BiggerPockets Real Estate Podcast - 631: BiggerNews July: Rich Dad's CPA on How ANY Investor Can Avoid Taxes in 2022 w/Tom Wheelwright

Episode Date: July 5, 2022

Everyone wonders how the rich avoid taxes. To most Americans, it seems like there is some big loophole 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’t know about? Tom Wheelwright, author of Tax-Free Wealth and Rich Dad’s (Robert Kiyosaki) CPA is here to tell you how to take advantage of these big tax deductions that mystify small-time investors. If you’re already investing in real estate, you’ll know that the tax deductions can be plentiful. You get mortgage interest, depreciation, maintenance, and insurance write-offs. But, even bigger than those, are bonus depreciation and cost segregation, which aren’t 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? Tom walks through the 2022 tax deductions 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. These tips could reduce your taxes by a significant amount, freeing up much more of your capital for future real estate deals! In This Episode We Cover: The disappearing tax deductions that every investor should take advantage of How the wealthy avoid taxes by buying real estate and getting into debt Renting vs. buying and which makes more sense in 2022 as affordability plummets Using cost segregation and bonus depreciation to wipe out your tax bill How to work with the government, instead of against it, to build wealth faster  The best 2022 real estate tax strategies that small or large real estate investors can implement And So Much More! Links from the Show BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast Get Your Ticket for BPCon 2022 Listen to All Your Favorite BiggerPockets Podcasts in One Place Subscribe to The “On The Market” YouTube Channel Hear Our Past Interview with Tom on 5 Steps to Eliminate Income Tax Listen to The Rent vs. Buy Debate on This Week’s Episode of On The Market Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts David's BiggerPockets Profile Dave's BiggerPockets Profile David's Instagram Dave's Instagram Books Mentioned in the Show Tax-Free Wealth by Tom Wheelright The Win Win Wealth Strategy by Tom Wheelright Connect with Tom: Tom's Website Click here to check the full show notes: https://www.biggerpockets.com/blog/real-estate-631 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets Podcast Show 631. As long as we're building the asset and liability side of our balance, you know, of our financial statements. So the balance sheet is where our focus should be and the cash flow statement, not the income statement. The income statement should could really well be zero. And for a lot of people, it is. 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. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast here today with my co-host on the bigger news episode. Dave Meyer, Dave, how are you doing today? I am doing great, David. It is a pleasure, as always, to be back. Thanks for having me. Yeah, I met one of your biggest fans ever yesterday. So 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've been a young man named Christian who works for Activision.

He's probably geeking out here in his name right now. And 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 kind of just wanted to get to me in order to get to you. because he's such a big fan of you as the VP of data analytics. And as a data scientist, he was in love with you. Well, it worked, right? You mentioned him on the Bigger Pockets podcast now.

So that probably worked better than his wildest dreams. But thank you, Christian. I really appreciate that. And yeah, hopefully people are learning about being a data-driven real estate investor. I'm hoping, you know, obviously, David, you're very analytical person as well. But hopefully our brains combine 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. Yeah, and that's what Christian had came to me and said

that he liked about my books was that they were basically built on systems and data. Like, 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. And I thought, yeah, it's funny to me that I forget some people don't think that way because we just naturally do it. So in today's show, Dave and I, combine our data brains and create a huge data transformer that will vanquish the foe of poverty and financial slavery. So I really hope that you like it. All right, I'm going to do today's 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. Please try. Come on.

Today's quick tip will be delivered to you by Dave Meyer. I'll just give you, I'll 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 Bigger Pockets podcast. So I know last week, Brandon was back on and gave away an awesome masterclass from building your social brand, an example of great free information that you should be taking advantage of. On my show, on the market, we've 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's 100% free. So don't be silly. Go download these things right now. They're on the Bigger Pockets website.

Just go to BiggerPockets.com slash podcasts. And there is a page there for each of the Bigger Pockets podcast that you know and love. And you can find amazing free stuff there. Go check it out. Yes, the website has so much more to offer than just this podcast. I think about Bigger Pockets. Like this podcast is how, what I first found out about it, It's just like when I signed up to work at a gym, I just saw that they had weights and that's all I would use.

And then one day I realized, oh 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 kind of supplement my fitness journey that I never even used because I didn't bother looking outside of the one thing. Well, that's kind of what the website is. We've got tools. We've got calculators.

We've got blogs. We've got an agent finder to get connected to the people that you need. We have all kinds of stuff to open your mind and broaden your horizons. So get on the website and see everything that we have to offer. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties.

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If you want to do the same, visit BiggerPockets.com slash retirement to learn more. So, Mr. Dave Meyer, What has the on the market research team been up to this month? One thing that I personally have been looking into, and we actually show that just came out yesterday with Ken Johnson, who's a professor at Florida Atlantic University, is rent versus buy. And this is like a time tested debate. You know, I'm sure you've had this conversation with people a million times.

But usually there's at least a clear option. And right now with rent going up so quickly. and we're seeing home prices go up as well. They're both at all times high. It brings up a very reasonable question of like, what is the right living situation for people right now? Even if you're not, if you're not an investor yet,

like, have you run into this at all? Do you, or any of your clients running into the situation where they're saying like, oh, it's actually probably better to rent right now than to buy just where we are in the market cycle?

I'm hearing people say that that believe the market's going to continue to go down. So people who think that prices are on the way down, yes, they're saying I'm going to rent because I'm waiting. I think that I'm going to have more opportunity later. But I still haven't seen anybody where renting is cheaper than buying if they buy right. If you're trying to buy a luxury property, a really nice, comfortable home, renting is usually cheaper. But what I've 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

if it changes so quickly, it's often better to look at in terms of time. So 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. And that's 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're not living for free, but they're living for less than what their rent would have been, particularly in the more expensive markets like where like Denver and in the Bay Area any market where you're seeing a lot of appreciation the rents are going up as well totally I think that a lot of the media people who just

aren't as familiar with real estate investing put up this false dichotomy it's like buy or rent and as real estate investors we know there are other options right you just said house hacking is a great option I actually the first investment I bought I was going to house hack and then I found 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. So I think it's a good question and it is worth, I think people really, the idea, the question is good because people should be examining what the cheapest way for them to live is because it's such a big expense that like 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. So I do think it's worth people examining, but the dichotomy of just renting versus buying is too simple. Because like, listen, we had this guy Ken come on the show and you should listen to the show. It's 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 down to buy a house, you reinvest it into the stock market. And like, that's cool, right? But realistically, do you know yourself? Like, if you had that extra

money lying around, would you actually invest 100% of it? Or would you have some lifestyle creep? You know, there's so many variables here. But what I think we're trying to show on the market is that there are gray areas and there are other ways to analyze this. And actually on the show, I also give out a calculator. It's really cool. If you listen to the show, you can get it for free. It's a buy hold house hack calculator because you see like on you know these financial websites they have these ways for you to analyze buyer whole 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 so that's what we've been working on we're going to be dropping a lot of data about it so I encourage everyone to check that out and see for themselves

what the best living situation for them is to optimize their financial position yeah my philosophy is if you're trying to win at the money game by depriving yourself of X amount of lattes per week to save money, you're already doing it wrong. Like saving money on $5 drinks is not the way that you get ahead in life. And I'm not a coffee drink or so. This isn't coming from a place if I love my coffee. It's your housing expense is such a bigger chunk of where your money's 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. Totally. Like if you make a bad decision, it's 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're saying. Because, you know, you're spending, the difference between spending $1,500 bucks on rent and $2,000 on rent, that's $500. That's $500 a day on coffee. no one spends that much. Like you can't cut that out on simple things. So that's right. You know, Scott Trench in his Step for Life book talks a lot about this. And he explains it more articulately than I. But I think it's with good reason.

Like this is why you should be thinking about your housing is the best way to cut costs and to reconsider where your budget is going. I just got an analogy for this. Oh, I can't wait. Having a comfortable living situation that takes up all your money and then trying to save on the coffee you're drinking is like buying a Hummer instead of a Prius and saying, well, I'm just never going to roll the windows down so that my gas mileage is better. Oh, yeah, that will definitely work.

They make electric humbers now, though. You can get an electric cover, I think. Oh, I bet you're at all, David. In some point, I'm 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. I, yeah, it really does. But I get what you're saying, right? It's like, you've already made the decision and you've already committed so much money to such a large expense. It doesn't really matter what else you do. The damage is already done. And listen, some people want to live in a comfortable home. Totally get it. But I think it's really worth analyzing this. If, you know, you have to weigh these things, right? Like, if you want to live in a comfortable home, you totally get it. But I think it's really worth analyzing this. If you know, you know, you have to weigh these things, right? Like, 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's probably a comfortable middle ground. So doing the analysis, thinking about the math behind this, it's not so simple. I'll just say that's not so simple as like looking at what your mortgage payment would be and your rent payment would be. That's not what it is. Like you have to think about what you would be doing with your excess income. You know, how much is the market likely going to appreciate? What, you know, given the topic of what we're about to talk with. Tom, are you getting the tax benefits of homeownership?

You know, it's not a simple question. And I think worthwhile taking the time to look into the data. And that's what we're trying to do over here on the market. Especially when you look at the price of rents over time. So I'll wrap up with this. Nine years ago, I bought a fourplex in Manteca, California, which is not known for having incredibly high rents. It's not like the Bay Area.

And when I bought it, the rents were at $700 a unit. I just put one up for rent this month at 1850. So whoever that tenant was was paying $700 and that same person is now paying $1850. So for them, if they were like, well, I could go buy a house. My payment would be $1,100, but I could rent for $700. Renting is cheaper. How much different is that when your rent is $1,350 and you can no longer buy a house with a mortgage of $1,100 that's locked in place?

At the same time where you're saving money in rent by owning real estate. estate, it doubles its value because you're also making money off other people that are paying rent. So it's not just that you're saving money when you buy investment property. You're also increasing the amount you collect every single year. So like you were saying, Dave, many times and you just look at right off the bat year one, renting versus owning, renting appears to be cheaper. When you give a time horizon, that gets crushed as far as the efficiency of owning real estate. Totally. I rent right now, for those you're listening who don't know this, I live in Amsterdam I moved here about two and a half years ago. And, uh, you know, we just wanted to

buy, you know, move into something furnished, make it easy, moving internationally. And it's been fine. It's been great. It's been really interesting experience being a renter again. And, but I will say, like what drives me nuts is my lease is coming up at the end of the year and the market's totally changed. And I have no idea what my landlord is going to raise my rent to. I'm usually on the other side of this. And I'm someone who likes to plan financially figure out, you know, how much money. I'm going to invest next year, how much, you know, how much I'm going to allocate to this asset class and this asset class. And I have no idea what my expenses are going to be. And even though that renting might be a better financial situation for me, I've been like sort of 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 like really valuable to me. That is a great point. And if people are interested in saving money, they are in for a treat because we are about to transition into bringing in today's 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. So buckle your seatbelt, strap yourself in and get ready for a wild ride as we bring in Tom Wheelwright. Tom Willwright, welcome back to the Bigger Pockets

podcast. How are you today, my friend? I am good. So good to be with you. you guys. Yeah, so 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're all about teaching people how to make that relationship mutually beneficial or at minimum beneficial for us as opposed to just the government. Sort of in a default state,

the government's benefiting much more than we are. When we're in a W2 position, they're taking our taxes right out of our check. We don't have write-offs. Could you share a little bit about your philosophy on this topic? Yeah, actually, it's interesting. I actually think the government benefits more when you're an active partner than when you're asylum partner.

So, you know, first we establish we're all partners with the government, right? You know that the minute you look at your pay stub and it says FICA withholding, etc. And it's a, it's a deal where you don't 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, while you know, you think about, well, do they really care? They actually make more money with active partners than they do with silent partner. And that was actually, that's a big topic in my new book, the Win Win Win Win Welt strategy, is that I actually looked at seven different investments and six,

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, I mean, remember, the government's giving a relatively small incentive and they're getting huge impacts in the economy. So, you know, this is not just, oh, well, the government allows it. This is actually the government encourages it. And I think that's a big mind shift that we need to get to. in society where this is not something where the guard, you know, and it doesn't matter, I'm sorry, but it doesn't 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.

So, you know, the key is just understand you're a partner with the government, you get to be either silent or active. And the reality is, is that the active partners actually do more for the government than the silent partners who are paying high taxes. Part of kind of fixing some of these misconceptions has to do with the language that we use when we talk about the tax code. So I was thinking when you were talking, there's a lot of guys that'll complain, oh, my wife's making me do a date night with her, 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's good to have date nights, right? So don't say I have to do it. part of the language with the tax code is we call them loopholes, which there is this sort of like projected meaning behind that that you're cheating, that you're getting away with something, that you're exploiting the tax code. But when you talk about it, Tom, you often portrayed in a way like, no, they're there because the government wants you to use them. They are incentivizing

you to do this because it's better for the economy as a whole. Yeah, you know, loopholes are unintended consequences of the tax line. And are they there? Absolutely. Are there people who take advantage them? For sure. But when we're 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. So it's not just the government's, you know, promoting the economy or promoting social causes or promoting, you know, clean energy or whatever. The government actually makes money on this. And that's, so I actually took examples in Win Win Win Welt strategy and I just took examples and said, well, look, here's what the government gets. Here's what the taxpayer gets.

Well, why, why have the, I agree with you, David, that the challenge is we've got this idea that the wealthy don't pay tax because they're cheating. And that's, 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. So I actually find that very offensive. And the reality is that it's not the rich people are cheating.

I'll tell you who cheats. And if you look at the IRS numbers, it's people making $100 to $200,000 a year. It's the contractor who comes to your house and says, it's $120, but if you give me cash, it's only $100, right? Those are the cheats. That, you know, cheaters have this idea that it's a zero-sum game, that either the government wins or I win.

And the idea behind what most of the tax laws is, it's a win-win. The government wins and you win. Now, can you lose and the government wins? Absolutely. So the government always wins. That's the point. The government always wins. The question is, are you going to win as well?

Or is it just the government who wins? That's a better way of stating what I meant in the beginning when I was saying sometimes the government wins more. It's more just the government is winning and you're not. that's sort of the default state that most people listening to this that are just working a job. The government's getting their taxes out of your check. You don't get a say in it. It's going to come out before.

You don't always get a say in where that money goes. When you're working with the government, both of you are winning. So I like how you restate at that. The government's going to win. So how do you make sure that you win also? And 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't get talked about a lot.

And I'll throw this in as a caveat to the few people listening to this going, yeah, you know, but I save a lot in taxes. 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, wait a minute, I've got all this money. Look, I'm showing it to you and we're like, what's on your taxes? Why do you need those? What does that matter? That's what every single lender is required to use if you're getting a conventional loan.

and you can lose a lot of money, not investing because you tried to save in taxes. Yeah. So let's talk about that for a second because what's really going on is, you know, how big a game are you playing, right? Why is the bank asking for that information? It's because most people at those lower levels of borrowing don't have real financial statements. Most of them, the only financial statement they have is their tax return. So, you know, if you go to a big real estate developer, they're 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're looking at their, they're looking at the cash flow from the property. They're looking at, you know, what's the real money here? What's the real risk here? And the challenge is that because people never overstate their income on the tax return, they're going, well, a most conservative view of a person's finance.

is going to be their tax return. That is true. It is the most conservative view, but it doesn't mean you can't overcome that. You're absolutely right, David, that 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's saying, I'm not going to give you a loan. And so 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. Oh, I really like that idea. You got my brain going. the size of the game we decide we're going to play determines the strategies we're going to use. And so you can feel like you're outsmarting someone getting paid under the table when you're

playing a small game. You're starting to look at a bigger game. You're like, what was the benefit of saving $9,000 and what my taxes would have been to miss out on building six figures of wealth many times over, investing in real estate over a long term period? And as I have had more financial success, particularly in the last couple years, I've sort have seen like an exponential growth. Taxes used to be mildly annoying like a mosquito bite.

And now they are like a shark bite. Like they will take you out of the entire game completely if you can't manage them. Or it'll remove all your incentive to work hard when you get to where you're paying so much of that money in taxes. So that's something that you're passionate about is helping people save money in taxes. I have been forced to learn how to, I don't want to say like avoid paying taxes. It's more how do I build wealth in the way where I don't. have to pay taxes, right? It's just shifting the way that I'm playing the game or the size I'm

playing the game. What's your thoughts on when people should start making that mindset shift? Well, when do you want to start playing the bigger game? I mean, that's really the question, right? I have noticed over the years that this is not the smaller pockets podcast. This is the bigger pockets podcast. And you guys are all about let's let's get bigger pockets. Let's have, let's have, let's play a bigger game. And what, what happens is that people, when you don't understand how the game is played, then you know, you try to take shortcuts.

And that's what gets you into trouble, frankly, it gets you into trouble with your lenders, it gets you in trouble with the government. You know, the reality is, is that the more, you know, the more income you make,

the more taxes you pay. But the more wealth you build, the less taxes you pay. That's good. And that's actually, to me, the big distinction. So I don't, ever say that the rich don't pay taxes because a lot of what we think of as rich people,

people have high income, pay a lot of taxes. Doctors, lawyers, entertainers, football, you know, professional athletes, they pay tons of taxes. But wealthy people do not. And that's the difference. So how are we defining? So wealth is measured in terms of assets. And it's not high income. It's high wealth. So is it safe to say your definition of wealth and probably the definition and 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's more desirable. It's the different than trading time for money. Riches would be your yearly income and maybe, yeah, I guess it would be that simple, right? Yeah, so I go through a very simple analysis. Of course, I'm an accountant. So I look at

income statement balance sheet, right? And if I look at an expanse, I'm going, why am I spending this money in my business, it's probably to make money, right? That's why I'm 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. And then I look at the debt side. I'm going, what's the purpose of the debt? The purpose of the debt is to buy the asset. And so what really comes down to is as long as we're building the asset and liability side of our balance, you know, of our financial statements. So 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. 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. So it's really about cash flow. It's really all about cash flows, as you know. And as long as if your cash flow is increasing, how much faster does your cash flow increase if you're not paying taxes? I mean, it's exponential. There are two kinds of real estate investors, those who have reviewed their insurance and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties.

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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? Yeah, absolutely. So, basically, Basically, here's what the tax law says is that when you buy a piece of property, you're really buying four different subsets of the asset. You're buying the land, the building, the land improvements, and the contents of the building. And they're saying, look, land doesn't wear out. We're not going to give you a depreciation deduction.

Depreciation is for wear and tear. There's no wear and tear on land. The building wears out, but it wears out over a long period of time. If it's residential, it's probably in the 25 to 30-year range. and if it's a commercial building, it's probably a lot less, maybe 40 years. And that is true, by the way. I've owned both, and let me tell you, commercial buildings were out not nearly as fast as residential buildings. Residents tend to be much harder on the building. Then you have the improvements, well, land improvements, you know, 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, well, that wears out really fast, like probably over five to seven years. 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% right off day one. Well, if you think about it, typically, and by the way, I'm using estimates here. Okay, please do not use these numbers on your tax return. But typically, the contents of the purchase price of the content is going to be somewhere between 15 to 20 percent of the purchase price of the project. And the land improvements is going to be somewhere between 5 and 10 percent. So in total, you could have 20 to 30 percent

of the purchase price that's deductible. Well, okay, so let's 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't even have to place that in service. That's not over the year. That's in year one, the minute you place it in service. Well, that's been a huge motivator for people to get into real estate over the last few years. And it's one of the reasons the real estate market has been pumped up, quite frankly,

is that big, what we call bonus depreciation, which is really just a first year deduction for the contents and the land improvements. it's remember you do have to do a professional cost segregation. So please do not try to do this on your own. This is something you need to hire professional. The IRS says, you know what? This is totally allowable. It is actually technically required in the law.

But you do need to do a professional cost segregation. Don't let your accountant say, well, we're just going to do some kind of quick and dirty allocation. That's going to get you into trouble. 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?

The first one is debt. Okay. So think about this. So take that million-dollar property. You could put down a million dollars and get a $250. thousand dollar deduction or you could put down two hundred thousand dollars and get a two hundred fifty thousand dollar deduction that's a big difference what what that means is if i had a million dollars to invest instead of getting a two hundred fifty thousand dollars

deduction i could literally get a one point a a million two hundred fifty thousand dollar deduction right because i'm getting it on every single you know i could do five times as much right i can do five times as much act as many acquisitions five times as much property. So the point of the balance sheet is not, you don't want to just increase your assets. Frankly, you also want to increase your liabilities. So the government really does incentivize debt because you're creating, you know, debt as we all know, at least, you know, here we know that, you know, debt puts actually produces money supply, right? So the government wants that money supply to increase, and they do that through debt.

So that's 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're continuing to incentivize through debt. So debt is really, you know, number one's 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, well, actually before that is even business. So one of the things I always tell our clients is that, look, you really need to treat your

real estate like a business. When it's really treated as business, business gets the most deductions. So you've got business deductions. You 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, let's say you take and you put $100,000 of solar panels on, your rental property that you're renting out, okay? You get a $26,000 credit, that's dollar for dollar,

plus an $87,000 deduction. So you're basically paying a third of the cost of the solar. Well, people say, well, you know, I hear this all time. Well, solar is not a really good investment. I'm going, well, not if you're paying 100% of it, but if you're only paying a third of it, it's actually turned out to be a really good investment. If you've got a lot of sunshine, you know,

if you're in the right location, like I am in Arizona or, you know, people in Colorado or some other places in the Midwest, you get enough sunlight, solar can actually be a really good investment. Well, that's a really good topic to point out is that when you start getting tax incentives, it changes the structure of the investment that you're making. So like you were just describing, if you buy a million dollar property, let's say you get a $300,000 right off. Let's say that turns into a $100,000 of tax savings in that case. and you're going to put 20% down on this property. So 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're saving $100,000 in taxes, which now doubles the ROI to 16%. That asset is now much more desirable for you than it would have been to someone who doesn't get that same tax benefit or if you bought it without the tax benefit. And 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're 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, how on earth is that guy going to pay this much money for that fourplex in San Jose? It's not worth it. He's going to make a 2% return. Well, he's saving $800,000 in taxes to put that money there. There's a much higher than a 2% return for that person. And so this is one of the reasons that I've been doing a, uh, better job of telling people you need to get a good CPA, not a CPA, it's not just, hey, stop doing turbo tax and actually hire someone, right? It's get a one who understands this stuff and be flexible with the way that you go about building your wealth. There's a difference between working more hours at your W2 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 would just work in his regular job because I was getting hammered tax is so bad. And you start to see momentum getting built. So you mentioned, Tom, that bonus segregation is sort of like, there's some schedule changes for that. Can you give us a definition of what bonus depreciation is and then what we should expect in the future? Right. Again, bonus depreciation is first year getting to deduct first year, your, the contents of the building and the land improvements. Right now, that's 100%. It's been 100% since 2000, late 2017. That percentage is going to go down to 80% in 2023 and down to 60% in 2024 and to 50% in 2025.

So what that means is that you've got a window of opportunity here to get faster depreciation. Now, why do we want faster depreciation? Because we're going to take that tax savings. You talk about that $100,000 tax savings. We're going to take that. We're going to buy another property, right? So we're going to use that cash for investing and using that. So we want our money now.

We don't want to wait to get our money over 27 and a half years. We want to get our money now. And 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. And frankly, that's why the government gives the incentives because they want the money back into the market. I mean, remember, you pay tax when you spend money or when you save money. You don't pay tax when you invest money.

Okay. So, you know, if you spend it personally or you save it, you're going to pay tax. But if you invest it back into the economy, back into your business, back into real estate, you're not going to pay tax. 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, you know, maybe they're 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? Well, my question would be at what point do you want to stop paying taxes? I mean, I just think, you know, I don't know, David, maybe you're the same. But for me, when I first started, I was like, I have so much to learn. And I was trying to learn about cash flow and property management and running my business. I was kind of like, oh, at a certain point, I'll learn more about taxes because that's, you know, a champagne worry because I'm already, I've already made it. and I'm making money, or at least that was my opinion back then. So I guess it's a question of priority, right?

Like, do you, 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, you know, is it worth it to spend the money on either professional cost segregation or a good high-quality CPA. You know, the cost segregations are not that expensive. They're not. You're talking, because if you've got one or two properties, you're 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's worthwhile. Okay. It's going to be worthwhile easily on $100,000 or more. You know, the question about hiring a good CPA is a question of what's your,

how big's your game, right? How big, you know, are you talking about, well, I just want to, you know, I just want to have one or two properties. I'm going to pay cash for them. I'm following the Dave Ramsey schedule of investing. I'm going, tax probably not a big deal to you, right? Because you're really playing a very small, slow game. If you're going, you know what, I'd really like to not have to work. I like my work, but I don't want to have to.

I'd really like to have more time to spend with my kids, my grandkids. For me, it's grandkids, more time to do what I want to do. I, you know, realize, just realize that taxes are probably your single biggest expense, probably your single biggest expense. So the question is, which expense do I spend time on? Do I spend time on my business expenses? Do I spend time on my tax expenses? Which is going to be, you know, which is going to be more productive.

It's really easy to reduce your taxes. I mean, it is really fast and really easy. Once you get the concepts, I mean, you know, when I write books, I write them for the average person. I'll write them for the CPAs. I find that complete waste of time because a lot of CPAs think they know everything anyway. So what I do is instead of, I write them for the entrepreneur, the beginning investor. And I want to make sure that at least you've got the concepts and that you can say, okay, whoever my CPA is, whoever my tax advisor is, do you understand these concepts? Do you follow things? I literally had my wife's a CPA. She sent me a note. She goes, by the way,

your name came up in the online forum at the Arizona Society of CPAs. I said, really, what'd they say? They said, well, one of the prospects, some entrepreneur was saying, and I'd like to know if, you know, anybody follows tax-free wealth, my first book in Tom Wheelwright, and if they do things the way Tom talks about them, and the question was, is this a scam, and going, well, maybe I'd just read the book see what you think, see if you think it's a scam. Because the reality is, is that I've actually, you know, Tax Oil has been out 10 years now. And I've never had any accountant say,

this is aggressive or this is wrong, not even one. And that's with over 3,000 five-star reviews on Amazon. So, you know, taxes just aren't that hard to understand the basics. And building a team is what investing is all about. It's a team sport. So with the changes in the tax code, what's your opinion on why those are going away and what people can do about it? Well, they were scheduled to go away, right?

So bonus depreciation, until we get a new administration, unless we get a new administration, certainly nothing's going to happen before 2025. That's the soonest anything's going to happen because the current administration is just going to let them phase out, right? I mean, if you had, I guess if, you know, if you had an override available in Congress and the Republicans, you know, took over Congress by, you know, boatloads.

Could they override a veto and do it? I don't think there's a big push for that. I think right now, the one thing that, you know, the solar's phasing out. So solar is at 26 now. It used to be at 30. It's going down to 22. And then it goes way down. I think that's something that you could literally write your congressperson about.

You could literally write your senator about. And I think there's a lot of people who would like to see that. They just don't want to see the tax, the revenue offsets on the other side of it, right? So I think there is, I do think that that's possible is to actually see some changes on the solar side. I don't think the depreciation is not going to change before 2025. And so do you think that people, it sounds like if people are interested in solar, like now would be a good time to do it if, you know, they're waiting around for that. Here's the problem, Dave, is that, you know, we've got a big shortage of solar panels.

And a lot of this is the whole China thing, right? And so if you're going to get them installed by the end of the year, you'd better act like right now. Because otherwise, you're not going to have them installed. You're not going to get that. You're going to lose 4% of that tax credit. it's going to go from 26 to 22 before you can get them installed. So this is something, the solar is something you need to act on right away. And it's, and again, the numbers can be big.

I mean, if you've got multifamily, you can basically have your own little private utility and then basically, you know, charge your tenants for the utilities. And that's actually a pretty decent moneymaker if you set that up. But it's going to take you four or five months to get that. done. So there is urgency for sure on the solar side. That's a, that's a great point. And I'm thinking about it for a short-term rental. I've always thought about doing it. And unfortunately, with short-term rentals, it's not one of the investments, at least I've never heard of someone passing a long utility cost to a short-term renter, pro-rating it based on what they use for a weekend or something like that. So you're

usually stuck with that. But you're paying the utilities on that, right? That's what I mean. So if you're paying the utilities, you get the benefit right away. Yeah, exactly. So you can get the tax benefit. And, you know, I think electrical on some of these nicer short-term rentals, maybe I have an electric hot tub, for example, it's a huge expense. And so if you can offset that, especially in Colorado's abundant sun, that could be a really good investment. Tom, I wanted to ask you, you're 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, do you see your clients and people, you know, acting and being more active than they might normally be because of these tax incentives? Isn't that playing into the appreciation we're seeing in the housing market? Oh, no question. I don't think there's any question at all. that they played a huge part.

I mean, I know, you know, anecdotally, I have clients that they were not investing until they heard about the tax benefits. And these guys are, do a lot of real estate. And yet they weren't really motivated to do it until I said, well, wait a minute, look at the cost, the cost benefit analysis to doing the real estate yourself instead of just, you know, being a, you know, tagging on to somebody else's real estate. there's no question. And no question it's helped push prices up. There's no question that it's helped increase the number of rentals that are out there. I mean, the whole goal, right, for the government from a social standpoint is we need housing. We're still short, you know, a lot of housing units. So I think it's been very successful. I mean, I haven't done any studies in that regard. I can just tell you anecdotally, my clients, definitely it's had a big impact. So when it comes to this game of

taxes and there's different ways that we can partner with the government, what are some of the common ones that if someone's trying to figure out where they could jump in that they should start off considering? Well, you know, you always start with the education. So start with, you know, my book, the Win Win Win Win Win Walt 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. So while the government's 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. So there are huge opportunities. But the first thing you have to understand, we've got to change this, like just what you started with, David. We've 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're not being bad people. We're actually being good people.

I will tell everybody, if you're paying high taxes, you're not nearly as patriotic as somebody who's 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 Win Win, Wealth. The government makes way more money with active investors

than they do with the silent investors. So I think we've 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 law is very complicated. Don't 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, you know, investing as the team is a team. much more, frankly, it's a lot more fun and a lot easier than investing yourself. I think it's a waste of time to do things yourself that somebody else can do better than you. So, you know, those are

really kind of the keys to me. It's less, you know, choosing which investment. I think for me, it's a, you know, 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-nut leases, do that. Whatever it is you really enjoy doing, do that. Yeah, I think that's a good point. It can be addicting in our space where there's so much information to consume all the time. Like, you could never get through all the videos in YouTube, even on one asset class in your entire life. So you're learning, you're learning, your mind's exploding with possibility. You get this feeling of progress and it's like, the dopamine's getting releases. I can do this and I could do that. You start envisioning this life you want

to live. And then you're like, all right, I got to learn it all. And it's like trying to download 700 movies on your computer at the same time. You never even get one of them actually finished. What I've learned as I've progressed is I need to learn just enough to get the basic idea, then find the team member that already knows how it works. So I will have people that will that will message us here on bigger pockets or submit a question that's a very nuanced and detailed question about a loan. I was like, you don't need to ask me that. That's a question for your loan officer. They know that immediately and that's not hard for them and it's silly for you to even be trying to figure that out. It's like, I need to go learn how cars work before I drop it off at the

mechanic's office. No, you know there's a problem. You know you trust the mechanic. Let them figure out what it is. Same is true with taxes, right? So 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, here's my problem, how would you solve it? And that's one of the litmus tests that I have when I'm picking a team member. Hey, 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? What advice do you have for what people should be asking when they're trying to find their team member to handle their taxes? I actually think one of the most important things is tell me what the system is you use

for doing this because I don't want everything to be a new decision. I don't want you to have to handle everything as a new decision. I don't want you to have to look everything up. I want to make sure that you've got a system that you use and you use the same system over. Yeah, I get every taxpayer's different to some extent, but you're following a systematic approach to it. It's those, you know, it's those few CPAs that have a systematic approach, and there are very few of them, frankly. It's that systematic approach that makes a big difference. Until I really understood the patterns of the tax law, I mean, 20 years ago, I was doing it like everybody else, right? Give me a question. I'll try to figure out the answer. Until I figured out, you know what, there's patterns here. And

Once you have patterns, now you can actually predict what the tax savings are going to be. You can predict what the result's going to be because you identify the patterns and you've set up a system and now I'm just going to take you through that system. You know, we talked about this before, David, but I find that the difference between a professional investor and 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 is true with a professional advisor, by the way. A professional advisor makes a single decision say, this is how this works.

And I'm just going to apply this over and over again, right, as opposed to looking at every single question as unique. We need to look at every question as, okay, here's the pattern. I understand the pattern. And so this is likely what's going to happen. Now, am I going to research to make sure I'm right? Absolutely. But I better have a pretty good idea going in what I think the answer is going to be coming out. So Tom, for those that are intrigued by what we're talking about, what can they expect if they get your book and where can they find it?

Well, first of all, the book title is The Win Win Win, Walt Strategy, seven investments the government will pay you to make. You can get at Barnes & Noble. You can get it at Amazon. You can get it anywhere books are sold. You can get it at our website, win-winwaltstrategy.com. You're welcome to get it there too. So wherever you want to get. What you're going to get is a whole different viewpoint. and I think you're going to be able to, it's going to help you get comfortable with your ability to reduce your taxes. So it's not just an instruction guide for you to reduce your taxes. It's actually a little bit of it is for you to know that what you're doing is a good thing, that you're actually contributing to society. You're, you know, you're contributing to the

housing market, you're contributing to the commercial market, you're contributing to the industrial market, you're contributing to the energy resources. You are, you are contributing to the housing market, you are actually making a positive contribution to society. And I think that that mind shift is so important because now we're not so hesitant. You know, we all have glass ceilings that we put on ourselves, right? And the glass ceiling is, well, you know, I'm not a good person if I make more than this much money. Or I'm not a good person if I only pay this much tax. And I think we need, you know, 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's the limit. But until we take those ceilings off, I think we're always going to, we're always going to be doing self-limiting behaviors. 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've been kind of a fly on the wall and I could just see the wheels turning in that smart brain of yours. No, this has been super helpful, Tom. As I said, I'm sort of a novice when it comes to taxes. I'm trying to learn a bit more. And I'm looking forward to reading your book. and I'm definitely going to think about how I can apply some of the things I've learned here today

before the end of the year to try and reduce my own taxes next year. 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're all better for it. This is David Green for Dave, the Champagne strategist, Meyer. Signing out.

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