JF1481: How The New Tax Plan Can Benefit Real Estate Investors #SituationSaturday with Tom Wheelwright
Tom is back on the show to tell us about the new tax law and how we, as real estate investors, can use it to our advantage and benefit. Without a doubt everyone will find something to learn in this episode, Tom is a tax expert who travels with Robert Kiyosaki to teach people about this, and we get it free today! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Tom Wheelwright Background:
- CPA and CEO of WealthAbility
- Best Selling Author of Tax-Free Wealth and a Rich Dad Adviser
- Specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes
- Listen to his first episode: JF387: Rich Dad Advisor, Tom Wheelwright, Says Your IRA Plan is WRONG and How to be Tax Free Till You Die
- Say hi to him at https://wealthability.com/
- Based in Tempe, AZ
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday, and the focus of our conversation today is how the new tax plan can benefit real estate investors. Whether you like or don’t like the president – well, there was a new tax plan, so we’ve all gotta deal with the tax plan, and what are the ways we can benefit from that as real estate investors.
We’re gonna be talking to Tom Wheelwright, who has been on the show before; I’m really grateful to have him as a guest again. How are you doing, Tom?
Tom Wheelwright: Good. How are you, Joe?
Joe Fairless: I am doing well, and nice to have you back on the show. A little bit about Tom – he is a CPA and CEO of Wealth Ability. He is the best-selling author of Tax-Free Wealth. What an incredible, incredible book. Please go buy that. Save yourself some money. I highly recommend that book. He’s also a Rich Dad advisor. He specializes in helping entrepreneurs and investor build wealth through practical and strategic ways that permanently reduce taxes… And you might recognize his name from the show, because about 1,000+ days ago – it was actually episode 387 – I interviewed Tom. The title of the episode is “Rich Dad advisor Tom Wheelwright says your IRA plan is wrong, and how to be tax-free till you die.” Episode 387, if you wanna listen to that.
With that being said, Tom, will you give the Best Ever listeners a little bit of a refresher of your background, and then we’ll roll right into the tax plan?
Tom Wheelwright: Yeah. I grew up in Salt Lake City, Utah, I went to the University of Utah, I have a bachelor of Arts and Accounting from the University of Utah. Then I received my Masters of Tax from the University of Texas down in Austin. I spent seven years with Ernst & Young, including three years in the National Tax Office in Washington DC. I actually was there the last time we had major tax reform, back in 1986… And what I did there was teach CPA’s actually how to help their clients reduce taxes.
Then I spent four years as the in-house tax advisor for a Fortune 500 company, and 25 years with my own CPA firm, and then we launched Wealth Ability in January to really expand the number of people we can serve. So we’ve actually created a network of CPA’s that within the next couple of years it will span the globe.
We have people in Australia, we have people in South Africa, and of course, throughout the United States. It’s very exciting; I have the great privilege of traveling the world with Mr. Robert Kiyosaki, author of Rich Dad, Poor Dad. We’re actually headed to South Africa, and then on to Australia. It’s always fun to be with Robert, and be on stage, and talk about taxes, which are pretty much the same around the world.
Joe Fairless: That’s interesting. I’m surprised they are pretty much the same around the world. I just assumed that certain countries would not be as favorable to real estate as United States is… Because I think that United States is very favorable to real estate.
Tom Wheelwright: I would say it’s probably the most favorable to real estate. All countries are favorable to real estate investing, because all countries use the tax law as incentives for doing what the government wants done, and that includes building housing, that includes building commercial buildings…
Where the U.S. is particularly beneficial where other countries aren’t is that we get tax benefits for used property, not just new property. Many countries allow depreciation only on new property, and not on used property. We actually take depreciation over and over and over again, which is a pretty interesting benefit when you think about it.
Joe Fairless: I never thought of it that way… Yeah, I could see how it would make sense to only do depreciation on new property. But let’s not say that too loudly, right?
Tom Wheelwright: And in fact, in this new tax law we’ve got additional tax benefits for used property, that we’ve never had before. So we’re actually going the other direction – we’re getting more and more aggressive with real estate. Of course, it helps when your president is a real estate investor.
Joe Fairless: Yes, absolutely. There might be some alignment of interest there with what he was doing. Talking about the new tax plan, what are some ways that we can benefit as real estate investors? What do we need to know about?
Tom Wheelwright: It’s pretty amazing actually what happened. One of the biggest new tax benefits is bonus depreciation. Bonus depreciation means that you can deduct 100% of the purchase price in the year you purchase things that are subject to bonus depreciation. Historically, bonus depreciation only applied to new equipment, so it was really aimed at manufacturing. This year, beginning September 27th, anything purchased after September 27th of 2017, now what we have is used property… And it applies to more than just your basic equipment.
If you think about when you buy a property… You’re buying investment property, and you’re really buying four things, essentially – you’re buying the land, which we all know doesn’t depreciate; you’re buying the building, which continues to depreciate at the same rates that it has in the past, but you’re also buying land improvements, like the landscaping, the outdoor lighting, outdoor structures, things like that. And you’re buying the content of the building, which might include even ceiling fans, window coverings, a lot of the electrical a building that’s commercial.
Those last two things, the land improvements and the content, are subject to bonus depreciation. If you look at the typical residential real estate, you’re going to be at about 30%. If you do a cost segregation, which that’s what you have to do to take advantage of this – you need to do a cost segregation, which you should be doing anyway… But you do it, and you hire a CPA and an engineer to go out and do a cost segregation on your property, and they come up with a percentage of the property that is content, and a percentage that’s land improvement.
When they do that, whatever that is – and typically, on a residential property that’s gonna be around 30%, and on a commercial property even more… When they do that, that 30% is entirely deductible the year you bought the building.
So let’s say you go out and buy a small million-dollar building. That’s not a big project. You go out and buy this million-dollar project – that means that you essentially could end up with a $300,000 deduction the year you bought it.
Joe Fairless: Just in this one aspect of taking the bonus depreciation, not including operations or anything else.
Tom Wheelwright: That’s right. That is just the depreciation. $300,000 on a million-dollar building. It means this much… The last time I was on the show I talked about IRA’s, and you know how I feel about owning real estate in IRAs. It’s really a bad idea, because you don’t get to leverage like you can, and you don’t get tax benefits. And none of this bonus depreciation — by the way, if you buy in an IRA, you don’t get any of that, because an IRA gets no tax benefits, outside of deferral.
So let’s say that you’ve got money tied up in an IRA and you go “I’d really like to buy real estate, but man, when I pull it out, I’m gonna pay taxes on that, and I’m going to pay a 10% penalty because I’m under 59,5.” Well, look at this… Let’s say that you’ve got $200,000. You pull that out and you go buy a million dollar building, so the $200,000 are gonna be taxed. However, you’re getting a $300,000 deduction. You’ve got a million dollar building and you’ve got a $300,000 deduction, so you’re actually better off pulling the money out and buying the real estate than if you left it in the IRA, and you get the leverage and you get an additional $100,000 of tax benefit, which will more than offset your 10% penalty… So literally, the very first year you’re better off pulling the money out of the IRA. You’re not gonna pay the tax, because you’re gonna get this big deduction.
Joe Fairless: Yup. So you mentioned the 10% penalty if you’re under 59,5… What are they being taxed at? Does that just depend on what your tax rate is?
Tom Wheelwright: Yeah, so you have your tax rate. If your tax rate is 25%, then you’re gonna get a 25% tax on that $200,000, so $50,000, but then on top of that, you get a 10% penalty.
Joe Fairless: Got it. So we’ve got bonus depreciation, and as you mentioned, you must do a cost segregation to take advantage… So if we’re buying a $100,000 house, does this help us at all?
Tom Wheelwright: Oh, my heavens, yes. You do a cost segregation — by the way, there are really inexpensive, good online technologies for doing the cost segregation yourself on a small property like a single-family home… So you go and do that, and it’s like $400. Now you’ve got a $100,000 home that you’re gonna get a $30,000 deduction.
Joe Fairless: It’s huge.
Tom Wheelwright: It’s huge. It’s absolutely astronomically huge.
Joe Fairless: Off the top of your head, do you know the online resource for that?
Tom Wheelwright: I do. It’s KBKG.com. It’s a really good one. We’ve just had a number of clients use it just this year, and they really liked it. It only applies to small, fourplex or below, and pretty much under a million dollars… So it can’t be a big property.
Joe Fairless: I own three single-family homes, all worth — they’re around 150k, and they’re long-term holds for me… Should I do this?
Tom Wheelwright: Absolutely. No question. So let’s say you’re not getting the bonus depreciation; let’s say you bought it three years ago.
Joe Fairless: Yeah, I did, long time ago.
Tom Wheelwright: That’s okay, because you get to catch up your depreciation. We’ll take that number, for example; let’s say you’ve got 20% of the property is content, which is pretty typical when you do a cost segregation. So that means for your $150,000 home, you’ve got $30,000 that should have been depreciated over five years, and in fact, you’ve been depreciating it over 27,5 years. Well, what happens is when you do a cost segregation, the year you do it you get to catch up your depreciation. So if you’ve owned that property for three years, you should have taken 60%. It’s actually more than that, it’s closer to 70%… You should have taken 70% depreciation on that $30,000, and what you really took was 10%. So what you’re gonna get is 60% of that $30,000, which is an $18,000 deduction; so your tax rates, what an $18,000 deduction means to you, but it’s a gift from the government, so why wouldn’t you do it?
Joe Fairless: And for a skeptical Best Ever listener, who’s like “Yeah, but aren’t I gonna have to just pay all this back later?”, what are your thoughts on that?
Tom Wheelwright: Let me get [unintelligible [00:13:45].18]
Joe Fairless: [unintelligible [00:13:50].13]
Tom Wheelwright: No, you’ve got two things. First of all, the people that say this – the same people put money into an IRA or 401K and they’re deferring their income anyway… So deferral is still good. On the other hand, what you’re doing is you get an ordinary deduction for your depreciation, at ordinary income rates. When you pick it up, the most you can pick up is 25% tax rate, and a lot of it is gonna be at 20%, or 15%. So you’ve got a big difference there; if you’re in the 37% bracket, versus a 25% bracket, would you rather pay 37% or 25%? If you need the cost segregation, you’re paying 25%; if you don’t do the cost segregation, you’re paying 30%. I don’t understand — and here’s the thing, the cost segregation… Remember, when you have that recapture, you’re really only recapturing the building depreciation and you’re gonna get that even if you don’t do a cost segregation. In fact, you’re gonna have more recapture… Listen up, you’re gonna have more recapture if you don’t do a cost segregation than if you do a cost segregation.
Joe Fairless: Why?
Tom Wheelwright: Because you’re content and your land improvement aren’t gonna get recaptured, because they actually go down in value, okay? Now, if you have bonus depreciation – I’m not talking about bonus depreciation. Bonus depreciation, you could have some recapture.
Joe Fairless: Sure.
Tom Wheelwright: But outside of bonus depreciation, just your normal 5-year, 7-year, 15-year rules for content and land improvements… Those things are actually going down in value, they actually wear out. So let’s say that you’ve owned it for three years and you sell the property. What’s the value of the content? Is your carpet worth the same when you sell it as the day you bought it? No, probably not. It’s worth 60% less. Is that realistic? Yes. [unintelligible [00:15:39].12] Yes, that’s realistic. So you’re not gonna have any recapture on that; if you do it right, you’ll have no recapture on that, or your land improvements. The only place you’re gonna have recapture is on your building, but you actually have less building now, so you actually have less recapture if you do a cost segregation. If you don’t do a cost segregation, you’re gonna allocate 80% to a building and all of that gets recaptured at the 25% rate. If you do a cost segregation, you end up with more capital gain at the 15% to 20% rate. It actually is the opposite of what people think.
Joe Fairless: It is. That’s incredibly interesting, and something we definitely should know, and I appreciate you mentioning that. Bonus depreciation is one benefit of the new tax plan for us as real estate investors… Anything else?
Tom Wheelwright: Oh, yeah. You’ve probably heard about the 20% deduction for pass-through, and most people are thinking that for the small business owner, right? Basically, what happens is a small business owner makes $300,000 of income, then they get a $60,000, just right off the top; $60,000 off their $300,000 in net income. Well, guess what? That applies to real estate, too.
So if you actually, for some reason, because you’re not leveraging, you’re really not taking advantage of other people’s money, and you have actual taxable net income from your real estate, you get a 20% deduction off of that, under this new law. It applies to real estate, too. So for people who don’t leverage, for people who are [unintelligible [00:17:12].11] of those who say “Don’t use debt”, they’re gonna have positive net income, even after depreciation; they’re gonna have positive net income. So if they have positive net income, they get that 20% deduction off of that… So that’s a huge benefit to the real estate investor.
Another one we don’t really think about is bonus depreciation on automobiles, and how it affects real estate investors… Because bonus depreciation also applies to the automobile that you use in your business. The first year you get $8,000 of bonus depreciation on a passenger car, but if you’ve got a truck or an SUV that is more than 6,000 pounds gross vehicle weight, and that’s the weight on the driver’s side of your car, on the door – it says “Gross vehicle weight on there”, if it’s over 6,000 pounds, you can deduct the price of the truck or the SUV in the year you buy it, up to the percentage that you used it for business.
So if you buy a $100,000 truck and you use it 80% for business, you get an $80,000 deduction in the year you buy it.
Joe Fairless: Section 179, right?
Tom Wheelwright: No, this is bonus depreciation. 179 limits it. Thank you, Joe, for bringing that up. 179 is different from bonus, and for the next several years, we have bonus depreciation, and for the most part, we’re not gonna use 179 very much in the next few years, because bonus depreciation is better. Bonus depreciation doesn’t have the limitations that 179 does… So what we get is we actually get bonus depreciation on that truck. 179 would limit it to $25,000, but with bonus depreciation we can take the whole thing.
Joe Fairless: Is that a box the CPA has to check? How does that work when you’re filing your taxes?
Tom Wheelwright: Your CPA must do it correctly… Don’t think that CPA’s understand this, because most of them don’t, unfortunately. We’re trying to change that, but…
Joe Fairless: Yeah, because when you were talking, I was like “Yeah, I know this, Tom. I’ve got it already…” We actually bought a Grand Cherokee because it qualified for what you’re describing, more than 6,000 pounds, at the end of 2017, so we could get in on that.
Tom Wheelwright: The great thing is you didn’t have to pay any money down. So the bank lends you the money, and you get the deduction. I don’t know about you, I think that’s pretty cool; you get to leverage your tax deductions. And of course, if you have a home office, you have a lot more business mileage, because you don’t have that first and last trip being a non-deductible commute, because your commute is now to your home office. So a home office actually has a much bigger impact when you’re talking about your automobiles.
There is another benefit out of the new tax law… You were talking about 179 – first of all, now it applies to residential real estate; it didn’t apply to residential real estate previously. And on top of that, for commercial real estate – this is office, industrial; this is not retail… Some people think of commercial real estate being because I’ve got a commercial loan, and a 200-unit apartment building is commercial real estate to them… No. From a tax standpoint, we’re not talking about 200-unit apartment buildings; we’re talking about retail, back-office, what we’d really think of as commercial property. They actually get 179 for things like roofs, HVAC, security alarms, fire alarms… That’s brand new, that you get 179 on those.
Joe Fairless: And when you say they get 179 on those – I know what it is because I’ve done a lot of research on this particular section, but will you elaborate for the listeners?
Tom Wheelwright: Absolutely. So let’s say you put a new roof on your commercial building, and let’s say that roof costs you $300,000 to put on; it may cost that much if you’ve got a big building. You get to deduct the full cost of that. That’s in lieu of depreciation, you take what’s called a 179 deduction. Now, it’s limited to a million dollars. So the limits for 170 went up from 500k to a million dollars, and then they expanded what qualifies under section 179. So for commercial property, you have additional things that qualify, and for residential property for the first time 179 now applies to residential property, under the new rules.
Joe Fairless: And just so the Best Ever listeners aren’t thinking “Oh man, I wish I could have got in on that…”, even though I did buy my vehicle that was over 6,000 pounds – actually, for Coleen, my wife; I still drive my Corolla. But even though we bought that prior to the end of 2017, the listeners can still take advantage of this now in 2018, right?
Tom Wheelwright: Of course. It applies for the next 5-6 years. This is really the government saying “We’d like you to go buy new cars.” That’s what they’re saying. “We’d like you to go do this, and we’re gonna give you incentives.”
Even passenger vehicles though, the depreciation rates for new passenger vehicles are much better. So you get an $8,000 bonus depreciation, plus you get $10,000 regular depreciation. You used to get $3,100 the first year of depreciation on a passenger car; now you get $18,000. The second year you get $16,000; you used to get $5,000. So they’ve massively increased the depreciation of cars.
This is, by the way, one place where we’re different from the rest of the world. Most of the rest of the world considers cars to be luxury items; they don’t consider them requirements for business, whereas we do consider them requirements for business. So a lot of countries don’t give deductions for automobile expense. We’ve just expanded our deductions for business automobiles substantially.
Joe Fairless: So if we’re not able to, or the listeners don’t go to your people at Wealth Ability, and they have a current CPA and they love that CPA, but they wanna get in on this, what do they ask the CPA to do or look up in order to make sure that they are getting the right bonus depreciation deduction on a new automobile that they purchase?
Tom Wheelwright: Well, first of all, [unintelligible [00:23:13].22] we updated; we have a new second edition of Tax-Free Wealth that’s out now…
Joe Fairless: Oh, good!
Tom Wheelwright: …available on Amazon. It’s updated for the new law, and it includes a free eBook on the new tax law; so we talk about this. So that’s the first thing I would tell them, is go tell your CPA to go read Tax-Free Wealth. The second thing I would do is tell your CPA “Well, maybe you ought to think about joining the Tax-Free Wealth Network and actually become one of these guys.” [laughter] We’re actually seeking for CPAs who are interested in learning how to do this the right way and to be better CPAs.
We’ve just decided, you know what, we’re gonna give other CPAs all the knowledge that we’ve gained over the last 35 years, so we’re very excited about that. Outside of that, they just need to do the research. If they can’t do the research, you really need to find a different CPA. I’m not kidding about that.
Joe Fairless: Yeah, that’s true. Good point.
Tom Wheelwright: If you point them in the right direction, you go “Really? That’s your job. You should know how to do that, and if you don’t know how to do that, you’re not qualified to do my tax returns.”
Joe Fairless: Fair enough. So keywords for them – “bonus depreciation, automobile, hook me up, buddy!”
Tom Wheelwright: [laughs] There you go.
Joe Fairless: Tom, how can the Best Ever listeners learn more about what you’ve got going on?
Tom Wheelwright: You know what, just join us at WealthAbility.com. We have a new podcast, The Wealth Ability Show.
Joe Fairless: Oh, cool!
Tom Wheelwright: And certainly I’d like you to get on the Wealth Ability Show. I’m actually interviewing Robert Kiyosaki this week.
Joe Fairless: Nice!
Tom Wheelwright: That will be out in a couple of weeks. We pre-record them. And we’ve got a number of guests that are on, and we talk about how to make way more money and pay less taxes… So the Wealth Ability Show – it’s fun; it’s actually just brand new, and it’s been extraordinarily, gratifyingly successful. We have a lot of listeners, thousands and thousands of listeners, and we’re always looking for new listeners, because we just wanna share what we know.
Joe Fairless: It’s a necessary topic. A lot of the time, we focus on making income as the primary way we put money in our pocket, but we don’t focus on the number one expense, which is taxes… And that’s a way to actually increase an income, and really increase our wealth and set us up for generational wealth… So thank you so much for being on the show.
We’re talking about the new tax law, how it benefits real estate investors. Three things you’ve mentioned: bonus depreciation, 20% deduction for pass-through, and bonus depreciation on automobiles… And you also mentioned some differences between the U.S. and other countries; in the U.S. we actually get depreciation on used properties, which now doesn’t quite make sense, but I’ll roll with it, I love it… And deductions on automobiles. And you’ve mentioned a lot of other stuff.
Thank you so much for being on the show, Tom. I hope you have a Best Ever weekend, and we’ll talk to you soon.
Tom Wheelwright: Thanks very much, Joe.