Want to Make Millions and Pay No Taxes? Try Real Estate

[MKTrader]

Yep, a lot of truth to this. Like trading, RE has plenty of get-rich quick hucksters and newbies who lose their shirts. However, there are A LOT more RE investors who become millionaires, make a living or at least make a nice side income. Say what you want about Kiyosaki (Rich Dad, Poor Dad guy). I don't know how much money he's really made with properties, but his "cashflow quadrant" concept and claim that you pay little to no taxes if you structure things right are true.

However, you have to get your hands dirty (literally or figuratively by hiring others to rehab), talk to people, develop selling/negotiating skills and learn quite a few nuances. With trading, you can listen to scammers like Jason Bond claim you only need 3 easy patterns to make millions in your underwear. No wonder so many are attracted to trading instead--especially lazy types who only want to push a few buttons and introverted nerds who like playing with backtesting software for hours. And I'm talking about my past self here, too....

 

[ironchef]

I gotta figure out how this stuff works. I met a few people in my town at a family event who are doing it and earning enough that this becomes their job.

If you bought BRK back in 1965 and held it till now, you don't pay any taxes either. I suppose if you need money, you have to sell some, or borrow against your BRK shares.

 

[Kammo]

Go to https://www.biggerpockets.com/forums?page=2 to hear from people who are down in the trenches on these and other real estate topics.

 

[ironchef]

https://www.bloomberg.com/news/arti...ake-millions-and-pay-no-taxes-try-real-estate

Real estate is a cyclical business. Markets crash. Deals sour. But hard landings are rare for a savvy property mogul, thanks to the U.S. tax code.

Take Harry Macklowe, a New York City developer. Macklowe, 81, hasn’t paid income tax since the 1980s, according to a court opinion in his divorce proceedings issued in December.
..
doesn’t suggest the couple did anything wrong to avoid paying income taxes. Rather, it highlights the special perks available to property investors in the U.S.—advantages that have expanded under the tax law signed in 2017 by Donald Trump, America’s real estate developer president. “The real estate industry is notorious for throwing off lots of deductions, and real estate developers are notorious for paying very few taxes,” says Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center. “As Leona Helmsley said, ‘Only the little people pay taxes.’ ”

...
Those trappings might not have been available if Macklowe had made his fortune in another industry. The U.S. tax code is designed to measure profitability over time, allowing businesses to write off losses in one year against income in the next. For most companies, that provision is limited to losses on their own capital as opposed to losses on borrowed money. “There’s a general rule that you’re not supposed to be able to claim losses for more than you put into a deal,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, a left-leaning think tank. “Real estate is the exception.”

I have been thinking about this a lot lately. The grass is always greener on the other side of the fence.

I think the advantage you talk about in real estate is investing vs trading and not real estate vs stocks. If you invest in RE by flipping houses, you won't get the tax advantage you mentioned. So, flipping is like trading.

If you invest in RE long term, you are like buy and hold stocks. Your rental income is like your dividend income. The difference is you cannot take depreciation. But the business represented by the stocks is allowed to take depreciation, so over time the effect is the same.

The one real advantage of RE is 1031. The only equivalent in equity is in a buyout and the buying company acquires the other in an all stock transaction.

Perhaps some smart ETer can figure out how not to pay capital gain on selling long term stock holdings other than keeping it in IRA/Roth?

 

[srinir]

I think the advantage you talk about in real estate is investing vs trading and not real estate vs stocks. If you invest in RE by flipping houses, you won't get the tax advantage you mentioned. So, flipping is like trading.

Flippers who flips their primary residences do get capital gain breaks up to $500k (Joint return) unlike trading. I know a couple here who do that pretty regularly every couple of years.
https://www.irs.gov/taxtopics/tc701

If you invest in RE long term, you are like buy and hold stocks. Your rental income is like your dividend income. The difference is you cannot take depreciation. But the business represented by the stocks is allowed to take depreciation, so over time the effect is the same.

Difference is the leverage and amount of deduction. Commercial and rentals usually lever up to 4 to 5 times. Not many businesses can lever upto that much. If big companies increase their leverage after certain amount, their stock prices gets effected (fall). At the most leverage amount is about 2 for stable companies.

The one real advantage of RE is 1031. The only equivalent in equity is in a buyout and the buying company acquires the other in an all stock transaction.

Perhaps some smart ETer can figure out how not to pay capital gain on selling long term stock holdings other than keeping it in IRA/Roth?

Only way not pay tax is to die. Basis will be stepped up for the heir's. Even in IRA after age 70, there is mandatory withdrawal unlike 1031 exchange which goes on forever. It is amazing that guy quoted in article has not paid any tax after earning many millions.

Bottom line is that Real estate is favored industry in USA. In many countries, there is not even mortgage reduction

 

[srinir]

https://www.nytimes.com/interactive/2019/05/07/us/politics/donald-trump-taxes.html

The data — printouts from Mr. Trump’s official Internal Revenue Service tax transcripts, with the figures from his federal tax form, the 1040, for the years 1985 to 1994 — represents the fullest and most detailed look to date at the president’s taxes, information he has kept from public view.
...
The numbers show that in 1985, Mr. Trump reported losses of $46.1 million from his core businesses — largely casinos, hotels and retail space in apartment buildings. They continued to lose money every year, totaling $1.17 billion in losses for the decade.

In fact, year after year, Mr. Trump appears to have lost more money than nearly any other individual American taxpayer, ...

His core business losses in 1990 and 1991 — more than $250 million each year — were more than double those of the nearest taxpayers in the I.R.S. information for those years...

Over all, Mr. Trump lost so much money that he was able to avoid paying income taxes for eight of the 10 years.

 

[Lula Gadapee]

I knew for a long time that real estate is the key and the secret to success. Even if you don't have a property, there are ways to earn money from the real estate domain.

 

[MKTrader]

I knew for a long time that real estate is the key and the secret to success. Even if you don't have a property, there are ways to earn money from the real estate domain.

One of the main edges of RE is the ability to exploit information and liquidity gaps in local markets. While I don't hold to a hardline "efficient market hypothesis" for stocks/futures, data and information are readily available, and much harder to exploit unless you have an edge in speed...something no retail trader has. In real estate, you may find a "desperate seller" who is willing to get rid of an inherited house out of state for pennies on the dollar. In the stock market, you can try buying "beaten down value stocks" but they're usually cheap for a reason. With that said, RE is very competitive and many investors are trying to get the cheap deals via "we buy houses" signs, postcards and letters to lists of certain property owners, etc. Many of those markets are saturated with a lot more potential buyers than sellers. The smartest players probably don't sell courses or post on biggerpockets.com with their strategies.

 

[ElCubano]

One of the main edges of RE is the ability to exploit information and liquidity gaps in local markets. While I don't hold to a hardline "efficient market hypothesis" for stocks/futures, data and information are readily available, and much harder to exploit unless you have an edge in speed...something no retail trader has. In real estate, you may find a "desperate seller" who is willing to get rid of an inherited house out of state for pennies on the dollar. In the stock market, you can try buying "beaten down value stocks" but they're usually cheap for a reason. With that said, RE is very competitive and many investors are trying to get the cheap deals via "we buy houses" signs, postcards and letters to lists of certain property owners, etc. Many of those markets are saturated with a lot more potential buyers than sellers. The smartest players probably don't sell courses or post on biggerpockets.com with their strategies.

My buddy has done very well in Texas buying at the auction. He has a set of rules he doesn't deviate from and if they bid outside of that he stays put. You can't finance and have to pay with cashiers checks so many can't take advantage of this.

 

[MKTrader]

My buddy has done very well in Texas buying at the auction. He has a set of rules he doesn't deviate from and if they bid outside of that he stays put. You can't finance and have to pay with cashiers checks so many can't take advantage of this.

Yep. There are also tax sales which differ in many states, etc. Lots of potential edges that you don't find in highly-liquid markets--although hedge fund have gotten a lot more heavily involved in some aspects of residential RE.