day one, not just year one, but on day one if it’s done right and it becomes such a big part of the investment return that you know, you, you can’t any more like you can’t even more compare investment returns from real estate with investment returns on the stock market because in the stock market, the best you can do is not have the gains tax it taxed immediately, right?
Tom Wheelwright: No tax. You know, you can do a Roth Roth IRA to Roth 401k and you know, you can, you can not have a tax but you’re never going to get a deduction for it. If you get a deduction then you have to pay it back down the road. So, you know, real estate is one is just a unique situation with this bonus depreciation that if, you know, if you’re, if you’re looking at an investment and they’re not doing the cost segregation and they’re not doing this properly, you really need to challenge, frankly, you really need to challenge the syndicator and say, what’s going on here? I need to make sure that I’m getting my tax benefits.
Randy Lawrence: Yeah, for sure. No, that’s, that’s so true. And, and I think it’s just even to, like you said about having the right advisors, the right team that understands how to maximize the results really. That’s really what it is. And, and so, and I, I think about even too, and I know Brad has said publicly in kind of announced it from the rooftops that like, you know, by him connecting together with you and gaining that understanding that like, he himself personally saved over a million dollars, you know, and, and that’s the power of what this can do. Now again, maybe your situation where you’re listening, you’re not going to save $1 million and buy a whole complex. But by investing into this type of real estate, you know, just like Tom said, the results are astronomically better because of the tax advantages and what you may get in a stock investment or a bond or a loan where you’re making kind of hard
Tom Wheelwright: money loan or something of that nature. Right. So we’ve, we’ve probably got to address, because a lot of your listeners I know are passive investors and syndicated deals. So we probably had addressed this passive loss issue because this is something I get all the time. I was in Dallas a couple of months ago and what I heard was, well, you know, Mike, Mike Kemp, my tax advisor says, I don’t get these deductions until the property gets sold because I’m a passive investor. And so they’re not deductible. I’m going, well, well then they’re not. They’re probably not explaining to you exactly how the wall works. Okay, so a pass a loss. Yes. It may be passive to you cause you’re not a real estate professional. But a passive loss can offset passive income. And the question is, should become then how do I convert some of my active income to passive income?
Tom Wheelwright: That’s where you really have to have the good tax advisor because they have to be looking at your entire picture. This is why we always start a new client going through a comprehensive strategy, a plan of action for reducing taxes. Because you can’t just look at one piece of it. If I just looked at the one piece, I say, yeah, you’re not going to be able to use these, but I don’t know the rest of your situation. So the question should always be, not can I use it? But how can I use? And once you start and you and your advisor should be talking in those terms, okay, here’s what you have to do in order to use these tax benefits. Are you willing to make these changes? Is this okay? Does this work? And normally what we find is, is that we can get other tax, other benefits, estate tax benefits, other types of, even family planning benefits, family financial planning benefits we wouldn’t ever do if it weren’t for the tax lot encouraging us to do it.
Tom Wheelwright: There’s actually a, you know, my, our philosophy and weldability is, no, not only is the tax laws series of incentives for reducing your taxes, it’s actually a roadmap for making money because you’ll always, your finances improve when you follow the tax law the way it’s supposed to happen, not just because you have more money that you can invest. That’s a big deal. That’s, you know, that’s what Brad learned. Right? Exactly. But, you know, yeah, $1 million extra. What can you do with that? You know, I mean, probably by a $4 million property, if you know, by the way, you’ll get taxed on the $4 million property. It just keep going and going and going. So that’s one part, but, but the other part of it is, is you actually end up making better decisions. Okay. If you’re really following the texts off. For example, you know, one of the, another one on our list or on the top five, one thing that people miss a lot is the home office deduction.
Tom Wheelwright: And the reason because their tax dollar says, well, it’s not that big of a deduction. It doesn’t help that much. But really it’s first of all, it’s specifically in the tax law. So it’s not a red flag. Okay. It’s specifically the tax law. Second of all, if you do it right, actually it’s not a red flag at all just because it’s not even reported to the IRS if you do it right. And, and, and thirdly, there are other tax benefits go on with it. First of all, it has to be a business deduction. So the key is anything can be deductible. If I make it a business deduction and the way to make it a business deduction, excuse me, the way to make it a business deduction is pretty simple. You have four tests. It has to have a business purpose and a business reason.
Tom Wheelwright: It has to be ordinary, meaning it’s typical in your business. It has to be necessary, meaning it’s going to make you a profit and you have to document it. Well, think about the financial benefits of falling in those four rules, not the tax benefits they mail the financial benefits. Yeah. Every dollar you spent was you was had had a business purpose was typical and not over the top right. People get in trouble when they buy fancy offices. I see. You’re in your home home office there. I’m in my home office here. Right? I w you know, we’re both, we’re both doing this. You know, we’re both in a, in a small house, we’re not in fancy offices. People do that. Well, you know, if it’s over the top, it’s not ordinary. Right? Well, it’s also not making any money. So, and if it’s necessary, by definition it’s profitable.
Tom Wheelwright: So if, if it didn’t make those tests, the question that I always ask is, should you really be spending that money in the first place? Yeah. Okay. Because if it doesn’t meet those tests, it’s probably a frivolous expense and it’s not going to make you money. So you’re always going to make more money. If you follow the rules that the tax law has set out, and one of those is, look, if you have a home office, the IRS actually, okay, I know this is completely contrary to what everybody’s always heard. The IRS or the tax law wants you to have home office. Wow. Okay.
Randy Lawrence: Well th th wow, right? I mean, because you so many times that’s what you hear in the streets, so to speak, or other people. It’s like, Oh well don’t put that on your taxes. That’s a red flag for an audit. And it’s like, that’s not really the truth. But that’s kinda like, you know what people think.
Tom Wheelwright: Well, let, let, let me show you how much the IRS wants you to have all office. If you think about, you know, think about your automobile expense, you’re pretty much, everybody knows that, the portion of the time that they drive their car for business, they get a deduction, right? Either a mileage deduction or an actual deduction. And I think most people understand that when you commute, that’s not deductible. That’s considered personal by the IRS. So that means even if your first trip of the day to a rental property, or even if it’s to a customer that’s a commute. And the last trip of the day is the community also. Well, the IRS is very specific in their instructions, but if you start your day at your home office, your commute is the 30 feet to your kitchen from your kitchen to your office. And if you end your day at your home office, your, your community at the end of the day is the 30 feet from your home office back to your kitchen.
Tom Wheelwright: Because we all know that our day start in our kitchen and it always starts with coffee and ends with wine. My wife calls those the bookends to her day, the morning wine in the evening. Well, if, if, if you’re commute now is that 30 feet, then that means that that first trip outside of your house, it’s no longer a commute. Now it’s business. Wow. For most people, that will almost double the deduction for their automobile if they have a home office. If they don’t have an office, they don’t get that deduction. And so, you know, this idea that the home office is not encouraged, all the IRS wants to do is make sure that you’re not taking home off. This one. Don’t, shouldn’t have all of us. I mean, I will tell you the others I’m in right now is in my home, but it does not qualify as a home office because there’s a bed in this room.
Tom Wheelwright: It’s a, it’s a Murphy bed, but it’s a bed. And I have guests that are not business guests stay there. So therefore this does not qualify. It’s not exclusive. I’m never going to take this, even though I use it 98% of the time or business, I use it 2% of the time for personal. And because I do that, it’s not a home office. Now I have other rooms in my home that are solely office. I don’t use them for anything else. They’re exclusive. We’ll so they qualify. So I always start my day in the morning with them, at my home office and I always end it on my home office. Now I spend most of my time in my home office because I actually find that I get more done in my home office. Now I have an office. By the way, here’s another thing people misunderstand.
Tom Wheelwright: You might have an office outside of your home, okay? The, you might go there to meet clients or to meet staff, to have meetings to do other things. But you actually, what most I’m guaranteeing most people don’t, don’t know, is that you can’t have two offices. What we have to do is make your home office your primary office. Okay? And if we do that, then the other office is your secondary office. And actually traveling from your home office to your secondary office is deductible. Wow. So you, you know, and when you combine this, now I’m going to bring back in bonus depreciation. Now we have bonus depreciation on cars. So even a passenger car, the first year you get $10,000 of bonus depreciation. If you use your car a hundred percent business. Well, if you don’t have all office, there is no way you can use that car 100% for business.
Tom Wheelwright: Cause you’re going to have a commute day. Yeah. Oh, you’re not going to get all of that bonus depreciation. Now, bonus depreciation on trucks, which a lot of real estate investors have, you know, big SUVs or big trucks. Okay, that’s, you know, it’s important to what they’re doing. no trucks. They don’t have that $10,000 limit. You get bonus depreciation equal to 100% of the purchase price. So consider this, you’re the end of the year, you’re thinking about buying a new car. You go on, I need that new truck, that new SUV. And it’s, let’s say it’s $60,000 that’s actually not a very expensive truck or SUV anymore, but it’s $60,000 and you put $0 million down on that, on that truck or SUV. If you have a home office and you’re using that truck or SUV only for business, then you could get a deduction up to $60,000 the first year. So, so here’s what’s happening.
Tom Wheelwright: You’re borrowing $60,000 from the bank, you’re getting at a 40% tax rate, you’re getting a 24% tax benefit. Wow. And you’ve, you are out no money, $0 million out of your Fiero dollars out of your pocket, $24,000 into your pocket right now. Do you have to pay for that car that, that truck or that SUV? Absolutely you’re gonna have to pay for it. But here’s if you’re using it right for business, again, business purpose, ordinary, necessary, documented, right? You need make sure you document those miles. But if you’re using it for business, guess what? You actually are going to produce income as a result of having that vehicle so that that income that you produce from having that vehicle is going to pay for the vehicle. So you get the tax deduction up front. I mean, think about how all this was working together here. You know, if people, they help, here’s what I hear.
Tom Wheelwright: People go, well, my testifier says home office. There’s just not many reductions there. Well, by itself it’s not entirely true, but it’s not that thick that it’s not that huge of a number. But when you add in the bonus depreciation and automobile and all these other things, I think what people, what a lot of tax advisors, especially in this is that the tax law is a, is a living, breathing organism and all the parts work together. It’s like, could you have a brain without a heart? Yeah. Right. Without organs you, you can’t do that. And the same is true with the tax line. It’s a living, breathing organism and all of these pieces work together on what happens is people have, accounts tend to be very linear. You know, a to B to C to D rec would always come.
Tom Wheelwright: You know, most accounts come down the line when the tax lies have built that way. It’s very nonlinear. And so we have to start looking at differently and just realize that, you know, what attack, it’s not that hard. No, it’s not. It’s a matter of, you know, how do I make a deductible if I’m going to change, as I always say, if you’re gonna change your tax, you have changed your PACS. And your advisor’s job is just telling you what facts to change. That’s it. And then decide, do I want a home office or not?
Randy Lawrence: Well, I love the fact too, a friend of mine is a president of John Maxwell team. And I remember John saying, you know, great answers come from great questions and I love hearing you. See, this is what’s so different too. And again, for you guys who are listening, you know, a lot of times the advisors will say, no, you can’t do that. And then what you’re saying is how can I do that? Here’s what it is. And then not only that, but then you’re saying, how can I look at the whole picture and see how we can then, adapt or change the facts to conform to what the picture is? And so that’s so key for those of you guys who are listening, you know, getting the right questions. And again, so oftentimes, and I see this so much where I talk with somebody, they talk with an advisor and the advisor says, ah, now you can’t do that.
Randy Lawrence: And it’s like, instead of saying, how can I do it? Because you raised a great point too about the question of how can I create passive income to offset those passive losses? Cause there’s plenty of people where maybe they own a law practice, a medical practice, a business. There’s different opportunities that may exist there for them to be able to create a passive income structure. You know, and just what you said, how can I do it? And so that’s, I would almost say very few, it seems like from my experience, ask those kinds of questions.
Tom Wheelwright: I was actually doing my recording, my own podcast this morning. What was, really clear is that, you know, we’re just not conditioned to asking those questions, but we’re not conditioned to, to really thinking about is, and we’re not conditioned to having an account where we typically an account, it becomes, sets up their own practice typically because they want to own their job. Okay. Not because they’re not an entrepreneur. In our network, we have a network of 20 CPA firms right now. And it’s growing on a daily basis. But in our network, what we look for is C is CPAs, accountants who are entrepreneurs who happened to be accountants. Yeah. Not accountants who happened on their own business. And so if you want somebody who’s going to think like an entrepreneur, I mean really, you can’t do this, you can’t do that. An entrepreneur would never ever think like that if you thought like that.
Tom Wheelwright: I think that in your real estate, if you want, you can’t do that. You’d be paralyzed from day one. You’d never be able to get anything accomplished. I mean, you have to go through zoning new act to go through, you know, red tape. You have to go through bank banking, finance, Oh my hands, I’m seriously, I refinancing my home right now and I am literally, I had a full head of hair or this refinance and you look at it now, it’s unbelievable what they put you through. And if I just said, well, you know what? Well, you know, you can’t do that. I’m going to, well, how do I do it? How can we get this done? Right? Guy even told the mortgage, my mortgage broker has been my mortgage broker for many, many years. I said, look, I am not doing this again unless you figure out how to get this done.
Tom Wheelwright: He’s here. That’s what entrepreneurs do, right? The job of not prayers to solve a problem, not create a problem. And it seems like a lot of advisors, whether it’s tax advisor or legal advisor, Mmm. Their whole, their whole mantra is let’s, let’s figure out what you can’t do. Let’s, let’s protect you from yourself. Let’s, you know, let’s make sure that you don’t make any mistakes. That’s not what entrepreneurs want. I’ve never met an entrepreneur that wanted one. Anything except tell me how to do what I want to do. How to get the result, you know, I know I get the result. What do I have to do to get there? Right? Let’s figure it out. Okay. Now you may not want, you know, there’s, there’s the other point where the juice isn’t always worth the squeeze, right? Know, you have to look at that too.
Tom Wheelwright: That’s not your advisor’s job. Your why. His job isn’t to tell you the juice isn’t worth the squeeze. And if your advisor’s job is telling you, here’s how to get the juice you decide whether you’re willing to, you know, to squeeze that squeeze hard enough to get that juice out of it or whether it’s not worth it to you. I mean, you know, the $24,000 tax benefit from your, you know, from, from a bonus depreciation on your truck may not be worth it to you. It’s $24,000 isn’t worth it. You don’t do it right. Don’t do the home office, don’t do these things. If, you know, if you’re like most entrepreneurs, you’re going, look, every dollar that I can keep as a dollar, I can invest in. Yeah, for sure. I’m going to do everything possibly that I can. So anyway, that’s, you know, let’s, let’s, let’s go on to some of these other tax things.
Tom Wheelwright: I know we’ve got a limited amount of time here. Nope. There are some amazing tax opportunities. You know, another one we were talking about before we started the show was the opportunity zone. And a lot of people have heard of this opportunity zone and they really don’t understand it. And frankly, I don’t even think the IRS understands it. Yeah. I’m not their fault. I think the law was really poorly drafted. And so let’s see if we can make it pretty simple because we’re at the, you know, we’re coming at the end of the year here and so people are going, you know, maybe too light to get into a real estate investment. What can I do? Because I had a big gain. I sold, either I sold a property or I sold stock. I have some kind of capital gain. Now. That’s the first key. It has to be Catholic.
Tom Wheelwright: And people would go, you know, and maybe it’s even that they were in a syndication, right? And syndications never do 10 31 exchanges. I, I’ve never seen it. That is syndication to a 10 31 exchange. That’s a case where the juice is not worth the squeeze, right? And so they don’t do 10 31 exchanges. So now I’ve got this gain. What do I do about this game? And I can’t. One one answer of course is by the way, take the money invested in a new deal because then you get the bonus depreciation. Remember, bonus depreciation, if as long as you place that property in service by December 31st you get all of the bonus depreciation. So you only have to have it in service one day and get all that bonus depreciation. You only have to buy that truck on December 30 if you buy that truck, you can get the bonus depreciation.
Tom Wheelwright: So you know you do have that option, but some of you are going, well, I don’t want to put all the money. I’d really just put like to put the game into something else. Okay, I’d like to take my principal back out. I have other uses for it. I want just put the game on this opportunity zone. This is something that Mmm. You really don’t see a lot of people talking about. I’m going to tell you, here’s another one where I think the tax law is creating a financial opportunity that some people are going to be multi multimillionaires as a result of the opportunity zone tax benefit. Because here’s what happens. If you take the game, let’s say that you, let’s say you’ve got $200,000 back right on the sale, but only $50,000 was a game and you go, okay, I’ll, I’d like to invest $50,000.
Tom Wheelwright: Will you take that $50,000 gain? You put it into an opportunity zone fund. Okay. What happens is, is that that $50,000, it gets deferred. The tax kids postponed for, well really, until either you sell the the deal or until the end of 2026 might see you get to defer that for a very long period of time. And on top of that, the appreciation in the property, if you hold it, hold it for 10 years, is tax free tax free. Yeah, it’s a huge tax benefit. But here’s what I think is missing when people, Taiwan is there always known about the tax benefits, right? Benefits are fantastic. The thing about where’s an opportunity, so it’s in a place, it’s in a part of town that is just on the edge of becoming a good good or a great part of town really is. That’s where the opportunities are.
Tom Wheelwright: The opportunities aren’t in the class. Neighborhoods are in the class C neighborhoods that are struggling become class B neighborhoods. That’s where they are, so this is a phenomenal opportunity not to allow the tax law to encourage us to do something that a is good for the community. I mean, I’m looking at what’s going on in Oakland, California for example. Oakland is, it’s a war zone down there, right? It’s not a war zone for years and yet you have , you have these areas in Oakland that are opportunities zones and you’re starting to see even now already you’re starting to see this redevelopment going on. I think you’re going to see more and more redevelopment. I think these are financial opportunities. You know, if this is part of your strategy, right? This is part of your fine year, your, your wealth strategy to do this. I think that, and an opportunity zone, you find the right one, I think these funds are going to be,
Randy Lawrence: Oh for sure. And that’s key too I think is like what you said is finding tthe right one. I’ve seen some that, you know, they’re kind of out in the sticks and it’s not really a great area. It’s there. They’re Florida, so we’re actually in Largo, right by the beach. And downtown Largo is always had a little difficulty gaining traction. It’s a good area, but it’s just like a downtown. And so that’s been designated and opportunity zone. And now you see there was a building that’s going up being completed there. And then two more, a combo retail apartments going up there for exactly that reason. You know, that they’re going to hold it 10 years, the investors will be tax free.
Randy Lawrence: A lot of that benefit that’s, that’s there, that, and I think too, would you also say there’s misinformation, cause I see that too, like an apartment complex deal will come through our desk, through our underwriting team and you know, Oh, it’s an opportunity zone. Well it’s like, yeah, but it really doesn’t because the buildings are, yeah, it doesn’t qualify because you’re not going to be able to put the money in to really upgrade it to make it qualify. I think the very least is what you said is being aware of it is a starting point. Because again, and again, unfortunately some firms they don’t have that awareness even to where the guy says, Hey, to his advisor, what can I do? And you can just put money in a, you know, 401k or you know, something along those lines, you know, and not really seeing the breadth of other options that may be available. So, you know, it’s great to be able to dive into some of these in, you know, see that there’s more available for people because of these tax law changes that took place.
Tom Wheelwright: Right. Exactly. And that’s really what we’re trying to do is we want to make sure that everybody is familiar with what’s possible given these new tax law changes. So I mean, for example there are some people that they’re there a little afraid right now of the market being so hot and there’s so much money going after these deals that they’re going do I really want to leverage, you know, go into high leverage situations. And so somebody would be going, you know what, I’m actually going to buy deals, cash because I don’t want to be so highly leveraged cause I’m worried that we’re going to have another, you know, 2008, 2009 it’s going to come along, which we all know what’s going to happen because real estate is cyclical just like the economy. And so we know it’s going to happen. We just don’t know when it’s going to happen.
Tom Wheelwright: Yeah. And so I know a lot of people are quite concerned about their leverage right now and they’re going, look, maybe I want to do some, some cash deals. Well, if you don’t, if you do cash deals, guess what? You’re going to have taxable income from that property. If you fits well managed property because your depreciation after your first year, is it going to be enough to offset that income? But here’s the good news. The good news is that real estate now qualifies for this new 20% deduction, a qualified business income deduction. And so this is good news for the cash investors. You know, a lot of cash investors say, well, I’m going to do this through my IRA. Because it’s a cash investment and it’s, you know, cause IRAs, of course you don’t typically do real estate because you can’t leverage, it’s through an IRA.
Tom Wheelwright: So they’re going, well I’m doing cash investment, I’m going to go through an IRA. But what you miss in there is that you’re taking income that could be low tax or no taxed income. You get a 20% deduction off the top. Whereas if you do it through your IRA, when you eventually pull that money out, you’re going to pay ordinary income roles, you know? So you’re going to pay tax at 100% of your ordinary rates and be able, well, yeah, I’m going to be in a lower tax bracket. I’m going Y yeah. If the goal is I’m going to retire and have less money, that’s not the goal. Right, exactly. It’s actually the whole, the whole idea behind the IRA or four one K is that you’re going to retire poor. Yeah. It only works. You’re gonna retire port. I mean, if you think, and I think about, okay, now let’s say that I retired, which I will never, but let’s say I did.
Tom Wheelwright: Okay, what would I want to be doing? What I want to be traveling coach, no, I want to be traveling first class. How am I going to be traveling more? Yeah, of course. Because I want to take my grandkids. I want to go on a cruise. Do I want to be in the, in the bottom, you know, in those bottom interior cabins. Are you kidding? That’s like, you might as well put me, stick me in a prison cell. I’ve done that very first time in his early days. That’s not returned to that. Oh my heavens. And then you get a cabin and you have the that you know that has a balcony and you’re looking out on the ocean and you go, wow, this is beautiful. I love this experience. Right? And it’s just a whole different world. Well why would you want to travel second class, third class a coach when you can try the first class.
Tom Wheelwright: And the reality is if you’re making as much money, is it true that you don’t have as many regular expenses? Maybe. Okay. Cause you know, your house may be paid off. Hopefully if you’re lucky, your kids are gone, right? They’re not living in your basement. But if so, you might have some fewer expenses, but you’re going to have additional expenses if you’re lucky because you’re going to be traveling and doing, you know, playing golf at first-class golf courses and you know, joining the country club that you never really were able to have time to do. I mean all of these things that we want to do when we retire and if we are making less money than we’re not going to have that, which is why, you know, which is why I love real estate because I’m going, okay real estate, I can have basically my cake and eat it too.
Tom Wheelwright: I can get all my tax benefits without having the, the handcuffs that the government puts on you when you’re in an IRA or four Ronk. So I love, you know, I always love being on shows like yours, Randy, because I just know that the more people we can talk to about what can we do if we build true wealth? We really are financially educated. We can reduce our taxes without having the government tell us what to do for sure. Right? And we can have, have freedom. I mean, think about this. So people have a five 29 plan, right? Which is, by the way, the dumbest idea ever, ever imagined by Congress. And you’re getting like half percent return on, you know, a, a year on your money, or maybe maybe 1%, maybe 2% and you can only use the money for education. So you’re going, but well, how do I build a retirement fund?
Tom Wheelwright: How do I build a fund for my child’s educational? What about real estate? What about real estate? Can’t you use that money for your child’s education? In the 2017 tax act we got a new standard deduction. It’s $12,000, which means the first $12,000 that you earn is tax free. Well, it also means the first $12,000 that you get aren’t as tax free. That’s, yeah, there’s your opportunity. So if you have a business or you’re a real estate investor, then why aren’t you hiring your kids? For sure. Why not? Why aren’t they working in your business? The government actually is encouraging you to work to have your kids work in the business. They money, they earn up to $12,000 is tax free. The next Mmm, $10,000 is basically taxed at 10% so they have these really low tax rates on top of that.
Tom Wheelwright: By the way, if the business is entirely owned by you, let’s say that you’re a real estate investor and you’ve got a partnership that’s owned by you and your spouse, there’s no social security tax when you pay your child that’s under 18 so that tells me that the government is wanting you to hire your kids. And if you think about it, it’s good for the government. Yeah. Have your kids learn how to work. It’s good for you to have the kids learn how to work. They learn your business. I mean, think of all the, the benefits. I mean, I grew up working, my dad’s a print shop. He had actually a fairly sizeable printing company and I, every one of us sick. I have five siblings and every one of us worked in, you know, at the plant. And I loved that experience and we all have memories of that experience. And that was such a great experience for us. My mother worked there too. She was the controller and that’s where I first got my numbers from my mother. And we all worked in the business, so family businesses, I’m huge fan of them. I had a great experience growing up and I think that they can be a tremendous learning experience for the kids. And the government obviously thinks that too and will reward us.
Randy Lawrence: Incentivize that. Well, it’s so exciting. I mean like even the things you’re talking about is, is I, I’m so glad for the people listening to be able to hear this because like we’ve had one of our younger guys, he invested with us in a deal for his kid’s college. That was his kid’s college plan to put money with us and then it will just roll from deal to deal as we, you know, do deals over the next 20 years. And that’s how he’s going to pay for his kid’s college and have them with a seed money for their own business. And then even to the thought of like so many fo folks list and I deal with two are entrepreneurs and like, man, why not have your kid work? Our daughter, she’s 15 she works in our business one day a week. And she started the Lord who she started investing with us with her Christmas and Easter money and birthday money where she saved it up.
Randy Lawrence: And I said, well, Hey, you could get, you know, 15% return here investing with us in this deal or you can put it in the bank and get 1% and showed her what that man, she was like, I want to go over here. And it’s like, so the more that people hear about these things and really it opens their eyes to see what’s possible, you know, you know, praise the Lord. That’s really what I’m about is helping more people. And again, I mean, good. I think we’ve had people that have invested with us now 17 years that have made double digit returns, you know, preserve their capital and it’s been done through real estate and, and that now with these tax advantages, it just, you know, hands down, I believe, promotes that real estate is a superior investment vehicle for people to accomplish their goals. You know, I’m glad to see that you guys are expanding your network too because more people need to connect together with advisors like you, it can help them. For the folks that are listening right now that want to find out more what would be the best way to connect together with you or your team so they
Tom Wheelwright: could learn how they could more a benefit and what steps they could take. So we’ll make it really simple. It’s wealth ability.com, just like it sounds, wealth ability. Our mission is to help you enhance your ability to create your own wealth. Instead of turning it over to wall street or somebody else, you can create your own wealth. So it’s wealth ability.com and like I said, we have a network of CPA firms. We have worked with firms that work with people that are just starting out. There may be, you know, consultants or they may just be starting in real estate all the way up to very, very sophisticated, you know, multimillion dollars a year. That’s our, that’s our mission in life is really expand how many people we can, we can serve.
Tom Wheelwright: Because every time I travel with a Mr Kiyosaki or I’m, you know, at Brad’s event or, or some other event, the very, the number one question I get is how do I find somebody? Because obviously I can’t take on not many clients. I only have 30 clients. I’m not looking for clients. Okay, that’s not my, that’s not my primary business. So what we want to do is we want to make it available to more people. And here’s the other thing to understand is that how you do your tax planning has a big impact. So it’s the process. You might even find somebody who really understands real estate and they and they, and they’re still not reducing your taxes on a long-term basis because they’re not taking you through the proper process. It’s a step by step process that we use. We developed this process and when you go through the process, we actually had so many, they actually went behind us and they went directly to one of our CPA firms and they came back and they said, they came back to us complaining.
Tom Wheelwright: They said, well, I went to one of your CPA firms and I didn’t get what you said I was going to get. We said, wait. You went directly to them. You didn’t go through the weldability process. It’s not understanding the tax law that makes it, it’s, that’s not the only thing that makes it work. You have to understand the process for reducing taxes. There’s a whole series of steps that you have to take to make sure everything hat gets done right, to make sure that you’re going to get an overall reduction in your taxes. Not just today, but you don’t want to. Just to get a tax reduction today. If you want to do that, just go max out your profit sharing plan. You know, if what you want is a lifetime of not paying taxes, you really want to build what we call tax free. Well that’s where you have to go. There’s a, there’s a process for that. So you know, if we can help you with that process and whether you just want to get some education on it and whether you want some professional advice, we are happy to talk to you at wealth building. We don’t charge you a dime for ’em, you know, for finding one of these firms. We do that as a, as a, as a free gift. Absolutely.
Randy Lawrence: Well, and that’s what I love too, Tom, when we connected together in, in, in met that you really are excited about the mission of helping people in, in this arena. And it really kind of, that’s a kindred spirit. I mean, we’re on a mission to help people again, you know, financial freedom through real estate investing. And then having that tax planning and strategy that couples together with it is such a critical piece. So I’m so glad to be able to have you on the show today and to have folks listened to it and, and for their ability to connect together because again, it’s undoubtedly going to help them really gain a place of getting to obtaining tax free wealth. So, Hey, thank you so much for being a part of the show and for coming on and sharing all this expertise with us today. Thank you so much. You have a blessed day to day, Tom. Thank you for having me. It’s been great being here. Thanks. Awesome. Awesome. Thank you.