Use the Ultra-Rich No Tax Strategy With Your Real Estate (Part 3)

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In Friday’s blog, we looked at the tax strategy that the ultra-rich are using right now to pay little to no tax. These tax returns have finally been revealed by the IRS and what a huge reveal!

The strategy is to:




Well, the strategy isn’t to actually die, but the point is that this is what you do (buy/invest and borrow) until you do die. You’re using your investments as collateral for loans and then you live off the loans. To the extent that the loan proceeds are used for your investments, you also get a write-off. 

A further refinement of that strategy is that this is a business you build yourself. 

Real Estate is Custom Made for the Buy/Invest and Borrow Strategy

There are three reasons why real estate can be such a good investment: 

Cash flow,

Appreciation, and

Tax breaks. 

I’ve talked about cash flow and the tax breaks you can get along with it numerous times, but let’s look at that again. 

You Make Your Money On The Buy

Let’s start off by talking about tax breaks. That’s the reason why most people contact my office. They’ve read one of my books, home study courses or are part of coaching. They know that real estate provides tax breaks that are unique. That’s because there is a phantom expense known as depreciation. And depreciation is very flexible. You can speed up depreciation expense, stop it, or catch it up from past years.

The problem that many investors run into, though, is that they have a real estate investment with a loss. They aren’t looking for a way to find more tax write offs. They’re trying to find a way to use the real estate tax loss against other income.

And because these investors are using after tax money to invest, they have to have a high income. That means their income is kicking them over the adjusted gross income threshold of $150K. That means they can’t deduct their tax loss.

On the other hand, the ultra-rich have wealth, not that much taxable income. That means they might not even have an issue with the AGI threshold. It’s not uncommon for the ultra-rich to show no taxable income whatsoever on their return. But they are unlikely to be in this spot because they buy real estate to create cash, not to use up cash.

So they have cash flow and that means taxable income. This is where the depreciation/phantom expense strategy works.

You can take a deduction against that cash flow and so the cash flow they put in their pockets is not taxable.

They bought right and got hold of something that makes them cash. If you’re wondering how to can take a write off for your real estate because it’s losing money, your problem isn’t the tax code.

Your problem is the property. It’s a liability that sucks cash, not an asset that gives you cash.

Cash-Out Refi

The other strategy that the ultra-rich use with real estate is very similar to their strategy is stock.

They build up value and then borrow against it. Loans are not taxable, but they are a great source of cash. Once you get enough property, you can create a great living just by managing your portfolio with smart loans. 

That’s one of the strategies we discuss in Less Tax for Mom & Pop Landlords that I call the critical mass strategy. You get enough properties that you create critical mass. You retire not based on the passive real estate cash flow, although that helps. You are also counting on appreciation that you can then later borrow against. 

Look for the new Less Tax for Mom & Pop Landlords, updated for all the current tax laws. Available through July 2021. 

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