The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 47 - How to Become a Tax Free Decamillionaire
Ever wondered what separates the real estate millionaires from the deca-millionaires and centa-millionaires? This episode goes beyond the basic milestone of a seven-figure net worth and explores the strategies our high-net-worth clients use to achieve true financial freedom. We reveal how these savvy investors scale up in the real estate game, focusing on larger deals and leveraging other people's money for amplified asset acquisition and cash flow. By committing to a focused investment strategy and mastering their chosen real estate niche, they manage to strategically reduce their tax liabilities while climbing to eight or nine-figure fortunes.
We're sharing the insider knowledge that could be your ticket to monumental success in real estate. Our conversation unravels why the most successful clients steer clear of shiny object syndrome, opting instead for substantial investments that provide greater returns. You'll learn how strategic use of debt can expand portfolios and the power of tax advantages when dealing with large-scale properties. If you're ready to make the leap from playing it safe to playing big, this episode is packed with the critical behaviors and business actions necessary to elevate your real estate endeavors and potentially join the ranks of the industry's deca-millionaires.
All right, today I want to talk to you about how to become and stay a real estate deck, a millionaire. The reason why I chose this topic is because the millionaire, to become a millionaire in real estate, honestly is not that impressive. If you bought three or four single family rentals around 2008, you could probably call yourself a millionaire because your equity in that property likely exceeds your debt by over a million dollars. So you've written the appreciation wave and you can call yourself a millionaire. Well, that's not really that exciting to me or our audience. So let's take it up a notch and talk about being a deck a millionaire. Maybe a cent a millionaire, now that is really something that's going to give you that liberating financial freedom. So we're going to dive into some concepts here, and you know we have clients from all walks of life and we do have clients that have not only seven figure but eight figure and nine figure net worths, and we often find that the highest net worth people some of them are still paying nothing in taxes because they are taking advantage of the tax incentives available for real estate investors. They understand the tax law. When working with us, they're performing certain actions that are going to create those tax savings. So let's talk about what I see in these real estate deck of millionaires how you can get there, what type of behavior you should be performing, what type of actions in your business can you be performing to become a real estate deck of millionaire? So first what this is going to be just a business thing that I see here with the most successful clients that we have. They have a game plan and they stick with it.
Speaker 1:So often do we see the beginning entrepreneurs or the less profitable entrepreneurs getting seduced by this shiny object syndrome. You know, maybe you start off going into multifamily but then you see this guy on the right is thriving in short-term rental and this guy is doing really good in mobile home park and you never and you're just bouncing around looking for where the grass is greener. These types of investors so often never really find their place because they never invest deeply enough into one strategy to really explore all the opportunities within that strategy to maximize their profitability. They're not going deep enough. They're just grazing the surface and only taking the smallest opportunities that are available because they never really commit to understanding their craft and investment strategy. So the clients that are really profiting not only do. They know what they want and commit to it and learn their craft and commit themselves, but they're investing into larger deals. So they are not getting the 100, the. You know the birth strategy is fantastic, but what they are not doing, they really aren't doing the $200, $300,000 single family rentals. They're not even visiting these rentals like that.
Speaker 1:If they had them, they're usually selling them and consolidating them into larger vehicles, because the amount of time it takes to close on a single family rental is not that much less than the time it takes to close on a multi-million dollar mobile home park or a multi-family rental or any sort of larger project that's going to create greater Cash flow. So they're doing larger deals and that allows them to make the best use of their time. They're only spending their time on the largest deals that are going to create create the greatest opportunity. And not only are they investing in larger deals, but they're not using their own cash. This is going to give them access to more assets with debt. More assets give you the ability to produce greater cash flow and also have more depreciation, and that's how we get those massive depreciation deductions rolling on to the 1040s and offsetting their w2 income or their espouses, w2 or their business income and that's really the name of the game in real estate is to go big. If you are doing larger projects and now I'm not saying you should and if you're just starting off, maybe you need those little single family or those duplexes or quadplexes just to get your feet wet and understand the game Before you can move on to the larger projects. But when you go, if and when you are ready to become a real estate deck of millionaire, if you're gonna be underwriting deals, negotiating contracts and Inspecting a property, you're not gonna be doing it on the smaller properties. You're not gonna be doing on something that'll only maybe produce $500 a month in cash flow. You're looking at something that could potentially create hundreds of thousands of dollars in cash flow or future depreciation at a minimum sorry, future, future appreciation and capital gains. So With the combination of leverage, we've now maximized our access to build wealth. Do value ads, create future gains and have that cash flow.
Speaker 1:Lover clients are using other people's money with bank financing. A lot of them are using other people's money with partnerships. Some of our clients are getting equity in these deals In excess other cash contribution. So we have real estate syndicators where they're pulling together other investors and Because they are able to find the deals and underwrite them, they're given additional equity in that property, even though they're not putting their cash into it. Now this advantage gives them the ability to again continue the cycle of having depreciation and having cash flow and having profitable exits on large deals.
Speaker 1:Some of the other things that we see here that really created advantages from a tax and profitability perspective Is with the refinances. So what a lot of these investors will do Instead of selling their property because they need the cash, how can you take the cash out of your property without paying taxes? Do a refinance, You're gonna go to the bank. You've done some value ads on the property. You find that the value has increased to a certain threshold. That qualifies you for having more equity in the property, which gives you the ability to take a loan out on your equity. Now this is not as exciting and popular as it used to be because the interest rates are higher now.
Speaker 1:But the general strategy that we see with a lot of our real estate investor clients as they find great deals, they improve the value and that allows them to pull out some of their equity in the property. Now they have cash, sure they can live on it, but what a lot of them do is they reinvest into more property with that and they repeat the cycle of taking their cash flow, taking maybe some of their exits and some of the refies and investing them into more and more real estate. That will allow you to repeat the process of value adding, getting that depreciation, using that leverage to get maximum cash flow. So you're continuously accessing cash and creating tax reductions. And then, when it comes to the sale of these properties, there's also lots of opportunities here for the full-time real estate investors. The exits, obviously, when you sell on a real estate investment property. So you can mitigate the taxes. With the 1031 exchange you can roll all of your proceeds into a property of equal or greater value and do a cost segregation study on that property. You may also find, let's say, the 1031 exchange doesn't work. You have all this depreciation.
Speaker 1:We have some of our clients who have hundreds and hundreds of thousands of dollars of unused depreciation here. They have more tax deductions than they need. So when that capital gains event occurs, they pull from the unused depreciation from prior years and then it'll offset the capital gains, giving them an untaxed event where they take their cash right back out on the sale of this real estate. Now I want you guys to think about what are you gonna do with your tax savings as well? They're gonna take the cash that is untaxed and they're gonna reinvest it into more vehicles, like we discussed earlier. So, at a high level, what the strategy here is you're gonna create tax savings and you're gonna reinvest your tax savings into purchasing more assets to give you additional cash flow, additional depreciation, additional tax savings, and then you invest your tax savings and your capital again. So it is a compounding snow balling effect over and over and over again. And I really like to pair this when you have one person who has a W2 or active income and another person who has a real estate professional tax status and this is kind of how it plays out.
Speaker 1:Let's say we have a physician making a million dollars a year and the spouse has a real estate professional tax status. This is just beautiful because we got the taxes coming out of the W2, the paycheck from the physicians, bi-weekly paycheck every time they get paid. All this money is being set aside and used to pay off taxes. The spouse then invests into real estate. We do cost segregation studies, we use leverage, we maximize the depreciation when they purchase this real estate. So let's say the spouse then buys $5 million of real estate. They use leverage and they're able to acquire a big chunk of real estate. We do a cost segregation study and then we create some tax inductions.
Speaker 1:Now you're maxed out on how much you can use. It's around like 580,000. It changes year after year. It's called the excess business loss limitation. But let's say we eliminate $580,000 of taxable income on your 1040 tax return If you're at maybe a 40% tax bracket and we eliminate close to $600,000 subject to taxes. All that money that was taken out of your paycheck every time you got paid is evaluated and we realized that we actually didn't need to have to set aside so much money for taxes, which results in a massive refund. And then you take that refund, obviously, and buy more property, use leverage, do more cost sex and do the process over and over again. You know we really like this strategy for not only affluent investors. But even if you're just starting off let's say you don't need all this depreciation you're still gonna see the advantages of having cash flow and wealth connecting with other affluent investors when you're doing this and even if you don't need these deductions and you don't even get a refund, you're still winning the tax game in that your cash flow most likely will not be taxed at all from your real estate. Other things that we see that just it's just amazing how effective real estate is as a vehicle to build wealth is that we were talking about all this depreciation.
Speaker 1:You're writing off the property year after year after year, which allows you to get your rent payments flowing through to you being untaxed. Well, when you die, that real estate gets stepped up to fair market value and then the so whatever that property is worth at your date of death, your children will inherit it. And let's say you bought a property for a million. You've written off a million over 27.5 years. Your children inherit the property and the fair market value is now $4 million. Property is now on their, in their tax return and on their balance sheet at $4 million and the depreciation starts all over again and your children and their children's children will all see the benefits of the properties being stepped up to fair market value. And then that really precious value tax induction of depreciation kicks in again and continues the cycle.
Speaker 1:There's just so much amazing stuff you can do, whether it's through tax advantage, capital gains, you know, favorable tax, rental income, tax deductions, investing in real estate where, even if you're cash flow positive, you're creating negative income statements on your tax return, pulling your money out through refis. With all these opportunities, there's just so many ways to build your wealth and not pay a diamond taxes, and because you're not paying taxes, you're winning the tax game and you have more cash that's not going to Uncle Sam that could be reinvested into real estate and grow and compound year after year after year. So these are some high level concepts and foundational concepts for building wealth and minimizing taxes and winning the tax game as a real estate investor, and I want you to think about. You know what are your goals in life as far as building wealth and achieving the lifestyle that you're looking for, and certainly winning the tax game and having access to these tax advantage investment vehicles like real estate are certainly going to help you achieve that objective. So what I really want you guys to think about here is you know we're hitting the year end at the time of this episode and I want you to think about not just becoming a millionaire, because that's not that exciting anymore. Think about becoming a real estate deck, a millionaire, by taking advantage of all the tax incentives written in the tax code to encourage you to take risk, use, leverage and invest in real estate effectively with a tax plan.
Speaker 1:All right, guys, I hope you liked this quick little podcast here and I hope it gives you some ideas and inspiration. And if you want to learn more, obviously subscribe and like and subscribe. And if you want to learn more about us, maybe you know someone who wants to join our team or if you want to be a client, email info at markprobergcpacom. Have a wonderful day.