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The Wealth Train. #1
I want to talk about a frequent topic here, but never really formalized. Put into something coherent. Building “Generational Wealth” etc. We get snippets, but not the full extended logic.
Here are the basics:
Cost Segregation —-> Losses, which either offset your W2 income, or are carried forward as Net Operating Losses.
Cost Seg. This is Turbocharged Depreciation. Jot that down.
§1031 Like-kind exchanges. You sell the property at a profit. We call it a “gain”. You put off the taxation of the gain. You “defer” the gain.
Debt. You rarely pay 100% of the purchase price. Right? You borrow. Maybe 20%. That is your ‘skin in the game”. The Magic? You can “write off” the cost of that property based upon the purchase price: downpayment and OPM [Other People’s Money]. How cool is that? You are getting a depreciation deduction on someone else’s money. You will have a positive cash flow, but a tax “loss”.
This is essence of a Tax Shelter. A deduction where you don’t have skin in the game. Same story with Oil and Gas Depletion. It’s Grand!
This, then, is our Engine: Depreciation, Debt and Deferral.
And how long can you defer tax? Turns out until you go to the Great Tax Shelter in he After-Life. Good estate planning. Stepped up basis after death.
Got it? It’s an Engine. You need to visualize as a locomotive. Adding cars which carry property and deferred taxes . . . miles long.
“The Wealth Train”. Make up your own words to the Cat Stevens hit: “Out there on the edge of darkness, there lies the Wealth Train [sound of Gospel choir] . . “
[Oh. Listen, you really shouldn’t be driving this train by yourself, you know]