Path To Wealth Using The Tax Code

Taxes on Real Estate Investments: Utilizing tax laws to increase our wealth.

Master Investor
April 20, 2024

Summary:

There are methods to take advantage of the tax code.
Ensure that we get knowledgeable tax advice to assist us in comprehending the tax code.
We too can get wealthy if we follow the rules.

A tax revolt laid the foundation for the US

If we were paying attention in school, we would have discovered that the Boston Tea Party in 1773 was the actual beginning of America. Yes, it is correct. A tax revolt laid the foundation for America. The patriots tossed the tea into the water because they were sick of paying taxes on it. Ultimately, this resulted in the Revolutionary War of 1776.

It's unclear when exactly so many people in this nation developed an infatuation with paying taxes, but the truth is that America was built on paying as little in taxes as possible. It is not patriotic to pay taxes. Theft is what taxes are.

The purpose of the tax code is to reward the right of the Cash-Flow Circle

As you are undoubtedly aware, there are lengthy and intricate tax codes in the US and many other nations. The reason behind this is the question.

The explanation for this is that government officials long ago discovered that they could use the tax system to force individuals and companies to comply with their wishes.

To put it succinctly, the government intends for us to utilize the numerous credits and breaks that are included in the tax code. For example, the government favors affordable housing.

As a result, developers and investors can benefit from a variety of tax credits for affordable housing that reduce their tax obligations, increase their take-home pay, and ultimately help to build affordable housing. Everyone is successful.

Rather than pay our money to a bureaucrat, we would rather put it in reasonably priced housing.

The tax system contains other scenarios similar to this one that encourage investors and entrepreneurs to engage in the kinds of activities the government is seeking for while rewarding those who do so with reduced or no tax burden.

As a result, lowering your tax liability essentially translates into following the government's wishes as expressed in the tax code. The most patriotic thing you can do is that.

Here at masterinvestor, we're passionate about demonstrating the tax benefits of real estate investing. Before we get started, though, let's first discuss why the tax code is so crucial for the wealthy and how the middle class and poor just have different perspectives on taxes than do the wealthy.

A few years back, when Trump's new tax code went into force, we would have noticed several pieces about who was getting what benefits and how.

For workers, well, most of them, it was excellent news. According to FOX News, the average middle-class household saw their after-tax income grow by 1.6% as a result of a tax cut of almost $930.

Several quotes from Twitter users were featured in the article:

"Someone discovered that he or she had an additional $100 in their paycheck! That cash will help pay a bill and be donated to their church.
"Someone took home $130 more than my last paycheck when he or she looked at their paycheck today."

For example a woman who works as a secretary at a high school was “pleasantly surprised” that her pay went up $1.50 a week. After calculating the total, she found that it came to $78 annually, which would pay for her Costco membership.

Although it was good that these people had a little extra cash in their pockets, the majority of people's responses revealed two different perspectives on taxes and, ultimately, money in general.

The mentality surrounding employee taxes

In actuality, employees don't really have much financial influence over taxes. They have very limited leeway because they are entirely at the mercy of the law.

It follows that the responses from the public are not shocking. At the time, responses ranged from favorable to negative, but one sentiment persisted: "They have to accept what the government gives them."

The belief that there is nothing they can do about their tax status is shared by employees, regardless of whether they are happy or bitter about it. They can't oppose city hall, after all.

The thinking of the wealthy tax

The wealthy, however, we are thrilled about the tax breaks. Not because they could earn more or less in after-tax income (though the astute ones will always make more), but rather because the legislation provided us with additional incentives that they could find and exploit.

We are aware that some activities are rewarded by tax regulations, which motivate us to take action.

Without a question, the majority of wealthy individuals were in communication with their tax advisors around the time of Trump's new tax laws, seeking ways to take advantage of the tax code to increase their wealth by avoiding actions that would raise their taxes and by implementing investments and practices that provide incentives.

This demonstrates a prevalent tax-related attitude among the wealthy: "We go and take what the government gives us.”

How the wealthy set the rules and manipulate the tax system

The wealthy make the rules when it comes to taxes.

If we want to be wealthy, we need to play by the rules of the wealthy.

The wealthy benefit from a system of money that is biased against the middle class and working class. Taxes must be paid by someone, after all.

Of course, this annoys the middle class. This explains why they become so enraged when they learn that the wealthy are exempt from paying taxes and that they frequently do so because they influence the laws.

In essence, wealthy people can invest our wealth in these low-income regions of the nation to promote economic growth. By doing this, individuals are able to postpone paying capital gains taxes until 2026 and avoid paying taxes on the profits they receive from their investments in these opportunity zones.

The fact that a wealthy individual drafted the law may vex people the most.

Sean Parker, the inventor of Napster and an early Facebook executive, is the man behind it all. He uses his notoriety and Rolodex to network with the city's wealthiest residents. Engaging in conversations with individuals such as his close friend Peter Thiel, Reid Hoffman, the inventor of LinkedIn, and venture capitalist John Doerr, he has been presenting the notion to them in a manner that only a genuine peer could.

The wealthy set the rules when it comes to taxes, but these rules are available for all to take advantage as long as we follow the patter of the wealthy when in comes to making money.

Wealthy people, taxes, and equity

Most individuals appeal to some sense of fairness in discussions such as these. They complain that the wealthy should set tax policy because it is unfair. Some argue that it is unfair for the wealthy to be able to dodge taxes while the impoverished and middle class must foot the bill.

Alright, that is unfair. However, as we have most likely already been informed, life isn't fair.

Consider understanding the rules the wealthy make and playing by them ourselves, rather than concentrating on what's fair and wasting time whining. The government is aware of this, of course. After all, they design the tax system to promote specific actions they want people to take, such as making investments in underdeveloped areas.

To put it succinctly, the government intends for us to utilize the numerous credits and breaks that are included in the tax code. For example, the government favors affordable housing. As a result, developers and investors can benefit from a variety of tax credits for affordable housing that reduce their tax obligations, increase their take-home pay, and ultimately help to build affordable housing. Everyone is successful.

The tax system contains other scenarios similar to this one that encourage investors and entrepreneurs to engage in the kinds of activities the government is seeking for while rewarding those who do so with reduced or no tax burden.
As a result, lowering your tax liability essentially translates into following the government's wishes as expressed in the tax code. The most patriotic thing you can do is that.

This won't sit well with many people, but that's okay. They are free to continue grumbling and filing their taxes. The real participants will continue to play by these rules since they are unchangeable.

Taxes: following the wealthy's guidelines

Anyone can take advantage of the various strategies used by the wealthy to earn large incomes while paying little or no taxes. For example, here's a real-world scenario where Robert Kiyosaki decreased my taxes by following the principles of the wealthy:

Ten residences in with a $100,000 down payment. Investor received $20,000 annually from the developer to use these 10 units as sales models. As a result, the investor got a 20 percent cash-on-cash return, and since the building's depreciation and the furnishings used in the models offset the profits, they only had to pay a little amount in taxes. Even though they were actually profitable, it appeared as though the investor was losing money.
With the soaring real estate prices, the 380-unit condo complex was quickly sold out. Investor was the last to lose ten models. Each unit he or she made about $100,000 in capital profits. Inside investor invested $1,000,000 ($100,000 x 10) in a tax-deferred 1031 transaction. On our millions of dollars in capital gains, they lawfully paid no taxes.
Investor used that money to buy a 350-unit apartment building a different location. The building was overrun with bad tenants who had evicted the good ones, and it was badly managed. It need repairs as well. After taking out a construction loan, they demolished the building and evicted the problematic tenants. After the rehabilitation was finished, they increased the rent and moved in nice residents.
Due to the higher rates, the property was revalued, and they took out a loan—which our new renters will be paying for—based on their equity, which was around $1.2 million tax-free. The property continues to provide them a positive cash flow of about $100,000 annually even after the loan.
The $1.2 million was subsequently used by to purchase a second, 350-unit apartment building in Flagstaff, Arizona, a desirable real estate market, tax free.

Instead of parking money, move it.

This is an illustration of the velocity of money investing technique, which says to move money rather than park it. Moving our money makes more sense than keeping it in cash, bonds, stocks, or mutual funds—the approach that most financial counselors advise. This has been covered previously.

Consider the example mentioned above. Initially, had $100,000 from a previous real estate investment that they had earned tax-deferred. In the end, the $100,000 enabled them to take out tax-free bank loans totaling nearly $20 million. The majority of financial gurus advise putting our money somewhere, but how long would it take us to save $20 million?

Benefit from real estate taxes: the best method to utilize the tax code

Our government intentionally rewards people who own large businesses or make investments on the left side of the Cash-Flow Circle, which categorizes people into four categories of income earners: employees, self-employed, business owners, and investors. Between 0% and 20%, these two quadrants pay the lowest taxes. In comparison, the right side of the cash flow circle bears the greatest tax burden as compared to employees and small business owners, who pay between 40% and 60% in taxes.

And paying taxes on real estate investments is one of the most effective methods to use taxes to enrich oneself.

Let's look at a few more ways that real estate investing can lower our taxable income:

Deductions: SubtractionsIt may surprise you to learn that we can write off a number of rental costs from our taxes, including running costs, property taxes, mortgage interest, depreciation, and maintenance. In the event that we are audited, be sure to maintain track of deductible expenses, such as receipts. Additionally, record any travel costs you spend on maintaining our rental property. For additional information on real estate deductions, visit the IRS.
Pass-through entities: Entities that pass throughResidential landlords who operate as pass-through entities—a unique business form that relieves the burden of double taxation—such as sole proprietorships, LLCs, and S corps—can now deduct 20 percent of net rental income immediately from the top according to the Tax Cuts and Jobs Act of 2017 (TCJA). That's true, we may effectively deduct 20% of our profits from taxes. Before presuming we qualify, make sure to speak with our tax professional as there are some restrictions and exceptions.
Bonus depreciation of 60%: In 2017, the regulations permitted landlords to deduct 100% of the personal property for rental units, or 100% bonus depreciation. The regulation was modified once more in 2024, this time to a 60% bonus depreciation, after gradually decreasing. However, these upgrades to rental units could also include furnishings, a new roof, improved HVAC systems, fire safety and alarm systems, and appliances.
Tax credits for low-income housing: Developers are incentivized to produce affordable housing by means of tax incentives offered by the Low Income Housing Tax Credit program. Private investors receive a federal income tax credit as a means of encouraging them to make equity investments in affordable rental housing.
Historic building tax credit: Tax credit for historic buildingsInvestors who renovate qualified historic properties are eligible for a federal tax credit, which allows them to deduct 20% of their eligible improvement costs from their federal tax obligations. Note: Rather of having to claim this credit in the year that the facility was put into service, taxpayers now have to spread it out over five years under the new TCJA.

Additional benefits of real estate taxes

These are some of the major tax benefits, but wealthy investors are also aware of a few tax breaks. Here, Master Investor we have details a handful of these breaks.

Additionally, we will be realizing our next eBooks and courses shortly: How to Raise Capital to Build Wealth? - How to Use Real Estate to Build Wealth?

Check out the books below for more business guidance.

When it comes to these tax benefits and loopholes, it is crucial to select the appropriate tax counsel to make sure we are abiding by the law and maximizing our real estate tax advantages.