The Personal Finance Podcast - 10 Incredible Tax Benefits of Real Estate Investing

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Starting point is 00:00:49 Countertop wipes and fly traps Hey fruit flies Your baby boom ends here Save the Everyday with Amazon On this episode of the Personal Finance Podcast, we're going to talk about 10 incredible tax benefits of real estate investing. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we are going to be talking about the 10 incredible tax benefits of real estate investing. If you have any questions, hit me up on Instagram, TikTok, or get on the Master Money News.

Starting point is 00:01:45 That's the fastest way to get a hold of me and respond to that newsletter with your question. If you aren't on the master money newsletter, we are going to be releasing a bunch of things like Index Fund Pro, which is going to be our investing for beginners course. And you can get a discount when Index Fund Pro comes out if you're on that Master Money newsletter. So make sure you check that out. It is in the show notes below. It's usually at the top of the show notes. So make sure you jump on the Master Money newsletter if you're not already on there.

Starting point is 00:02:12 In addition, we're going to have a contest giving away coaching session. and potentially some courses as well if you leave a five-star rating and review on Apple Podcasts or Spotify. So go ahead and do that. Make sure you screenshot it so that you can enter in the giveaway when we launch that as well. We are so incredibly excited for you guys to access everything master money is going to be offering very soon. So in this episode, we are going to be talking about the 10 incredible tax benefits of real estate investing. Now, some of these you may have heard before, but some of these you probably have not. We're going to kind of deep dive into each and every single one of them and the amazing benefits of real estate investing.

Starting point is 00:02:49 And there's a reason why a very large number of wealthy people invest in real estate. Yes, it can be cash flow. Yes, it can be appreciation over time. Or it can also be the tax shelters that you can take advantage of in real estate. Some people even take a cash flow loss because they want to take advantage of those tax shelters. Now, some of these you may have never heard of. Some may be brand new concepts to you. And if you want to get into real estate, this is something.

Starting point is 00:03:13 you definitely want to understand. Why? Because real estate is actually a very creative endeavor. The most creative investors out there are the ones who can become the most successful when it comes to real estate investing. A lot of people don't think of it that way. But deal making is a creative thing. And if you can figure out, hey, maybe I can make some money on the tax shelters. If I know these tax advantages, then maybe I can make this deal work. You can make a lot more deals work once you understand what the tax advantages are. So understanding this is so incredibly valuable and can make you millions of dollars over the course of your career depending on how much real estate you're going to be buying. So today I want to be unlocking these 10 different rules for you

Starting point is 00:03:52 so that you can use money as a tool. In addition, make sure you are always looking on the IRS website to see if any of these change over time. If you're listening to this a couple years in advance or anything like that, make sure you're looking up the rules, understanding the rules every single year, and staying up to date on these tax advantages because these are things that definitely will benefit you if you're interested in real estate. And this is something that is one of the biggest and most beneficial things to investing in real estate. In fact, it is probably one of my top priorities when investing in real estate is being able to take advantage of those tax benefits so that you can utilize it as an income shelter and a way to get your income out of Uncle Sam's pocket. So if that's something you're into, I'm going to unlock these 10 rules for you so you can use money as a tool to build wealth instead of being a source of stress and anxiety.

Starting point is 00:04:38 So let's get into it. All right, the first one, there is no taxes on appreciation if you don't sell. So what do I mean by that? So if you want to own real estate, it is almost always in your best interest not to sell. Now, we are going to talk about reasons why to sell if you want to scale up in real estate potentially, or maybe you want to utilize some real estate and rental properties as a way to fund your lifestyle. We will talk about that here shortly. But almost always, one of the best things that you can do is not sell your real estate.

Starting point is 00:05:09 You could take it right out of the textbook of Uncle Warren. Oh, Warren Buffett, our favorite fella. And the thing about Warren Buffett is he's the greatest investor of all time. But what does he say? And we're going to do an entire episode actually on this. But he says his favorite holding period is forever. Now, you know if you listen to this podcast, that is my favorite holding period as well. We are long-term investors at Master Money.

Starting point is 00:05:31 We are long-term investors at the Personal Finance podcast. Holding things forever long period of time is what is going to help you build wealth. Wealth is not a quick thing. And building wealth over time, no matter what TikTok says, I mean, it irritates me so much when people will comment, say something on TikTok, for example, and we say, oh, it's going to take you 30 years to get to a million dollars if you invest $500 a month. Every single person there says that's too long. Well, guess what? Somebody is telling them that you can build wealth quick, that you can get rich quick. And sure, there's a millionaire fast lane.

Starting point is 00:06:00 There's a fast line by building businesses, but you have to do a lot of work and a lot of sweat equity to do that. If you're looking for a way to build wealth while you work your day job, or if you're looking to, you're looking at a, for a way to build wealth while you're running other businesses, this is a fantastic option, or it can be your backup plan. As we've talked about, the different levels of wealth and having those backup plans into place. So holding these assets for a very long time is incredibly powerful. Because guess what?

Starting point is 00:06:26 Selling real estate is very expensive. Trust me, I have sold dozens and dozens and dozens of properties, and it never sits well with me how expensive it actually is to sell real estate. In fact, this is one of the many reasons why, your personal residence is not a great investment because when you sell that personal residence, it is taking a ton of the profit off the top when you have to sell that property. When you sell, you have to pay things like commissions to real estate agents. The commission to a real estate agent is somewhere, especially if you're the seller,

Starting point is 00:06:53 is somewhere around 6%. So if you sell a million dollar house, you are paying the agent $60,000 just for listing that property for you now. Can you do for sale by owner? Absolutely. But the numbers usually equal out that if you have an agent in place, a lot of times agents will try to sell you on the fact that they can sell it for much higher. Now, what is the data say?

Starting point is 00:07:12 There's been a bunch of studies coming out. A lot of studies are starting to release now to see if we're going to change the way real estate is sold. But right now, you have to pay 6%. Another thing you have to pay is transaction fees, which can cost thousands and thousands and thousands of dollars. And worst of all, if you don't live in the property, if it's a rental property for you, then you have to pay taxes.

Starting point is 00:07:32 Now, if you live in the property, we'll get to that in a second. But if you don't live in the property, you have to pay taxes specifically on a rental property. So this is something that you want to avoid at all cost because you are not going to be taxed on the appreciation and the wealth building that you have from that property if you just hold on to it. Now, I will show you how to access cash out of that property on this episode as well so you could pull cash out tax free and you're not paying taxes on that appreciation.

Starting point is 00:07:55 That way, you'll be able to still access those funds. But at the same time, selling the property means zero taxes, especially when you have a portfolio of rental properties. because remember every single dollar that goes out to commissions and fees can't help you compound your wealth. So plan to hold these properties as long as you possibly can. Let's get into number two. Number two is depreciation. Now, you may have heard the word depreciation before, but you may not fully understand how useful it can be.

Starting point is 00:08:23 See, wealthy people absolutely love depreciation because guess why? It shelters your income from taxes. Depreciation helps you shelter your income from taxes. Now, the IRS uses depreciation to acknowledge that an asset that wears down over time. For some reason, the IRS came up with the number 27 and a half years for residential real estate. That's where it wears down. With other assets, it's longer and with some other assets, it's shorter. But for some reason with real estate, it's 27 and a half years.

Starting point is 00:08:50 So depreciation is something called a paper loss. So for most business expenses, you have to spend money to count it as an expense. With depreciation, you don't have to spend any dollars whatsoever. You just have to own the property and it becomes a paper loss. So the cool thing is that you can offset your income, whether it's from rental income, or if you just want to reduce that tax pill. So here's an example to just to drive this home so you understand how this works. Scenario 1. Without depreciation.

Starting point is 00:09:15 Let's say you have $10,000 in taxable rental income. You have a rental property. It earns you $10,000 in taxable income. And you have to pay 25% federal income tax on that income. That means you owe $2,500. Well, let's look at it with depreciation expense. So let's say that same $10,000 a year rental income and you have a depreciation expense of $6,000. That means you only have $4,000 of taxable income instead of $10,000 of taxable income.

Starting point is 00:09:44 So if you do 25% federal income tax of $4,000, you only own $1,000 in taxes instead of $2,500 in taxes. That means with depreciation, you're saving $1,500 per year in taxes. Now, that's just one property. Think about this if you have 10 properties, for example. That's 15,000 per year that you are saving in depreciation. But every time you save money in your business, especially in your real estate business, guess what that means? That means you now have control of the opportunity with that money.

Starting point is 00:10:15 See, losing that money to taxes means that you lose the opportunity cost. You don't have the ability to utilize that money to put it towards things that is going to compound for you over time. Instead, what you can do now is you can now invest those dollars. $15,000 a year can get you into. a $100,000 property every single year. So maybe in your area, they're $200,000 for a rental property. So maybe every two years you're now buying an additional property just with the tax savings

Starting point is 00:10:41 that you have. This is powerful. And this is something where being able to write off that depreciation is something you definitely want to be able to do. And this is one of the major benefits of real estate because that depreciation costs over time. Now, I want you to remember something. Always remember this.

Starting point is 00:10:56 When the IRS gives, the IRS takes away. So when you sell a property, it is very likely that the IRS is going to want to recapture the depreciation and pay taxes on it. Now, this is another reason why not to sell a property? Because they're going to want to recapture it. So the tax rate on this recaptured real estate depreciation is usually around 25%. So this is a huge incentive to hold on to real estate, is to make sure that you get those tax savings and that tax advantages or you utilize something like a 1031 exchange

Starting point is 00:11:23 we're going to be talking about here in a second as well. So this is a major factor when it comes into play. you can shelter your income, especially across a portfolio of properties. Now, remember this, because I'm talking about a single property and then I'll talk about the portfolio. Real estate is really, really beneficial at scale, meaning the more properties you have, the more benefits you can have in play because you have more income, the more income is going to allow you to have more cash flow, the more cash flow you have, the faster you can be able to fire.

Starting point is 00:11:49 But in addition, it also helps you in your business. What I noticed was the first property I ever bought, when I just had one property, if something came up like a leaky faucet, it would take away all the cash. flow. And we eliminate all that cash flow there. But once you start to have a portfolio of properties, then what happens is over time, they start to take care of each other. And once you have one of those properties paid off, for example, then you can utilize that cash to start paying down some of the other properties. And sooner or later, this thing snowballs. And it's just like compound interest the same way. So having a portfolio of properties is incredibly beneficial for you

Starting point is 00:12:21 over time. Let's go to number three. Number three is you pay a lower capital gains tax. Now, we talked about how important it is to hold real estate as long as possible. But if you're an aggressive investor, sometimes you're going to want to sell to scale up to larger properties or even fund your lifestyle in retirement. So right now, long-term capital gains on your investment is 0% to 20% depending on your tax bracket. So maybe you want to sell a property because you want to get into an apartment complex. Maybe you sell a 4plex because it's gone up in value tremendously and you want to get into a deal where you can buy 20 unique apartment complex, for example. That may be a reason that you want to sell. Or maybe you have 100 different properties and you planned on selling

Starting point is 00:13:02 one property a year in retirement in order to fund your lifestyle. Well, if you want to do that, that would be another reason to sell. That's a great strategy if you don't want to hold on to as many properties. But if you do this, you can put together a plan to strategically sell. So selling at a time when your tax deductions are high and your depreciation is factored in means that you may be able to fall into a zero percent tax bracket when you are selling a property. What do I mean by say for example one year you just have a ton of deductions you spent a lot of money on repairing properties or acquiring properties or there's a lot of just different expenses that you had in a year maybe you were on fire one year and you were buying a bunch of properties but in addition you had to

Starting point is 00:13:41 fix a lot of properties you had a lot of flips going into play there's a lot of things going on at the same time well you're spending a lot of money if you have to do that and maybe your cash flow is getting eat up when you have to do that in addition you have depreciation cost of all the other properties that you have in play you can run the numbers on this with your accountant if you're a real estate investor, you need to have an accountant. But you can run the numbers with this on your account and say, hey, does this make sense to sell properties this year? Can I be in that zero percent tax bracket? Because that would be the time that you want to sell where you're not paying taxes on the capital gains. So think through that and make sure you understand how this works because you want

Starting point is 00:14:12 to sell strategically if you have to sell, especially if you want to scale up to bigger properties or fund that lifestyle. Number four is you get to avoid FICA tax on rental income. Now, this isn't like a major factor, but what you're going to see here is all of these different things kind of compound together, and it's going to make a big difference over time. So if you don't know what FICA tax is, it's when you pay like Medicare and Social Security on your paycheck and your payroll. If you look at your paycheck, you pull out your W-2 stub, you're going to see FICA tax on there. At the time I'm recording this, it's 6.2% for the employer and 6.2% for the employee. Rental income is not subject to this Fike attack. So you may be saying, 6.2% who cares? I don't really care,

Starting point is 00:14:52 but that's not a big deal. But combining these all together, all of these tax advantages together can become a massive amount of money, especially when you factor in opportunity costs and you should always be thinking about opportunity costs. Because opportunity cost is what you can do with those dollars instead of paying them to Uncle Sam.

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Starting point is 00:18:20 For five, you can swap it out for like-kind properties. So this is one that is at risk with political pressures right now. There's a lot of political pressures on what is called the good old-fashioned 1031 exchange. So the 1031 exchange is named after section 1031 of the tax code. It is one of the best ways to defer your taxes and or reduce your taxes over time. If you're not familiar with the 1031 exchange, I'm going to make this as simple as possible for you. So in order to do a 1031 exchange, you must follow very, very specific rules. And I will link those rules up in the show notes.

Starting point is 00:18:56 Now, one of the thing you cannot do is you cannot be a flipper. So you have to be a long-term investor to be able to utilize a 1031 exchange. But make sure you check out those rules in the show notes. And that's a great place to start. And we'll do a whole episode on 1031 exchanges because it is a very long subject to go into detail with. But why is this a good thing? Why do you want to do a 1031 exchange? What a 1031 exchange is, is you can take 100% of the profits that you made on a property when you sell them

Starting point is 00:19:21 and put them towards another like-kind property. What this does is it preserves and accelerates the compounding on your real estate. Say, for example, you go buy a single-family house and you want to scale up to a fourplex, for example. And that single-family house over the course of five years had a very large gain. You bought it for $500,000. It went up to $800,000. and you can buy a fourplex with $800,000, maybe in another location. Well, you won't have to pay taxes on that money if you allocate those dollars to selling the property

Starting point is 00:19:52 and then in 45 days you put those dollars towards the fourplex, then you can do that without having to be able to pay taxes on the sale of that single family residence. This is incredibly powerful because you're not paying taxes on that money and you're deferring those taxes to another like kind property. Let me give you a really good example of this. So I have a friend who's been in real estate for a very long time. And he sold a mobile home park that he had owned for 30 years that he bought for $500,000. Now, if you don't know, mobile home parks are actually very profitable endeavors.

Starting point is 00:20:23 A lot of hedge funds buy out mobile home parks now because they're so profitable, they figured out how profitable they are because they can charge rent on the actual unit, the mobile home, but in addition, they can charge rent on the land. Now, obviously, you don't want to be a slum lord in owning mobile home parks that are in very sketchy areas. But what you can do is on like 55 and up mobile home parks, and there's really profitable ways to do that. But what he did was he bought it for $500,000. And over the course of time,

Starting point is 00:20:50 he just sold it for $3 million to get out of the deal. So that's what he got was $3 million out of that mobile home park after he initially put $500,000 in. So after he sold that mobile home park, what he did was he bought a hotel on one of the best beaches in the U.S., which is Clearwater Beach in Florida. He bought that for $3 million down. And he had this hotel for five years.

Starting point is 00:21:09 He had his sons run the hotel, so he wasn't running the day-to-day operations. And that hotel appreciated significantly just over the course of five years. This just recently happened. And so now he sold the hotel for $9 million. And his initial investment was $500,000. He has scaled that $500,000 up to $9 million completely tax-free because he's utilizing a 1031 exchange. Now he is looking for a much larger property, $1031 exchange, $9 million into. So there's a bunch of options, either larger mobile home parks.

Starting point is 00:21:39 He could scale up to maybe storage facilities. He could scale up to all sorts of different things. But the hard part with this and the hard part with a 1031 exchange is being able to find that property. But think about this for a second. He went from $500,000 to $9 million completely tax-free. That's $8.5 million in total that he has made just because he invested in real estate. Now, that is just one example. There's a million examples out there of people who do this, but you're deferring those taxes

Starting point is 00:22:08 and you don't have to pay taxes on that money if you keep doing that, and your net worth and your wealth build over time. We've talked about this in past episodes before. Should you focus on your net worth or your income? My opinion is, early on, income, raise that income so you can put it towards your net worth, but net worth should be the majority of your life, which you're focusing on. So looking at this over time, his net worth has gone up significantly just because of this initial investment and because he understood how the 1031 exchange works.

Starting point is 00:22:36 So obviously, having 45 days to find a like kind of, property that is $9 million is not an easy thing to do. I think he's actively doing it right now unless he already found it. So this is something where definitely you want to make sure that you understand what you're doing and understand those rules. Now, if you're trying to find that like kind property within that 45 days, what you can do is put stipulations that the sale of your existing property to try to sell cannot happen until you find that like kind property. So you can say, hey, this will not sell until I find a like kind property. It may take me two months. It may take me six months. But I need to be able to find that before we can have this sale. because once that sale goes through, you've got 45 days to allocate those dollars,

Starting point is 00:23:12 or you're going to have to pay taxes on that money. And it is a race against time. I've heard people coming down to the final day or not even getting there. Number six, and we have a whole episode on this. It's called the Live and Flip. The Live and Flip is one of the best ways for anybody in this world who's not even interested in investing in real estate to build wealth with real estate. If you're looking to get your first house, maybe get into your very first house that you

Starting point is 00:23:33 want to live in, your starter home, whatever you want to call it, one of the best tax-free ways to build wealth is the live-in-flip. So what you do is you buy a house that needs cosmetic repairs. Cosmetic is the key word there. You don't want repairs to structural things. You don't want repairs to major plumbing or anything like that. You want cosmetic repairs. What is cosmetic repairs?

Starting point is 00:23:52 That means new paint, new floors, maybe a new kitchen, maybe a new bathroom, nothing that has to do with structural integrity of the home. And once you find something that has those cosmetic repairs, you want to fix it up over the course of the next two years. So you have a long time horizon to be able to do this. this. Two years is key, and we'll explain why here in a second. Then you want to sell that house at a profit after those two years, and you don't have to pay taxes since you lived inside of that property. So here are the rules. As long as you live in that home for two out of the last five years,

Starting point is 00:24:20 in the U.S., you can make tax-free profit of up to $250,000 as an individual or $500,000 as a couple. Incredible, absolutely incredible. Canada and the UK have slightly different rules, but the principle is actually very close to the same. So look up your local laws and regulations if you are in Canada or UK. I know we have a lot of folks across the pond and across the border to the north of us who listen to this podcast. So the rules are very close to the same. Making sure that you understand those rules, though, is incredibly, incredibly important.

Starting point is 00:24:53 And then keep in mind, this does not have to be a permanent strategy. You can do this, you know, two or three of these and then you'll have to do it again, but you're getting paid to live in your house. You're getting paid to live in that property. So it's something you definitely want to consider. and you definitely want to make sure that you are doing so that over time you will be able to build wealth. This is what we did with our first property.

Starting point is 00:25:12 It was one that was very successful for us and allowed us to scale up to a much larger home later on. So if you really want to buy your dream house, this is a great strategy as well. It's like a forced savings account to allow you to force appreciation into the property so that over time then you can get to the next level and buy that bigger house without having to come up

Starting point is 00:25:29 with a major cash influx when it comes to coming up with that down payment. So great option here is the live and flip. One of my favorite strategies out there. And we are going to have another episode on this as well with some other people who have done this because I believe in this strategy so much and it's so incredibly powerful. Number seven is you can borrow against your properties tax-free. So instead of selling your properties, you can actually use other people's money and

Starting point is 00:25:53 borrow against those properties instead. So we talked about this a little bit with like getting a he lock on the wealth protection plan episode. But in addition, you can do this for. for all sorts of different things. So most investors, when they want to raise cash, they consider selling their investments. You got to do this with stocks, for example. Maybe you want to scale up into buying real estate so you decide to sell some of your stocks to liquidate some of those stocks so that you can buy real estate if you want to change your asset allocation from real

Starting point is 00:26:20 estate to stocks. Well, in addition, what you can do is you can either leverage that with margin or you can do it some other way. But with real estate, a lot of lenders are willing to lend on real property. And you can simply pull out capital of an investment tax free by refinancing. Refining the property means that you go out and you get a new loan on a property with the new equity there and you can pull cash out of a property. So this isn't just the standard he lock. This is actual full on refinance. Now, there's a couple of things that come into play here that we'll talk about. But here are the pros to this is you get a well-performing property that you know very well and you keep that property. So you know this property backwards and forwards if you've owned it for a couple of years.

Starting point is 00:26:58 So you get to hang on to that property. You know what's wrong with it. You know what's right with it. You know the good, the bad, everything about it. You don't have to go into a new property with not knowing anything at all. You also get the benefit of using loan amortization and allowing your tenants to pay down that property. So somebody else every single day is going to get up.

Starting point is 00:27:16 They're going to go to work. They're going to come home from work. And they're going to pay down your house instead of you because they're renting the property from you. In addition, you get the benefit of future appreciation of rents and the property price. So rents appreciate. We all know that. Rent has gone way up in the last couple of years.

Starting point is 00:27:32 But in addition, properties have also appreciated a lot in the last couple of years. Now, real estate, this is something that TikTok won't tell you. Real estate can go down. A lot of people need to hear this. Real estate does not go up forever. Real estate can go down. It's not like it's the most amazing investment in the world, but the tax benefits are incredible.

Starting point is 00:27:48 So you want to make sure that you understand that as you think through this. And there's no tax pay on the cash when you refinance just because it's borrowed. So there's no tax paid on that earned cash. Think about that for a second. When you pull out cash, when you refinance a property, since it's borrowed money, you're not paying taxes on it. That's incredibly powerful to understand as well. Now, there are some cons to this.

Starting point is 00:28:12 There's always a con. When there's pros, there's always a con to that. So you've got to think through that. There's always risks involved. One of the big ones is people would say, well, you're taking on a lot more debt and you're increasing your debt ratios. Absolutely you are. But as long as the debt is attractive, meaning as long as it's got a fixed interest rate,

Starting point is 00:28:30 we don't want some variable interest rate or balloon payments on these loans. You want it to be a fixed interest rate. You want it to be a low interest rate. So anything below 5%. At the time recording this, interest rates keep going up. So you're much less likely to refinance at a time like this and much more likely to refinance when interest rates are lower. For example, I bought my house two years ago.

Starting point is 00:28:49 The interest rate was 2.7%. I'm not paying that thing down anytime soon. The reason behind that is it's, because, it's an extremely low rent just rate. In addition, it is something that you can really, really utilize someone else's money to buy more properties and assets. And you want to have long amortization on this stuff so that your tenants can pay it down over a long period of time. You have higher cash flow because of that. 15 to 30 years, something in that range is absolutely perfect for something like this. Lastly, when you do this, if you want to refinance something

Starting point is 00:29:17 like this, you also want to make sure that it is covered completely with cash flow, conservatively. To do well in business, you want to have cash. And to do well in business, you want to have cash, in hand so that you can prepare for winter. When winter is coming, something bad is going to happen, say a recession comes into play, you want cash to cover your back. So making sure that you have that in play is going to be something that is very powerful over time. Number eight is utilizing a self-directed IRA for real estate investing. So we had an episode on self-directed IRAs and it was all about Peter Thiel and how he has that $5 billion Roth IRA. And I'll link it up in the show notes below so you you check it out. But if you don't know what a self-directed IRA is, it's a way for you to invest in real

Starting point is 00:29:58 estate through your IRA or your Roth IRA. Now, it's not just as easy as going to Vanguard or Fidelity and buying a house through your IRA. You have to utilize something called a custodian. This is the reason why I haven't done it yet is because, A, I love index funds and ETFs. It's one of my favorite things to invest in. It's really passive. It's really easy. You don't have to worry about a bunch of stuff. But in addition, you also have to have what is called a custodian, which is a third party that facilitates the transaction. So there's fees involved. There's more close. costs involved, but you can invest in something like your Roth IRA, for example, and what are the tax benefits in a Roth IRA we all know that grows tax free. So when it comes to your

Starting point is 00:30:37 self-directed IRA, the IRS does not describe what you can invest in in your IRA. It only describes the things that you cannot invest in. So there's something that a lot of people call the do not invest list. And this includes things like life insurance. This includes collectibles, artwork, rugs, antiques, and it also includes non-traditional investments like real estate, private mortgages, limited partnerships, and tax liens. But non-traditional investments like real estate, private mortgages, limited partnerships, and tax liens are allowed. See, you want to look for like a local custodian in your area.

Starting point is 00:31:08 You can Google it, see which ones come up, and make sure you are checking those fees as well, because the rules make it a little bit complicated. But Peter Thiel, in that episode, we talk about this and we go into detail on it, but he is famous for doing this because he put a bunch of shares of venture capital investments that he had in addition to very large tech companies when they were first starting out startups. He put into his Roth IRA and he now has a $5 billion Roth IRA. So I'll link that up down below so that you can check that out as well. The next one is to keep real estate forever or die with it. And yes, I'm very serious about this. One of the best plans or the best tax

Starting point is 00:31:45 strategies at least is to die with your real estate. So instead, Instead of facing the tax issues of recapture depreciation, which we talked about earlier, or your capital gains tax, your heirs instead get what is called a stepped up basis. So, for example, let's say you bought a rental property for 300 grand, and 40 years later, you pass away and the house is worth $800,000. When your heirs sell the house, they would not pay capital gains on the $500,000 gains. Instead, their basis would actually be the $800,000 that they acquired it for, which means they could sell it for $800,000.

Starting point is 00:32:16 This is a really cool tax loophole. allowing you to not have to pay a big tax liability and burden to your heirs, instead allowing them to take over the property and be able to sell it if they don't want to deal with the rental side of it or they can hold on to it and just keep doing it over and over and over again. So this is a great strategy for your taxes if you want to be able to utilize that for your future heirs as well. And then the last one is deferring your income or deferring your taxes by utilizing something like an installment sale. So another great way outside of the 1031 exchange to sell your property

Starting point is 00:32:53 is to become the bank. And when you sell a property, you can do something called seller financing. And when you sell or finance a property, say for example, you bought a house for $300,000 and it went up a ton over the course of a few years. Maybe it went up to $500,000. So you do seller financing at something like a 6% interest rate with the person who is actually buying the property. So you get 6% on your money every single year. So you make more money on that property, even in that $500,000 and you can pass that note down to your heirs. But in addition, what you do is you defer those taxes every single year. So you only pay taxes on the money that you made and the profits that you made that year instead of paying all the taxes at once. So you can make some changes to your tax

Starting point is 00:33:36 bracket and you can do a lot of different creative things to be able to allow yourself to reduce the amount of taxes that you pay every single year. Because why does this matter? Because if you sell property and say you make $300,000 in that property, well, that pushes you into a new tax bracket. And so you're paying higher taxes because you made so much money that year. Instead, what you can do is reduce that liability by doing something like seller financing. This is why real estate is so creative because getting creative like this is how you can reduce your tax liability over time. And this is where it truly matters to know this stuff so that you can see, hey, where am I tax wise? And what can I do next? And between you and your accountant,

Starting point is 00:34:17 really creative with this stuff is going to really be beneficial for you over time. So reducing your tax bracket by doing something. You make more money. You make that 6% interest rate. In addition, when you sell that property, you become the bank. They make the payments to you. And if they don't pay you, you get the house back. So maybe they make payments to you for three or four years and all of a sudden they stop paying because they're a terrible landlord. Well, guess what happens? You get the house back and you can do it all over again. So this is another awesome example of how you can defer those taxes over time so that you can build wealth. Listen, I hope you guys learned a ton in this episode.

Starting point is 00:34:52 If you liked this episode, we did a ton of research on this. So make sure you leave that five-star rating and review on Apple Podcasts or Spotify. On Apple Podcasts, we are trying to get up to a thousand reviews. So if you could help us out by doing that, it'd be truly beneficial so that we can reach more people out there and be able to spread this message about building wealth. Again, if you guys have any questions, I'm always here for you. And we will see you on the next. episode.

The Personal Finance Podcast - 10 Incredible Tax Benefits of Real Estate Investing

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