How do rich pay zero taxes legally?

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How do rich pay zero taxes legally?

Mary Jay

Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes

Hi guys,

So I hear often (Robert Kiyosaki, Trump, other rich etc) pay zero taxes legally.

Lets say Kiyosaki's business "Rich Dad, poor dad, educational LLC" made 100K.

The same LLC went and bought a rental house for 100K.

Since all the money were spent now the tax liability is zero?

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

When you buy a rental property for $100k you didn’t “spend” the $100k, you invested it, that’s not the deduction. (If you bought $100k in Tesla stock, you don’t get to take that off your taxes.)

Imagine you buy $100k property and rent it for $1,000/mo. You have $12k in income. Minus $600 mortgage payment ($100 principle, $500 interest.) x 12 - $7,200, $1000 for insurance, $1000 for property taxes, $1,000 property management. That’s $10,200, so you put $1,800 in your pocket and made another $1,200 in loan paydown. You made $3,000 profit. Then you get to deduct $3,636 in depreciation. Your taxable income is minus $636.

Now apply that to a $500k house, or a $100 million apartment complex. All of this is before you deduct your cpa, vehicle, cellphone, and a collection of other things “regular people” have to pay for after they pay taxes. You’re taking them off your taxes. They are part of your business.

Don’t forget your first $11k as a single person is tax free also.

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Jeff Nash
Accountant · McKinney, TX · Member since 2023 · 394 posts · 580 votes
3y
The simple answer to your question is that they are Real Estate Professionals and can use accelerated depreciation on real estate investments to offset other active income.
6 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
3y
Rich dad poor dad should have been a pamphlet instead of a book, but a book makes more money. The gold nugget was the cashflow quadrant. The neat thing about real estate is you can have $0 taxable income due to expenses (depreciation, interest, etc.) but still make money. Accelerated depreciate is not required. It is not complicated.
6 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
When you buy a rental property for $100k you didn’t “spend” the $100k, you invested it, that’s not the deduction. (If you bought $100k in Tesla stock, you don’t get to take that off your taxes.)

Imagine you buy $100k property and rent it for $1,000/mo. You have $12k in income. Minus $600 mortgage payment ($100 principle, $500 interest.) x 12 - $7,200, $1000 for insurance, $1000 for property taxes, $1,000 property management. That’s $10,200, so you put $1,800 in your pocket and made another $1,200 in loan paydown. You made $3,000 profit. Then you get to deduct $3,636 in depreciation. Your taxable income is minus $636.

Now apply that to a $500k house, or a $100 million apartment complex. All of this is before you deduct your cpa, vehicle, cellphone, and a collection of other things “regular people” have to pay for after they pay taxes. You’re taking them off your taxes. They are part of your business.

Don’t forget your first $11k as a single person is tax free also.
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Although being larger is usually better, you have many more options than those high profile People have.

2 out of 5 years. 1031, Year one writeoff which is going away, writing off living expenses and even housing depending on your REI type. Pay for your kids cars and college. Pay for your vacations.
1 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
3y
@Henry Clark Pretty cool to have CPAs on the forum. Question - Does on have any options regarding 1031ing rental property into the purchase of a new primary residence? Best to you.

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Account Closed
Investor · NH · Member since 2023 · 54 posts · 25 votes
3y
If you lose money you can write off your gains until you make back the loss.
Really wealthy people re-invest in their companies to grow the stock price. They pay some taxes but their workers pay a lot of taxes based on their salary too.
It is a different set of rules but as a real estate investor you can 1031 exchange however the taxes are due at some point.
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Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
3y
Quote from @Account Closed:

...you can 1031 exchange however the taxes are due at some point.
Not if you die before selling. Generational wealth you know.
4 Reply
Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
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Quote from @Jeff Nash:

The simple answer to your question is that they are Real Estate Professionals and can use accelerated depreciation on real estate investments to offset other active income.

End of the thread. Seriously. Stop reading guys.
[email protected]732-289-3823
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Quote from @Terrell Garren:

@Henry Clark Pretty cool to have CPAs on the forum. Question - Does on have any options regarding 1031ing rental property into the purchase of a new primary residence? Best to you.
Not supplying financial advice. Just options and considerations.

0 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Is your question a curiosity question or are you at a financial wealth point you’re starting to look holistically?
0 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
3y
Quote from @Henry Clark:

Is your question a curiosity question or are you at a financial wealth point you’re starting to look holistically?
Just looking for options. financial wealth point you’re starting to look holistically

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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
We have not paid taxes believe 3 years. One was for 1031. And the other 2 years due to year one write-offs.
Sounds good not paying taxes but it can have a negative impact or environment.

The 1031 we purchased our new property then sold our old property. We’re under time pressure to sell.
If you sell a property for say $1mm then due to time crunch you might have to buy a $1.3mm property. Buy 4 smaller properties at $250,000 and keep track of your basis. Or you might buy a $900,000 property and the full $100,000 is taxable as profit. Make sure you truly understand 1031’s by talking with your intermediary.

Year one write-off. If you ever consider selling you have to recognize depreciation recapture in your decision. I would not do year one writeoff unless I wanted extra cash that year or the next due to lower tax payments.
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Quote from @Terrell Garren:

Quote from @Henry Clark:

Is your question a curiosity question or are you at a financial wealth point you’re starting to look holistically?
Just looking for options. financial wealth point you’re starting to look holistically

Would do a few
exercise's.

Use the lookup on my name and “What happens if you die?”.
Pull All of you financials together. Now do a risk reward analysis.

You would like to have 2 years living expenses covered. Put that in cash equivalents or cash. Low return but you sleep better. Even inflation is eating into it, but that’s ok.

You want some relatively secure investments. Put xxxxxxx amount into ??? Stock market.
Or pay down debt. Good from a security standpoint. Bad from an inflation standpoint. You should keep debt and pay in cheaper dollars later.
Now for your aggressive investments. Where you want to beat inflation and grow your wealth.
Or you’re really wealthy and want to do generational wealth planning. You look at Insurance loan combo programs for your kids.
Or you invest in timber. Read my Belize Teak investment log.
0 Reply
John Duston
Accountant · Santa Barbara, CA · Member since 2016 · 213 posts · 66 votes
3y
@Mary Jay
If you own real estate and pay taxes, buy more
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
keep in mind the very rich will stick to double tax free municipal bonds and other sorts of tax benefited investmennts and call it a day.
they will pay cash for their primary secondary and other personal homes and their ranch in Montana.
those building wealth Through real estate will get on the depreciation hamster wheel through various methods.. that's 99% of the BP audience.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Henry Clark:

Quote from @Terrell Garren:

Quote from @Henry Clark:

Is your question a curiosity question or are you at a financial wealth point you’re starting to look holistically?
Just looking for options. financial wealth point you’re starting to look holistically

Would do a few
exercise's.

Use the lookup on my name and “What happens if you die?”.
Pull All of you financials together. Now do a risk reward analysis.

You would like to have 2 years living expenses covered. Put that in cash equivalents or cash. Low return but you sleep better. Even inflation is eating into it, but that’s ok.

You want some relatively secure investments. Put xxxxxxx amount into ??? Stock market.
Or pay down debt. Good from a security standpoint. Bad from an inflation standpoint. You should keep debt and pay in cheaper dollars later.
Now for your aggressive investments. Where you want to beat inflation and grow your wealth.
Or you’re really wealthy and want to do generational wealth planning. You look at Insurance loan combo programs for your kids.
Or you invest in timber. Read my Belize Teak investment log.
having been in the Timber industry for many years and owning hundreds of acres of timber land I can attest to the benefits of Timber land ownership.. Harvard endowment and John Hancock insurance are two of the largest lenders and owners of Timber land in the US. One can also do a 1031 with your Timber deed.. and actually the Starker exchange ( the very first 1031) Starker is a large timber owning family in ORegon and created that vehicle when dealing with their hundreds of thousands of acres of timberland holdings.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Andrew Wilke
Member since 2022 · 1 post · 2 votes
3y
Another answer: The super wealthy borrow against their assets to live until they die, especially if the bulk of their wealth is in stock. For portfolios in the many millions of dollars, these borrowing rates can be as low as 1%, far below the average ROI of holding the asset in the first place. When the person dies and his assets are passed on to their children, they avoid a taxable event through the step-up basis, and the heir can choose to pay off the loan by selling the securities with no tax liability, or just continue the cycle.
2 Reply
John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
3y
You won’t pay any taxes off your RE for several years. The tax code is set up in our favor.
0 Reply
Nate Marshall
Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 737 votes
3y
They have better accountants than you. Plus lawyers. The ultra wealthy can establish family offices and employ experts to advise them where to place capital.
In regards to the Trumps they may have skirted some loopholes but they have legitimate business unlike the Bidens.
3 Reply
Chris Merchant
Member since 2023 · 216 posts · 133 votes
3y
@Nate Marshall I agree!
I recommend the book Money Hacks by Larry Stienhouse, he goes into some pretty good detail on how to lower your tax liability. He also goes over several other topics on finance and investing, it is a great read and explained in laymen's terms so it is easy to understand. I know it is not a BiggerPockets book but I do feel it is a must read.
0 Reply
John Malone
Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
3y
@Mary Jay the answer is complex. Beyond RE, there are a lot of HNW strategies to deploy.
Do we have tax strategy clients that have completely eliminated their tax? Yes, the concept of “tax free wealth” some may say.
However, this is not extremely common and the lessons of Rich Dad should be to think this way, but have realistic goals.
For example, it could be as simple as saving $3,000 per year in taxes by working with your advisor and reinvesting that at 7% etc. Everyone has to start somewhere!
1 Reply
Mario Morales
Member since 2020 · 240 posts · 104 votes
3y
@Terrell Garren I have always heard what you said, but my question is if I paid zero taxes because of my deductions in real estate, will that make my schedule E look unprofitable to an underwriter when looking for a loan for my next property?
0 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Quote from @Mario Morales:

@Terrell Garren I have always heard what you said, but my question is if I paid zero taxes because of my deductions in real estate, will that make my schedule E look unprofitable to an underwriter when looking for a loan for my next property?

If your negative due to accelerated depreciation expense they will not include that. They will look at Net Operating Income. NOI. They will actually treat it as a good thing. You understand taxes and it improves your cash flow up front.
0 Reply
Joe S.Pro Member
Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
3y
Quote from @Mary Jay:

Hi guys,
So I hear often (Robert Kiyosaki, Trump, other rich etc) pay zero taxes legally.
Lets say Kiyosaki's business "Rich Dad, poor dad, educational LLC" made 100K.
The same LLC went and bought a rental house for 100K.
Since all the money were spent now the tax liability is zero?

I wouldn’t say zero taxes. Extreme statement like that Gives a lot of ammunition to certain flavors of politicians.
1 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
3y
Quote from @Mario Morales:

@Terrell Garren I have always heard what you said, but my question is if I paid zero taxes because of my deductions in real estate, will that make my schedule E look unprofitable to an underwriter when looking for a loan for my next property?

I don't know. I've only used HELOCs on my primary residence to borrow. I've never leveraged my rental property.
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