This is episode #317, and my guest today is Tom Wheelwright. Tom is the nation’s leading tax advisor for real estate investors, and is actually the Rich Dad Advisor to Robert Kiyosaki. Tom is not only a great guy, he’s extremely knowledgeable at helping real estate investors minimize or even eliminate their tax bills. Unless you’ve been under a rock, you know that the upcoming Presidential election is likely the most polarizing in our lifetimes. Regardless of where you stand politically, you need to know how it may impact YOU as a real estate investor, specifically from a tax standpoint.
Tom joins us today to share his thoughts on how you may be impacted whether Donald Trump or Hillary Clinton is our next President – and how you can plan, at least from a tax standpoint. There’s opportunity to thrive as a real estate investor in every market and under every president…the questions is whether you’re prepared or not!
Please help me welcome Tom Wheelwright to the show.
Mike: This is the flipnerd.com expert real estate investing show, the show for real estate investors whether you’re a veteran or brand new. I’m your host Mike Hambright and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility and taking control of your life and financial destiny, you’re in the right place.
This is episode number 317 and my guest today is Tom Wheelwright. Tom is the nation’s leading tax advisor for real estate investors and is actually the Rich Dad advisor to Robert Kiyosaki. Tom is not only a great guy but is extremely knowledgeable at helping real estate investors minimize or even eliminate their tax bills.
Now, unless you’ve been under a rock you know that the upcoming presidential election is likely the most polarizing in our life time. So regardless of where you stand politically, you need to know how it may impact you as a real estate investor specifically from a tax standpoint. Tom joins us today to share his thoughts on how you may be impacted whether Donald Trump or Hillary Clinton is our next president and how you can plan at least from a tax standpoint. There’s opportunity to thrive as a real estate investor in every market and under every president. The question is whether you’re prepared or not. Please help me welcome Tom Wheelwright to the show. Tom, welcome to the show.
Tom: Thanks for having me.
Mike: Yeah, good to see you. For folks that are listening if you haven’t heard Tom before speak and you haven’t and Tom’s been on the show before it was like 150 or 170 episodes ago something like that. And then of course Tom is a very well-known guy in our industry but if you’re not familiar with Tom, I think you’re going to be excited about today’s show and I always love talking to you, Tom, because I get kind of nerdy about taxes because I know talking to guys like you always saves me money so I am excited you’re here today.
Tom: Well, I’m always exited to be here. Always excited to be, you know, getting out there letting people what they can do with their taxes.
Mike: Yeah. So why don’t you maybe take a minute before we get started here talking about the topic today, which is going to be very timely, talking about what’s going on with the election coming up. Why don’t you just take a few minutes and just tell us a little more about who you are and your background?
Tom: Sure. Thank you for that. So you know you’re a flip nerd, I’m a tax nerd and I started back . . . I have a master’s degree from the University of Texas and my undergraduate University of Utah all in tax and then I spent 7 years with what is now Ernst Young including three years in the national tax office back when Ronald Reagan passed the last big tax bill in 1986. So that kind of dates me a little bit but also gives me a little perspective on what’s going on in the elections that most people would not have because I was there when that whole negotiation was going on with Ronald Reagan.
And then I spent four years as the tax advisor for Fortune 500 Company and for the last 20 some odd years I have been doing my own thing. So ProVision is my company and we’re an international CPA firm based out of Tempe, Arizona and we have clients on six continents and over 30 countries and all 50 states so it’s a lot of fun. I do some tax work. I do a lot of speaking as you know. I do a lot of writing. I wrote a book that is fortunately for me every month it remains on top of the bestseller in its category on Amazon, “Tax-Free Wealth.” And I get some real nice comments on it. I got to tell you. So the best review I ever got, I got a comment the other day from this young woman and she said, “Tom”, she goes, “I love ‘Tax-Free Wealth.’ It’s a great read for the beach.”
Mike: Is that a good comment or bad comment?
Tom: And right now she’s a little nerdy to say that but at the same time going if it’s easy enough to read on the beach, it’s pretty easy to read. I know it was intended as a very high compliment. I thought, that is awesome. Somebody said a tax book can be a beach read, I think that’s pretty cool. You know, typically, you’re thinking about, right, trashy romance novels and here you have a set of trashy tax book. But no, it’s a lot of fun. I mean, we were talking earlier about travel and I just got back from six weeks with Mr. Kiyosaki from “Rich and Poor Dad” and we’ve got another travel, more travel coming up and it’s just a lot of fun. It’s a lot of fun to teach, a lot of fun to help people understand that the tax law can be your friend. It doesn’t have to be your enemy.
Mike: Yeah. And most importantly and I know this what we are going to talk about today is sometimes it just is what it is and you have to figure out how to navigate those waters, right?
Tom: Well, it is. I mean, nobody’s going to argue that the details aren’t complex but the principles are very simple. And this is what people tend to miss is that the principles of tax law are very simple and they’re consistent from country to country to country. So I’m in South Africa, I’m in Australia, I’m in New Zealand. The taxes, while the tax rates vary and some of the details vary, the purpose of the tax law, which is not to raise revenue but primarily to incentivize certain activities to get people to follow government policy like investing in real estate is a huge incentive, businesses big incentive, oil and gas big incentive, mining big incentive depends on the country you’re in.
And in South Africa for example they really want to bring in research and development in their businesses, so they give 150% deduction for every dollar you spend. So you spend $100,000 you get deduction for $150,000. And they have a 50% tax rate. So you think about that you’re getting for every $100,000 you spend, you’re getting $75,000 back from the government.
Mike:Yeah, that’s fantastic.
Tom: So that’s a great contribution. You know, that’s sharing the risk. And that’s really what you’re doing is you’re becoming a partner with the government and to me that’s what makes tax exciting because once you see that taxes are positive that they can be . . . all they are is just the series incentives, all you have to do is find what incentives can apply to me and then if I want more incentives, great. I’ll just go change what I do and get more incentives.
Mike: Yeah and I would say for a lot of our listeners out there, depending on who you are, I know that . . . My background is in finance, so I’ve always kind of understood the importance of having a good resource a guy like Tom in your corner. I realized that even more as my business grew and my tax bill grew and all those things, so if you’re brand new, then you need to be paying attention to this now and if you’re a veteran and you don’t have the right person in your corner or you’re thinking . . . really a lot kind of real estate investors are thrifty people, right. You’re like, “Well, I’m just going to do my own taxes or whatever.” You’re probably missing some opportunities out, some of the incentives that you just talked about.
Tom: Well, what I would say is if you’re a serious real estate investor and you’re paying taxes, you’ve got the wrong advisor. I mean it’s that simple. It’s that simple. It’s not difficult here is that real estate is such a great tax benefit in every country that if you are seriously investing in real estate and you’re paying taxes, you’re doing something wrong and your advisor is completely missing the boat.
Mike: Well, Tom, I know today we’re going to talk about, and by the way, we’ll add some links down below here. There’d probably some more things we talk about here but definitely to your book “Tax Free Wealth” we’ll add links down below for anybody that’s interested in checking these out. But I know today we’re going talk about the upcoming elections. So there’s I don’t know if it’s more like my age and maturity level or whatever or if it’s the impact of social media that everybody can just share how they feel about everything but it just feels like there’s more tension in this upcoming election than any other election that I can remember.
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Mike: There’s more tension in this upcoming election than any other election that I can remember.
Tom: Well, of course we have two candidates that everybody loves to hate. I mean and I don’t remember an election where the supporters of one candidate were criticized so much for being supporters of that candidate. I mean nobody supporting Hillary Clinton’s supporters for being Hillary Clinton’s supporters. Okay. Well, you support Hillary Clinton no big deal but if you come out . . . I mean people are scared to death of saying, “I support Trump,” because you will just get hammered.
“Well, what do you mean you’re supporting Trump? Are you a freaking idiot?” I’m going, “Well.” Right now according to polls almost half the country supports Trump. I mean, as many people support Trump as support Hillary and I’m going, “Well, so you’re saying half the country is idiots because they don’t believe the way you believe.” To me, that’s another problem but, you know, there’s obvious problems with both candidates. I mean, Trump is a little nuts and Hillary is a crook. I mean and nobody and in fact even the big supporters of Hillary don’t question that she’s a crook. They’re just saying, “Well, that’s okay. That’s what politicians do.” Right? And it’s like well that’s . . .
Mike: Try to rationalize it and yeah . . .
Tom: Yeah, totally. It’s fascinating and you know the old saying, “Do you vote for the devil you know or the devil you don’t know.” To me that should be the byline of this election because they’re both devils I mean in one way or another. Right? So I mean, I’ve met Donald Trump. I actually I think he’s a very interesting guy. Hillary’s not so interesting to me but their tax plans are very, very different and what’s really interesting to me is that the Clinton campaign constantly hammers Trump for not being specific enough in his policies. And I get it because most of his policies are really, “I’m going to build a wall and Mexico is going to pay for it.”
I’m going.” Well, that’s specific that I’m going to build a wall but it’s not specific as to how you’re going to pay for it, how you’re going to get them to pay for it blah, blah, blah. The same with other immigration. You know, his ridiculous comment about . . . I think it’s ridiculous we’re not going to let Muslims into the country. I’m going, “Where is that on my passport?” Right? Last I checked my religion is not listed on my passport nor should it be. So on that end what you have is you have a candidate that’s not been very specific but when it comes to taxes Trump’s been very specific and he actually has a really interesting tax plan that is remarkably similar to the Reagan tax bill that was passed in 1986 before your time, of course, but I remember very well . . .
Mike: Not before my time but before I was paying taxes.
Tom: Right, before you were paying taxes. So what Reagan did was he reduced the number of rates, which is what Trump’s doing. He broadened the tax base and eliminated some tax benefits for certain individuals particularly in the real estate area, right? That’s where the passive loss rules came from and so very similar to Trump.
Now, a couple of things where Trump’s considerably different one is his rates are a little higher for the average individual because they go up to 33% which I think is good because what happens is if your rates get down below 25% people stop paying attention to taxes. And while you and I might think that’s great, that’s a complete shift in the economy because there’s a lot of activity that happens because of these incentives that if you took away the incentives . . . I mean look at what happened in 1986. We take away the incentive for doctors and lawyers to invest in real estate because we put the passive loss rules in and at the time they were funding their investments over five years.
And so what you had is you had a lot of people funding a real estate development project over five years and all of a sudden they’re not going to get the tax benefits, which was one of the primary reasons they did it. They stopped funding. Well, that directly created the savings and loan crisis which directly created the collapse of the real estate market in 1989, 1990 and the collapse of all the savings and loans, big bail out. The RTC had come along and take over all those properties.
Actually, if you look back at Robert and Kim Kiyosaki and when they talk about when they . . . and this is public knowledge when they talk about when they got out of the rat race, it was in 1993. Well, clearly they bought all these RTC properties. That’s when you make money is in a crash and Robert and Kim had been very good watching the crashes, being ready for the crashes, and then taking advantage of the crashes.
So when you look at the tax bills the thing to remember is that taxes have such an impact on every aspect of the economy. So if your tax rate gets too low, then you start impacting it. Well, that’s going to be one of the issues. You know, he’s got this 15% tax rate on business, which is great for you and me pal, because all of a sudden our tax rates are no longer 40%, they’re 15%. Awesome. Okay, well assuming he can figure out how to pay for that.
But let’s say it’s 15%. What we’re going to have is nobody’s going to want to be an employee. Everybody’s going to want to be an independent contractor. I mean, to me, that’s a real simple thing to do. I mean, okay, well if I’m Trump’s going to make it to 15% business tax and all I have to do is be an independent contractor to be a business tax, why would I want to be an employee? I just reduced my tax rate from 33% to 15% just by being an independent contractor saying that my own company, etc. Well, we do that anyway because it has all sorts of tax benefits for being an independent contractor. So from what we do it won’t change but it will have, I think it’ll make a bigger impact on people when you have that low tax rate if he gets down to 15, I think he’ll probably end up at 25.
But what happens is that when you do that now people go, “Well, other than being in business, I don’t care about taxes.” So now that incentive for real estate, I may not be looking at that so strongly. Incentive for oil and gas, I may not be looking at that. That incentive for agriculture and mining, all those deductions, what they have to do is they’d actually have to go to a credit system so that instead of being deductions they’d be tax credits, dollar for dollar offset like the research and development tax credit.
But it’s really interesting when you compare that to Hillary’s plan, which is basically a status quo plan and that’s fine. I mean, what that means is that things will go along as they’ve been going along. Obviously, she wants to raise rates on a couple people, people that make more than $5 million, great go do it. Nobody’s going to complain about that except those people and there’s only 15 of them in the country. Right? I mean, it’s just not that big of a group and they’re all her buddies so . . .
Mike: It’s more like lip service. Right? It sounds like let’s get the first person [inaudible 00:16:03]
Tom: Well, it’s not a lot of money. You know, it’s pretty hard to argue against putting an extra tax on people that make $5 million or more that’s a pretty tough argument and who’s going to make that argument. I mean, people making $5 million no they’re not going to make the argument because they’re making by $5 million a year. So they’re not going to make the argument and everybody at the end of that is going to go, “Yeah, go get them. Go get those people. Get that extra of $200,000 out of them which is the 4% or whatever it is.” $20,000 I’m sorry. “Go get that extra $20,000 out of him.”
But on the other hand again and then she wants to change the capital gains rate, etc. so she’s really not changing that much, which that will have less of an impact on the economy. Now, you know, we think about the impact that lower tax rates go, we think well that’s good for the economy. Well, maybe, maybe not.
So like I was talking to a couple of lawyers the other day and having a meeting with a client and the lawyer asked said well he was very liberal, very big Hillary supporter and he goes, “Well under Trump’s plan.” He points to my buddy and he goes, “You would pay less tax.” And I said, “You don’t know that.” He said, “Well, but the tax rates going from top would go from 40% to 15%.” I said, “You don’t know that.” I said, “Because what you don’t know is you don’t know what else my buddy has.” I mean, let’s say that you’re a higher investor in real estate, you’re probably paying zero tax.
And let’s think about why Trump doesn’t release his tax returns. He’s not paying any taxes. He can’t possibly be paying any taxes with that much real estate. If he’s paying taxes, he absolutely needs a different tax advisor and I’m sure he’s using one of the biggest firms in the world, he’s using one of the big four and why would and I came out of there . . . I’m telling you, he’s just not paying tax.
So it would be crazy for him to release it. He’ll just get hammered if he released his tax returns because everybody will go. “Well, you’re not paying tax. You’re a crook.” Well, no, you’re not paying tax because you’re a real estate developer. You’re doing what the government wants you to do. Okay, people don’t understand that but for somebody like Trump actually you know if you go, “Okay, well you’re paying zero tax under the current real estate, under the current tax regime, you go to a 15% tax rate and you pay for it.”
Well, you may have to eliminate, take depreciation and change the depreciation schedules. You may have to do . . . like, you know, a lot of countries only allowed depreciation if you’re the first buyer. If you’re a subsequent buyer, you don’t get depreciation. Okay, only the initial builder or buyer of that initial project gets the depreciation.
Mike: Wow, that’s interesting.
Tom: Yeah, that’s a very different animal in other countries where you could make that change and all of a sudden, you know, a real estate investor who was paying zero now may be paying 15%. Well, okay, 15% is a lot more than zero. Okay. When you’re talking about millions of dollars of cash flow, so it’s not that simple to think that well the 15% rate is going to be good for me. You really have to look out what are the other aspects of that tax change because that’s what happened in 1986 is that they wanted to come up with . . . Reagan insisted there’d be a revenue or neutral they had come up with a way to pay for it and the way they came up with it there was the passive loss rules, which of course caused all these other problems.
Mike: Right. So the devil’s in the details for sure. That’s at a high level what you hear in the media doesn’t get into some of the details of how that tax law changes.
Tom: Well and you got to recognize that it’s not the president that makes tax law changes. President may put forth a proposal but Congress makes the tax law changes. So Congress has to agree to it and even if you look at Trump’s plan right now, he originally had two rates. Now he’s gone up to three. What he has right now is Paul Ryan’s plan. So the tax rates that Trump is proposing are Paul Ryan’s tax rates. So they’re the Republican, you know, they old guard . . .
Mike: The pre-approved.
Tom: Now, they’re the pre-approved rates. Exactly. Well, which means that that’s more likely to happen. I mean, that’s what it is because if the Republicans retain control, which is questionable, but if they retain control of the House and let’s say perhaps also have control of the Senate, well that’s where you get a tax bill like that where you have a major change. But at that point, it’s still Congress. I mean, you still have all this negotiation. Are you going to pay for it? Are you’re going to incur huge deficits? Are you going to rely on what they used called to call voodoo economics, Reaganomics, which is a supply side economics and you say, “Well, it’ll just produce so much activity.” Well, it won’t.
It’s pretty clear that if you enacted Trump’s tax plan, you’re going to end up with a much bigger deficit and what does that do the economy? So there’s just a lot of collateral tax . . . a lot of collateral economic consequences. I think it’s important to pay attention to because something like that, I mean, look at the real estate industry. You could have a huge positive impact in real estate industry. I mean, Reagan in ’81 enacts the 18-year depreciation tables, you know? For real estate, it just gave real estate this huge boost. Okay? You could go the opposite direction. You could have a crash. I mean, the passive loss rules in ’86 created a crash in the real estate market, so it’s very important when you look at your market in particular real estate what happens in the taxes has a huge impact on the market.
Mike: Absolutely. Well, Tom, I want to go into part two in just a second here. We’re going to take an action statement. I know we’re going to talk about, how people can start to plan for thriving no matter what happens here, start to think about how to protect themselves. Before we go into that segment though two things, one is tell everybody here how they can learn more about you and where they should go to.
Tom: Sure. So go to taxfreewealthadvisor.com and you can find out everything you want to know there. Certainly the Amazon, the bookstores they all have “Tax-Free Wealth.” I was actually without a copy of my book when I was in New York not too long ago and I went down to the Barnes and Noble on Fifth Avenue and they had a copy. I thought, “Oh this is pretty cool.”
Mike: Yeah, you run endcap. Weren’t you on endcap after all these years?
Tom: I was not on endcap. You have to pay for that. That’s pretty expensive to have an endcap but I was pretty impressed they had a copy of it. I didn’t have to ask for it. It was right there on the shelf. So you’re pretty happy when your book is carried in the Fifth Avenue store of Barnes and Nobles.
Mike: Absolutely. Well, it’s a very successful book and it’s definitely one that I’ve got on my shelf as well. So Tom and one of the thing I want to jump to before we go into part two is we have a question from that somebody asked on social media and for those that’ve been listening we actually we send you a little gift if you get involved and you ask questions of our guests. So this was a question from Damon, and by the way, Tom, doesn’t know what this question is yet so but this will be an easy one for you I think.
So a question from Damon who on Facebook asked, “What is the one write-off that everybody thinks is legit but it causes the biggest red flags and maybe not legit at all? Any kind of one thing that everybody you kind of hear other people say, “Oh you can do this but.”
Tom: Well, I would give you the opposite. I’ll tell you the one deduction that people don’t take because they’re being told it’s a red flag and that’s the home office deduction. And here’s what happens so I’m going to give you some real practical here. So I actually was, I had this just came up just yesterday. When I’m speaking in the US I always ask, “Okay. So how many have ever been told not to take a deduction because it causes a red flag?” And you know most of the hands go up.
I said, “Okay, now how many of you was that the home office deduction?” And it’s pretty much all the same hands. Okay, because there’s this argument home office deduction is a red flag. Well, what’s a red flag is taking a deduction that you’re not entitled to. That’s not clearly specified in the code. So the one I’ll tell you that is might be a red flags is if you put down education that would probably be the one. Okay. If you put down seminars, education that’s going to be a red flag. If you call it continuing education, now it’s not so much a red flag. Completely different that continuing education is deductible. Seminars are not.
But with the home office what happens is that the reason it shows up if it does show up as red flags is because you’ve got a Schedule C. Schedule Cs are a red flag, okay, because if you have a Schedule C that’s a sloppy way to handle your accounting. It’s sloppy. Okay. So funniest thing ever, I just got to tell you. It’s funniest thing ever. I’m meeting with a client last week down in Texas and his attorney is with us. His attorney says, “Hey, I met this tax consultant/tax advisor and he was speaking to a group of us about tax savings.” So he says, “Here, do you know him?” And he shows me his card and his card is actually on a Schedule C and I just started laughing.
I’m going, “Are you freaking kidding me. This guy’s a tax consultant? And he actually thinks the Schedule C is something that he wants to promote.” That is the worst thing you can ever do. You have a five times greater risk of being audited with a Schedule C and then you put your home office and now you have to show that you have a home office deduction on your Schedule C. Whereas if you were like an S corporation, partnership, something else, something, anything but a Schedule C, what would happen is, no, the IRS already knows. They’d have to audit you to know that you have a home office deduction because it doesn’t show up anywhere. It only shows up if you have a Schedule C, which it’s not the home office that’s the problem. It’s the Schedule C.
Mike: Wow, wow. Well, in the second part of the show here, which we’re going to kick off in just a second, Tom’s going to share with us how to kind of protect yourself or prepare for what could happen in this crazy election where I saw something that a 68% of the population wishes they had a different choice no matter whether Democratic or Republican.
Tom: Yeah, I think I’m in that 68%.
Mike: I think, well statistically, we all are, right? So . . .
Tom: I would like a different choice.
Mike: Yeah. Well, Tom, let’s jump into the taking action segment here and let’s talk about what people can actually do. I mean, you’ve shared some great information here and I think what some people tend to do is just shut down now, like I’m going to wait and see what happens. But I think there are opportunities. There are always opportunities with your knowledge and there’s always opportunities to kind of win no matter which direction we end up going here. We may want somebody but that doesn’t mean that we kind of lose if our candidate loses, right, necessarily. So, well, how should people start thinking about how to frame this up and how it will impact them?
Tom: Well, the first thing I think is to recognize that taxes aren’t going away. I mean, we’re not going to a flat tax. We’re not going to, you know, a postcard and if you’re a serious investor or you’re in business, you know, if you’re flipping or you’re investing in real estate, then a flat tax wouldn’t affect you anyway because you still have to calculate your net income. Okay. So recognize that all of this discussion about simplification is phony baloney, okay? It will never simplify. Okay.
Going from seven rates to three rates, you want to call this simplification, go for it but most of us use the tax tables and we don’t even look at what the rates are. We use a computer. We use preferably a professional tax preparer and we’re not doing that, so how’s that simplifying? Okay. So I don’t think the simplification issue is really something to be thinking about, but I think what we ought to be looking at is there is one thing that you can be preparing for and that is we have what’s called in the tax law grandfathering rules. And grandfathering means that if you did something before the new tax law is announced, then you’re grandfather in, okay, and you’re not subject to those new rules.
So I’ll give you an example. We just got proposed regulations on estate planning. Now, estate planning for anybody who’s got any kind of money or plans to have any kind of money is really an important part of that overall tax planning and there’s income tax planning that goes with the estate planning. Well, we got these proposed rules. Well, a proposed rule from the IRS, it’s just their idea of what should happen. It’s not law. Okay. So what’ll happen is what we ought to be doing is we ought to be going in and doing our estate planning now because if those rules are finalized, then you’re going to be out of luck. So you’re going, “Okay, they’ve given us notice that we better be doing our planning now because otherwise we’re going to get hammered down the road.”
Okay? So that’s really the way I look at . . . you know, if I look at changes in a president for example administration, then you’re looking at, okay so, all right, what if Trump’s elected? What if Hillary’s elected. So what if? I mean, what’s going to happen is, is you’re still going to have a top tax rate at a minimum of 33%. You still need to do a tax strategy, you still need to be preparing yourself, but the idea is that prepare yourself now.
So let’s say, I mean, there are a lot of people talking about markets crashing, right? That’s just a big topic going on right now. Is it going to crash this year? Is it going to be the election that crashes it? Is it going to be a year from now, two years from now, three years from now? I think there are very few people that don’t think we’re going to have a major market turnaround. I mean, you got George Soros putting a $2 billion bet against the market right now and so if you’re putting money in the stock market, you’re actually betting against George Soros. And I’m going, “Really, that’s the guy you’re going to bet against?” You know? But you can look at that and then you go, “Well, let’s be prepared for it.”
So I think the biggest thing to do is get educated because you know and whether it’s on FlipNerd or tax free wealth or whatever you’re doing, when you’re educated what that means is then you can take action. I look at Robert and Kim and used them as examples because everybody knows them plus they’re very open about what their life’s been like. It’s been a very public life. And they made money in every crash. And why did they make money in every crash? Well, because they were educated. So they got their education. They practiced ahead of time.
I mean they started buying real estate back in the ’80s. Okay. Well, in the ’80s real estate wasn’t . . . I mean in the mid-’80s it wasn’t a great deal. Well, it was okay but then it crashed in ’89, ’90, ’91 it crashed. Well, that was a great time to be buying the real estate and that’s first time to get out of the rat races in 1993. Well, okay, fast forward you go, “Okay, when was the next time that they took advantage of a crash?” 2001. Okay. Robert’s on Oprah “Rich Dad Poor Dad” it got big because we just had a huge market crash, so again took advantage of the crash.
Now he’s been talking lately about how he made so much money in the crash of 2008, 2009 as he was reinvesting in real estate and did so much real state investing. They were buying everything they could get their hands on. I look at their history I’m going, “Why are they so wealthy and so successful?” It’s because they were educated before the crash and then took advantage of the crash. Well, think about it from a tax standpoint.
So if I’ve got my tax strategy in place. I’ve got this plan of action that I’m going to use. So I’m going to reduce my taxes every single day by how I deal with my money. Okay. That’s what a tax rate is. How do I reduce my taxes every day by little actions I can take whether it’s what credit card I use or how to make it a business expense or how do I recognize the income? You know, can I get it to be capital gains instead of ordinary income? Can I shift my tax brackets to a lower bracket? You know, can I get some credits that I’m not currently getting?
I look at all those things on a daily basis then what I do is I have this plan going forward and you know better than anybody, Mike, that if you don’t have a plan for real estate investing, you’re going to get caught with your pants down. I mean, that’s what happened in 2007, 2008, 2009 with people who had bought real estate before. They didn’t have a plan for what if it goes down. Okay. They only had a plan for it’s going to go up forever. Well, that’s like the people who are currently in the stock market. You know, it’s going to go up forever. I look at the real estate market right now, and Mike, I don’t know about you but it scares me a little because . . .
Mike: It feels like back like you just said people feel . . . there’s people, you know, I was just thinking of this the other day because we have a lot of listings on our platform and I see people more than ever saying, “Well, clear this lot and add on and do stuff that’s just like.” It’s just that you didn’t hear that as much in years past where it’s like this is what you have to work with. Now people are like, “Well, if you have a second story and you do all this, then it’s going to be worth this.” And it just sounds like people are really stretching now and getting that crazy.
Tom: I’ll tell you what it feels like, to me it feels like 2006. Right now I don’t feel any kind of softening in the market like 2007 but it feels a lot like 2006. Properties are not staying on in the market for more than 30 days ever, okay. It doesn’t matter what market you’re in. We’ve got cap rates in the multifamily that are down around 4%. I mean, that is just like really Class B space is going up 4% cap rate? And you’re going, “That is crazy.” That’s crazy.
I mean, because when you think about it you’re hoping that the value goes up. The value can only go up if you either increase your net operating income or your cap rate goes down. Well, you can’t get much below 4%. I mean, there’s just nowhere to go. So you know and you lose so much when it goes up, so if you buy at 4% cap rate and it goes to an 8% cap rate, you just lost half your value, even if your net income didn’t change.
And now what normally happens in a crash, as we saw in 2008, is now people start . . . you know, they’ve lost money, etc., etc., so now you see two and three generations housing up together and now your rents go down. Because that was the thing that caught me off guard, quite frankly in 2008 and 2009, is I had cash flow, no big deal, except my rents went down and in some cases by 50%.
So you can have crashes in the rental as well and I think it’s a matter had I been educated at the time, I had been more educated, I had been watching been . . . you know, really I wasn’t involved with Rich Dad much at the time, hadn’t been watching this closely. Had I, I might have understood that. But I think what’s important now is that we learn the lessons from 2008, 2009, 2007 and we go, “Okay, what does that mean? I just have to be prepared. I have to get the education. If I get the education then I can apply that and I want to be ready if it goes up. I want to be ready. If it goes down I want to be ready.” Okay.
And tax wise it’s really easy. That’s just a matter of doing a really good tax plan and find a really good tax advisor, sit down with them, spend the time with them. There is not one investment you can ever make that will get you a better return on investment ever than the right tax advisor. It’s just impossible.
Mike: Yeah, I agree with that. I had a different advisor in the past, somebody that was a real estate investor himself, owned thousands of properties actually. In fact, he’s been on my show before and I loved meeting with him because whatever his hourly rate was I got you know 10 X that or 20 X that. Every time we met it was like . . .
Tom: Well, exactly . . .
Mike: Can we meet more often? Like yeah.
Tom: No, it’s like I tell people. I’m going, okay, if you’re trying to minimize expenses . . . then you if you’re focused on expenses, then you want to pay the least amount as possible. But if you’re focused on assets . . . you know, if I come to you and I said, “Geez, I’ve got this asset that is guaranteed to produce a 30% after-tax return and it’s a $10,000 investment.” I mean the first question a professional investor is going to ask is, “Going to give you 100,000.” Right? “Do I have to limit it to 10,000?”
But if you’re thinking of the 10,000 as an expense, you’re going to kind of get it for 5000. Well, yeah you can get it for 5000 but you’re not going to get a 30% return. But if you go and you pay 10,000, 15,000 and 20,000 and actually spend the time at it, then you can get that huge return on investment. I don’t know where else you can get that kind of return other than with good tax advice.
Mike: So Tom, for the upcoming election it basically sounds like you’re saying that hey, it’s not really going to get simplified. If you have a good advisor, they’ll help you shift direction either way. Is there anything that people could be doing now or should be thinking about other than kind of planning for maybe a general downturn in the market? You’ve been through more a lot more cycles than I have but you could feel this same thing that we talk about 2006, 2007 where there’s people that are starting to like back down and say, “I’m waiting for something to collapse.” But those same people have been saying that for two or three years and there’s some opportunity there between the people that think it’s not going to end. So the question is when do you sit on the sidelines and not miss out? That’s what I can say.
Tom: Well, I’ll tell you, it’s actually not that difficult. You watched the professionals. I mean, that’s what I do. I watch the professionals. Here’s what I know. I can tell you the day I knew in 2007 when the market was coming down. Now, I’m not telling you I paid attention to it, but I know the day because what I saw was is I saw a softening and I went to refinance a property and it was the value was a little bit less than it was two months before when I’d gone and looked into refinancing that same property. That’s a softening, okay.
So what that’s telling you is be prepared. Okay. Something’s going on here. Okay. That’s actually the ideal time to sell because the challenge with real estate, of course, it’s not liquid, right? So if you wait till the top of the market, you will get caught with your pants down. There’s no question. So now on the other hand, if you have good cash flow in real estate, you can weather that, right?
Tom:So one of the things I’m seeing clients do is reduce their leverage a little bit and reduce their . . . make sure that their cash flow’s better and kind of reduce the expectations even of their investors because I think that, you know, don’t be thinking you’re going to get huge returns that you’ve got in the last five years. I think that’s the first thing. But I think from a tax standpoint I think it is, look, if things go down, you’re going to have tax . . . you’re going to have an issue because you going to have cash flow challenge and you’re going to want to pay less taxes.
If things go up, you’re going to have a cash flow challenge, so you’ve got all this taxable income. You want to pay less taxes. So either way you look at it, the best thing to do is to sit down with your tax advisor and don’t look at, “Okay, well what did I do last year and how do I defer income come next year?” That’s a waste of time. Sit down with your tax advisor and say, “How do I reduce my taxes every day on a permanent basis because if things are going to crash what do I need to do. If things are going to go up, what do I need to do from a tax standpoint.”
And guess what? They’re the same thing. Okay. So in the tax world it doesn’t matter whether they go up or down. You want to do the same types of things. Now, if you think Clinton is going to win, which is most people think Clinton’s going to win, then you ought to be looking at that capital gain issue right there and maybe you think, “Well, if I can’t do a 1031 exchange maybe I’d be looking at am I really going to hold this for six years,” okay or, “Do I want to think about well the market’s pretty good right now. Do I want to take some cash or do I actually recognize my gain.”
I mean, that’s backwards to what most people think about but maybe right now if you think the market is too hot and you think that, “Wow, I’m either going to sell this year or next year.” Then you got to look at the tax consequences if you sell next year and now you’ve got a 40% tax rate because you haven’t held it for six years. And let’s say, I mean, you don’t know what those grandfather rules are going to be versus you sell this and get a 20% tax. If you have got $1 million a gain, that’s $200,000, you’ve got to have a pretty big difference. You’ve got to have an awful lot of appreciation. You have 20%, 30% appreciation to make up for that, so that’s the type of thing that I’d be paying attention to.
And if you’re going to sell anyway within the next six months, maybe you look at this is the one time you think, “Maybe I don’t do a 1031 exchange. Maybe I do want to recognize some tax.” But that’s a matter of everybody is different on that and everybody needs to get their own tax advice.
Mike: Yeah, awesome. Tom, well thanks for being with us today.
Tom: Any time.
Mike: It’s always great. I’m like I’m making a list. I literally I’m kind of writing some short notes over here and look like I have my head down a lot and I’m also writing some things that I need to do. I mean, literally that’s . . .
Mike:I can tell you that there aren’t very many guest I’ve had on the show where I’m writing out like, “this is what I need to do,” “oh I just heard something that I need to do,” so.
Mike:Well, one more time. Why don’t you to tell everybody how they go learn more about you and your service or anything that they . . . we’ll add a link for access to your book here. Where’d they go if they want to learn more about you and your company?
Tom: I would go to taxfreewealthadvisor.com, very simple and you can get anywhere you need to get to us through that website. You can call us at, our phone number is 866-467-5809.
Mike: Awesome. We’ll add all that in the show notes down below the video here.
Tom: All right.
Mike: Tom, great to see you my friend and thank you for being with us.
Tom: You too, any time. Thanks very much.
Mike: And everybody that’s joining us on the show here, thanks for joining us again and we’ll see you on another upcoming episode.
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