How To Avoid Taxes (Legally) as a Real Estate Investor

If you’re asking your CPA how to avoid taxes, this may be the perfect episode for you. In fact, this episode is geared towards anyone making money in real estate, and listening could save you a massive amount in taxes over your lifetime. But isn’t tax reduction only for the ultra-rich? How can the average, everyday investor who has one, two, or a dozen rentals keep more of their capital so they can invest in more deals?

Tom Wheelwright is the exact man to ask this question to. He’s so good at what he does, that he’s been advising Rich Dad Poor Dad’s Robert Kiyosaki for decades. Tom is dedicated to minimizing the tax burden that he and other investors suffer from. If you’ve read Rich Dad Poor Dad, a lot of Tom’s strategy will sound familiar, but in reality, it’s what all intelligent investors are doing.

In today’s episode, Tom walks through the biggest areas where real estate investors can cut their tax bills, how to generate losses through depreciation, building an investment system, and the five steps to eliminating income tax from your real estate deals. If you make money in real estate, no matter how, this is information you can NOT live without.

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Episode 569

0:00 Intro
3:42 Quick Tip
4:23 How to Legally Pay No Tax
14:57 How Raising Taxes Lowers Tax Revenue
16:15 Tax Loopholes vs. Incentives
23:14 Where to Decrease Your Taxes
31:19 The Bright Side of Being in Debt
35:08 The 7-Day Rule
37:22 Generating Losses and Depreciation
48:49 Do You Need an LLC for Real Estate?
57:35 Building a Bullet-Proof Investing System
1:02:54 Control Everything & Own Nothing
1:07:10 Tom's Advice for David
1:16:49 5 Steps to Eliminate Income Tax
1:22:08 Connect with Tom!

[RichardMPM]

BP was one of the influences that led me to start real estate investing, along with Ken and Robert. Im halfway through the process of my first purchase. Found a overly leveraged landlord that needed to sell urgently and cheaply. Soon having an apartment rented to nurses by the room near my city's hospital which will cashflow HALF of what I currently earn at my job. This started out as me just devouring hours of videos and books from all of you authors and thinking about real estate 24/7 for a year while saving money for first investment. Grind, grind, grind !!! Wish me luck guys !

[tamekamostella]

It would be amazing to have him come back and have a less experienced buyer interview him so the information will be more understandable and easier to relate to. The video was very informative and great.

[alphabeta]

40:00 Depreciation is magic

50:00 LLC facts

[MrWaterbugdesign]

I retired 21 years ago at 45. I didn't have a pile of money and had no plan to retire. I was a software engineer working at startups and had one pay off a $100k so I decided to take off work and develop my own app to sell. My plan was to go back to work when the money ran low. I absolutely loved writing code and creating consumer apps. But wanted to create my own app. This was when the web was starting out so there wasn't a lot of social media or info on "retiring early". A strange thing happened...the money lasted much longer than I had imaged. I also got into gardening and playing basketball which was fun.

I owned my home in San Jose CA with a $2200/mo mortgage payment. I could see without that mortgage payment that wow my expenses were really low. So I fixed up that house (had to refi with no doc loan) and sold for a $400k profit. Moved to Phoenix bought a house for $305k, sold that 6 months later for a $60k profit (just before the crash) and bought a $265k house closer to central Phoenix. Bought a second house in central Phoenix for $200k during the crash.

Basically I've lived off cap gain on houses I lived in. I try to buy dumps in OK areas and I fix them up, sell, repeat. I do all the work myself, another hobby. I generally keep the cap gain below the $250k tax free limit ($500k when I was married).

So my taxable income over 21 years has been below the limit needed to file so I don't even fill out Fed or State income tax forms. Weird feeling. I don't invest (other than my home) because I suck at investing and it's a job I don't like. So no income from investments.

$0 income triggered qualifying for Medicaid so $0 health care costs. I loved Medicaid. No stress having to pick an insurance company, everything is paid for, no co-pays. Medicaid only considers income, not wealth. That saved me a lot of money. Then I found out because I was on Medicaid I could also get a smartphone and data plan for free (Lifeline).

My average spend in the past 10 years has been $600/mo. Crazy right? I self insure my home, don't heat in winter, hot water heater off in summer, no clothes dryer, eat Keto so limited diet (never eat out). $600 includes everything including $100/mo for property tax. I love living simple. I don't have cable TV or even a couch.

It's been a strange trip. There are options to retire early, not pay income taxes. I get no one believes any of this is possible. 21 years ago I wouldn't have believed it either.

Today I'm fixing my remaining central Phoenix home to sell later this year or spring 2023 and moving to SE Asia. As a 65 year old single white dude it's pretty cool I'll be able to date/marry a very young attractive woman who will be a great wife. I can even have kids and have the funds to make sure my kids get through college. No sure I will, but pretty sweet option to have.

The one tip I have is how important marriage is to any financial plan a person has. The biggest risk to retiring early for example is divorce. Never hear that mentioned. When there's a big pile of money people can start seeing being divorced as a way to get more control over that money. Also I couldn't live the way I do, and want, while being married. Chances of find another person to live like this is pretty much impossible. I'm not against marriage, only marriage in the US and most western countries. It's a bad financial contract.

[RachelTomeTampa]

I’m about 3/4 through Tom’s book! Great content! Thank you!😊

[travisjacobs]

Thank you for making this episode, I have been rambling in my mind about what I should do about my goals with taxes. Now I will have less questions for my CPA...

[sadams]

Love this show. For years, many BP shows focused on "20 doors in 1 year" type of stories. Not much on financial side of real estate investment. It is nice change to see!

[jackmabbett]

Love this. More tax and insurance strategy shows. Thanks for the hard work, BP!

[LeeG]

Excellent Podcast episode. Mini-course on Real Estate investing all in one package. A question I have for Tom Wheelhouse is whether using Statutory Trusts (Wyoming, Nevada, etc) for each rental property, held within one LLC (From a state that has a charging order only for creditor remedy) would protect one property's claims from each of the others and the LLC protecting all properties from an outside/personal or other claims?

[jerrysweany]

This is great. My question is: How do you create loss through short term rentals when the goal is cash flow? What am I missing? Depreciation can help...but not very significant.

[christobar]

Great information! He's simplifying the situation with the amazon like deals around the country, for example in WI the state actually paid Foxconn to build there, it wasn't just a reduction in taxes. The benefit to the communities that pay large companies to move in are highly contested.

[luistovar]

Tom W is a master mind on taxes. Great learnings from his books and this discussion

[Storybooktea]

Really good information! I took pages of notes and now I have so much information I have to act on.

[susanshen]

Hi David: great show. We have a few rental properties that are paid off, under an LLC. Understand it’s dangerous if get sued. But how do you get mortgage for an LLC? Mortgage companies wouldn’t lend to an LLC. Thanks Susan

[TriNgoMBA]

Tom is great CPA, i register his website to learn more on my tax preparer practice already

[khongcolong]

Thank you Tom W! Thank you for educating and sharing us your passion.

[yourwellnessla]

Love these solo deep dive discussion with David with guests or with QA. So informative, engaging, and enlightening.

[stevencorrea]

Tom mentioned an online/DIY cost segregation tools for single family houses we could use. Anyone have more info on this or specific links they can reference?

[seanwaters]

Ah! I get this now. When I was 35, I used credit cards to renovate a home, and buy a car (for business only, not pleasure). My method would have worked, except I did not have any financial education. And yes, my asset did not cover my expenses, I did not know about CAP rates. I did have to go bankrupt, but in the process I learned from my mistake, and today I have an amazing spending plan, where I can document my money movement. I can definitely now see that using credit would have helped me build wealth, but I just didn't know how. Buying and hold makes sense, but only if a person understands all of the expenses to run a property (plus emergency funds should be calculated into that equation, me thinks).

[awesomebosssoccer]

Hi David. Thanks for sharing this information. I am thinking about investing in a 37 unit JV out of state. All 6 partners have a percentage of ownership, voting rights, sign on the loan and an active role. My role would be to prepare and update the financials. Would the hours spent in this role count towards material participation? Thank you!