Kiyosaki talk. Write off RE with business??
Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
Kiyosaki talk. Write off RE with business??
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesPrepare for a highly opinionated rant.
First, @Account Closed, stop polluting your brain with Kyosaki, Grant Cardone etc. They do not teach business. They are mindset gurus preaching how you're entitled to be wealthy yada yada yada. And they make good money from preaching and products. I know crowds love these motivational shows and books, but I don't. Most successful investors that I know did not need to be high on these motivational drugs.
Jared Kushner does not do flips, I suspect. Flipping is a job. A very hard job, with very unpredictable results and very high taxes. Wealth is built with rental properties, not flips. Most of the tax benefits come on the rental side, too.
Wholesaling or flipping may be necessary if you need to make current money to live on. Profits from such businesses are taxed high and cannot be "written off" or otherwise magically shielded from taxes by any legitimate approach. You may be able to somewhat reduce taxes thru some tax planning but never eliminate them.
Also, I cannot agree with your thinking that giving up 50% of the profits to the govt is a deal breaker. Would you rather have $0 taxes and $0 left for you or $25k for you and $25k for the govt? Yes, the less taxes the better obviously, but high taxes should not stop you from making money.
41 Replies
- 7yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Account Closed:
Hi, I was watching a kiyosaki vid, and I heard him talk about Jared Kushner not paying taxes in regards to 3 forms of income. I’m not totally sure what’s being said here and I’m not asking for the “safe” “sounds really legal and compliant” answer necessarily. I want to know, is there loopholes on RE through owning a business that would keep you from paying taxes at all on a flip or does that only pertain to rental properties, or none of the above? Or to be specific, I’m curious if there’s a way to legally write off the profits of a house flip, if there is a connection with the use of the house to say a construction business during the time of ownership. I’m not looking to break laws; just asking about what’s possible with the existing tax laws.
There is never writing off the profit.
I am not sure what you are asking or thinking. May be you mean if a business loss can shelter flip income ?
If an owner participates in the flips and the business, the loss from the business can offset the profit from the flips. However, that is not the best strategy. Why would you run a business that gives you loss like that. But if it happens to have a loss for various reasons, yes it can offset flip profit. FYI, this is a general statement.
What you are asking is very specific at individual level. There is no blanket answer.
INVESTOR FRIENDLY CPA®5241 Reviews - Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
Thanks @Ashish Acharya! So if the house is a major expense for the construction company, and causes it to be unprofitable on the front end of purchasing and renovating the business location (house). Could one then write off the expenses of the purchase and upgrades to the house for the construction company as a write off for the construction business, and then separately take the same expenses spent on upgrades to the house and write them off as expenses for the home flip if you ran the flip as a business as well? I’m just wondering if this is a legal “loophole”, or wishful thinking. And how do the rich “not pay taxes” on RE profits because of their businesses? I’m hearing it’s possible, but searching for how it’s typically done legally. 50% tax on flip profits does not sound good at all! I can’t afford to improve the home I’m doing if my 50k profit will turn to 25k. Or I could at least do better elsewhere, but I’m taking a home that’s an eyesore to a neighborhood and making a great house for someone, so why would there be taxes that would keep people like myself from ever fixing a place and flipping it, if we can’t keep but half of the small profits we make and all the while we carry the risk of losing our shirts if it doesn’t sell? So the big question is how do businesses typically shelter profits from RE and keep the rich from paying taxes according to Kiyosaki? Is there a missing 3rd element or income source that I’m not considering to help offset and bring someone to 0 on tax day?
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Prepare for a highly opinionated rant.
First, @Account Closed, stop polluting your brain with Kyosaki, Grant Cardone etc. They do not teach business. They are mindset gurus preaching how you're entitled to be wealthy yada yada yada. And they make good money from preaching and products. I know crowds love these motivational shows and books, but I don't. Most successful investors that I know did not need to be high on these motivational drugs.
Jared Kushner does not do flips, I suspect. Flipping is a job. A very hard job, with very unpredictable results and very high taxes. Wealth is built with rental properties, not flips. Most of the tax benefits come on the rental side, too.
Wholesaling or flipping may be necessary if you need to make current money to live on. Profits from such businesses are taxed high and cannot be "written off" or otherwise magically shielded from taxes by any legitimate approach. You may be able to somewhat reduce taxes thru some tax planning but never eliminate them.
Also, I cannot agree with your thinking that giving up 50% of the profits to the govt is a deal breaker. Would you rather have $0 taxes and $0 left for you or $25k for you and $25k for the govt? Yes, the less taxes the better obviously, but high taxes should not stop you from making money.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes7y
@Account Closed that you shouldn't be letting the tax tail wag the dog. If your goal is to pay no taxes there is an easy answer: move to the country, homestead, and never make any money.
If you aim to grow your net worth and be financially free one day, the goal should be to minimize your effective tax rate over your lifetime. Taxes are just one component of ROI. How you minimize taxes depends on your facts, circumstances and goals. It should be a deep conversation between you and your tax pro.
- New to Real Estate · Plains, PA. Luzerne County · Member since 2019 · 3 posts · 2 votes7y
@Jonathan Greer
I just read about this topic in one of his books. He wrote about an article from The Times, where the reporter called out Kushner and his company for having little to no taxes while making lots of profits.
The way Kiyosaki explained it; Kushner’s company made $1.7M in income that year, and filed for $8.3M in depreciation. A tax benefit that allows real estate investors to deduct a portion of their building(s) cost(s) from their taxes. Its a legal government tax incentive available to investors.
I am merely writing what I read in the book. But it seemed interesting to me as I'm sure it did you. Something to consider looking further into for sure. But like many other comments in other posts, (and the fact that I am currently in the education stage of REI, and not an expert,) be sure to talk with you accountant and attorney about this stuff. They should know what's real and what's speculation.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
@Derek Zielinski oh, ok! Thanks.. that was really nice that you just read it. I just heard him mention that on a YouTube vid, so it was non descript. Thanks for clarifying what he was talking about. I kind of understand the depreciation thing from a distance, and think I’ve heard it can come back around though too.. sounds like more of a holding RE scenario rather than flipping.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
@Michael Plaks ok, I appreciate the other side, and to hear some push back on these guys. I’m more of a doer than a listener. I’ll listen to guys occasionally and read in the down season (whenever I can find it), but I don’t listen to Cardone but only on rare occasions. Yeah, they are motivational, but personally I need a lot of motivation. Pretty much everything I do, I look for wind to catch in my sails and waves to ride to shore. I like Kiyosaki and many on BP have given him mad props for RDPD, but I’m with you on thinking for yourself and knowing these guys are pro sales guys that got the touch to sell you on whatever they say, but they do hit some good truths. Thanks
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
@Eamonn McElroy hey thanks for the reminder. Oh, I’m definitely moving to the country to homestead and pay low taxes for sure!! Haha, really I plan to do that with my wife and kids and have done that, but we take a balanced approach and travel around to do out of state RE flips or buy and hold, but still clawing our way through hard knox and difficult flips and rehabs! So what I’m hearing from you guys is to look at the bright side of the gains on a flipping business and don’t sweat the taxes, just get more efficient with the flips to make more 50%s. Sounds reasonable. Ok, we’ll I’ll try not to get too caught up with one property making me all my money then. Man I can’t imagine paying 50% on a 500k profit. And I’ve done the construction side of flips for people that made that and double that. Crazy.
- Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes7y
@Account Closed's point about depreciation, that's a tactic that can be better exploited by people who view real estate as a long term and generational wealth strategy. It's less feasible if you're looking to become wealthy through real estate investing alone, if that makes sense. If you're starting from "zero" and looking to "get rich" in real estate, then you're mostly going to rely on shorter term strategies (like flipping, or development, or syndication) to put money in your pocket immediately.
The best example I can give, is that I used to wonder (when I started) why people in San Francisco or Palo Alto were willing to buy up property at a 3% cap rate. Don't people want cashflow?? Well, many of those are people/entities with a lot of cash at their disposal. What they see is an opportunity to buy property in highly appreciating markets, with a tax free (as you were saying) 3% annual yield. So from a wealth preservation standpoint, that's a really good deal compared to where else you might put the money, especially when you consider the cashflow and appreciation will also grow over time. The depreciation also gets crazy when you're in an upswinging market, because the assessor (based on local guidelines and I'm sure a company like Kushner's petitions) can easily assess the land as a smaller fraction of the total property value. So, like a $10mm property could end up depreciating $8mm for the building's value upon purchase.
You'll find that on BP, there's a lot of push back about the risk/reward of buying high cash flowing properties versus low cap, highly appreciating properties. My view is that the risk assessment of wealthy investors is different from the folks who are really relying on returns to make a living.
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
@Account Closed
All of that high-level talk about wealth and appreciation and whatnot obscure the simple basic fact that we tried to communicate: depreciation deductions do NOT apply to flipping.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
@Robert C. Oh, wow.. this thing just keeps getting deeper! From what I hear on podcasts, to the deep experience and knowledge of the technical side of RE investing. I’m going to have to do a little more research on exactly what “cap” means in this explaination. I have a concept of capital expenditures (cap x) but it seems the cap rate you’re referring to is different, so I’ll have to study a little to catch up and make sense of exactly what you’re referring to when you say 3%. I understand the basics of what you’re saying though, and it sounds like this is a strategy for truly wealthy people who can afford to make these long term moves. I’m not there and still in the hustling mode of trying to turn some dollars. I started out wanting to buy and hold. Then did the math on my properties and found I could fast track my gains by flipping right now... However, I didn’t realize I’d have to lose so much on taxes in flipping, so I’m learning right now and figuring out where I belong. Is it better to start out flipping to build funds, before buy and hold cash flow? Thanks for the explanation.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
@Michael Plaks aha! Gotcha.. haha, makes sense. Dang, I’m flipping a good buy and hold, but might try to keep em on the next ones. I’m full time flip RE right now, so I’m doing what I can to figure out the profits while I’m doing it. It would be nice to know everything before starting to invest in RE, but I’m learning as I go make some miscalculations along the way..
- Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes7y
@Account Closed, One method isn’t necessarily better than another. It’s part personal choice and part market you’re in. Sounds like you’re already starting with what you feel more comfortable with, which is probably a good thing.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes7y
@Account Closed,
There are two types of CAPs:
1) CAP RATE. This is defined as the Net Operating Income (NOI) of a property for one year divided by the Capital required to generate that income. So if you have a building that has an NOI of $10,000 per year and it cost a total of $100,000 for purchase, rehab, holding, etc. then the CAP RATE is 10%. 10,000 / 100,000. If the total cost was $200,000, then the CAP RATE is 5%. Basically, the higher amount of capital investment it takes to produce a Net Income, the lower the cap rate. This is why "nicer" properties (i.e. more expensive) typically have lower caps rates. Rents often do not rise proportionally to the total capital investment. When you're at the low end properties, you may pay $100 for every $1 of rent you earn. When you're at the top end, you may pay $200 for every $1 of rent you earn.
2) CAP EX. Capital expenditures. This is the money it takes to repair or replace high-dollar items that have a long life span. Examples are roofs, HVAC systems, plumbing, windows, vinyl siding, etc.
CAP EX should be factored into the calculation of CAP RATE because it represents the money that you should be setting aside month by month and year over year to replace large items that cannot be replaced out of monthly cash flow. If you fail to factor in CAP EX, then you'll be toodling merrily along making $200 per door for several years thinking you're doing well, but then the AC unit dies and you have to come up with $4,000 to replace it. Suddenly, your $200/month cash flow for the past 3.5 years disappears or you take out more debt, which reduces you cash flow in future months.
Some people might lump CAP EX in with Vacancy and have one category called "Reserves." Potayto, Potahto. Just be sure to have money set aside and figure that in as part of the monthly expenses that are part of long-term property ownership.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes7y
Btw, to the original post's point: guys like Kyosaki are good entry-level to get you started thinking, but once you start thinking critically you'll need to move on. They're big on what I call "fluff", but when it comes down to the nitty-gritty details of implementing a wealth-building plan, you'll need better advice and strategies.
I can sum up most of Kyosaki's work with the following:
1) Work smarter, not harder.
2) Don't work for money; make money work for you.
3) Don't make your incomes from forms that are highly taxed. Avoid W2 income. (higher tax rates). Go after Capital Gains (lower tax rate)
4) Buy assets and businesses. Don't try to earn wealth investing in the stock market. The stock market is where rich guys who already have money park the wealth they made from owning assets and businesses.
5) His tax advice is almost all bunk and/or vague. You cannot take your family on a 2-week Hawaiian vacation and write it off as a "business expense" because you claim you spent time there studying real estate prices or looking at potential investments. If the IRS audits you, I can almost guarantee you that will not fly. I have a friend who is an IRS auditor and she has busted several Kyosaki disciples on their "aggressive" (i.e. BS) strategies for writing off toys and trips as necessary business expenses.
There, I saved you 10 hours of reading and the cost of 4-5 books. J/K...there's a little more to it, but that's the bulk of it. Most of what he has are repackaged versions of tried and true "Wealth Building 101" lesson illustrated with cute fictional anecdotes and stories.
- Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes7y
Kyosaki makes another interesting point in his books/Youtube channel: You don't pay taxes on debt. Meaning if you put down $20k on a $100k house and get a mortgage for $80k you're not paying taxes for that. Essentially you're getting $80k untaxed.
This gets super interesting when you build a portfolio and decide to cash-out afterwards. Lets say you have properties worth $1,000,000 that you own and you decide to cash out 75% on them. A lender will give you $750,000 and you are not paying a penny of tax.
'Good debt' along with Depreciation are powerful tools to minimize your taxes legally.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes7y
Well shucks, I keep seeing more stuff I should've covered.
Depreciation. Yes, that's a legitimate strategy to protect your income from taxes. Here's how it works.
The IRS says you can deduct all legitimate expenses from your Gross Income. In other words, if you pay $10 to buy widgets and then sell your widgets for $20, you only pay taxes on the $10 profit.
Real estate is the same way, except the IRS has "graciously" given us what is called depreciation. I "graciously" because in reality all they are doing is slowing down the rate at which we can deduct our expenses when we purchase and/or make major improvements to real estate. For example:
Let's say you buy a single family house for $100,000 and it rents for $1,000 per month. To keep it simple, I'm ignoring all other expenses. If we treated that house like a widget, we would instantly deduct the entire $100,000 against the $12,000 yearly rent in the first year and have a HUGE loss of $88,000 on paper. We paid $100,000 and only got back $12,000. Yay! That means I pay no taxes on my income for almost 8.3 years. That's how long we could make $12,000 profit per year until we recoup our original investment.
The IRS got smart to this and said, "Nope, you can't deduct the whole building starting in year 1 like you would deduct the entire cost of a widget. Instead, you have to spread it out (depreciate) over the lifespan of the asset." So it's not like our nice $10 widget. Rather, we have to follow the IRS rules that say we have to divide up the total cost of the asset over 27.5 years (for residential real estate) and we only get to deduct that portion of what we paid.
So back to our example: we only get to deduct (depreciate) $3636.36 per year against our $12,000 income. We pay taxes on the after-depreciation profit of $8363.64.
In reality, it's a bit of a sham, but it's what we've got to work with.
Now where depreciation HELPS us is to shield rental income and possibly have some left over to shield other income. For example, let's say out of that $1000 per month rent, you actually spend $800 on expenses and debt service, leaving you $200 profit per month. That's only $2,400 per year, which is LESS than your $3636.36 depreciation. After you apply depreciation, you still show a net loss of $1236.36. You can use that loss to shield other income or profits from W2 job or flips. And the best part is, unlike our $10 widget, the house didn't really "cost us" $100,000 to create. Rather, the value is still there. We didn't lose $100,000; we simply transferred that wealth from cash into real estate.
So after 27.5 years the house is--to the IRS--worthless. It has $0 value because it wore out and fell apart over the last almost 3 decades. But in reality, if you've kept it up, it is still worth at least $100,000 and probably a lot more.
The kick in the teeth comes when you sell it and have to pay depreciation recapture or do a 1031 exchange, but that's out of the scope of this discussion.
Bottom line: yes, you can use excess (unused) deprecation from Property A to offset the tax liability of profits from Property B, or a flip, or W2 income from another source. But there is no free lunch and no way to legally just avoid paying taxes on profits. You have to buy an asset that is losing money on paper via depreciation to accomplish that, and that is not "free lunch".
- Rental Property Investor · San Francisco, CA · Member since 2019 · 42 posts · 16 votes7y
“you can use excess (unused) deprecation from Property A to offset the tax liability of profits from Property B, or a flip, or W2 income from another source“
Using excess depreciation to offset tax liability from non-real estate income (like W2 or non-real estate 1099 income) is subject to some serious limitations (on income and deductions), so please be sure to research this topic carefully before you proceed.
The content from https://www.therealestatecpa.com/ is excellent - I suggest you start there.
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Account Closed:
Kyosaki makes another interesting point in his books/Youtube channel: You don't pay taxes on debt. Meaning if you put down $20k on a $100k house and get a mortgage for $80k you're not paying taxes for that. Essentially you're getting $80k untaxed.
This gets super interesting when you build a portfolio and decide to cash-out afterwards. Lets say you have properties worth $1,000,000 that you own and you decide to cash out 75% on them. A lender will give you $750,000 and you are not paying a penny of tax.
This is only partially true. You will pay taxes on $750,000 when you sell, unless you exchange.
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
@Erik W. - an outstanding review of Kyosaki!
- Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes7y
robert would have us believe you can make untold millions buying up Ferrari’s going on lavish trips with fine dining and designer suits all paid by the company tax free while you simply go to the mailbox and collect checks . Reality is much different for the average guy than his advise promises ! Look The irs has strict guidelines as to what can be deducted and how much of it can be . This idea you’ll be buying up Porsche’s and going on Hawaiian vacations for free is nonsense .Robert has done a fantastic job of getting an average person to think critically about their finances and future ..but the tax stuff he preaches is something I’d take with a grain of salt . If he truly does what he claims Some of it borders on tax fraud
- Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes7y
The tax rules are different depending on whether you call yourself a real estate investor or if you claim real estate is a "business". I prefer the rules being an investor. But you have to decide what is best and works for you. I'm a CA. licensed tax preparer.
- Member since 2019 · 226 posts · 115 votes7y
@Account Closed you do know the 20k you paid isn’t what gets deducted right? You only get to deduct the depreciation every year and the interest, the irs doesn’t care about your cash flow.
- Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes7y
Originally posted by @Tom Makinen:
@Account Closed you do know the 20k you paid isn’t what gets deducted right? You only get to deduct the depreciation every year and the interest, the irs doesn’t care about your cash flow.
Of course
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y
Hi @Karen Lee, thanks for the added insight. Any way you could explain the potential benefits of filing as a business or as an investor in relation to flips or buy and hold?
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