Borrowing money means less taxes?

Question

Hi all,

First time poster here, I would like to buy my first home soon, so I am trying learn about real estate investing, from Seattle, WA.  I am reading one of the Rich Dad, Poor Dad books: Retire Youg Retire Rich, and there is a quote in here that I like, but I was hoping someone could shed a little light on for me: he poses the question, "Why do the people who work the hardest and save the most pay more in taxes than people who work less and borrow more?"  I assume this refers to taxabe retirement accounts vs. tax deductible mortgage payments and such... is there more?

Thanks for any insight

Ben Leybovich · Answer

The quote tries to make a distinction between earned income and passive income. Earned income, either W2 or 1099, is subject to FICA taxes, while passive income, which is investment income such as interest, dividend, rental, is not subject to those FICA taxes. That alone (and there are many other advantages) positions passive income at an advantage.

The "working more" phrasing is simply Robert's play on words. His way of illustrating that doing work, otherwise thought of as any activity which require personal service from you (requires you to trade time and effort for money) costs you a lot more than any activity which is systematized, automated, and produces returns without you directly trading time or effort for it...

Hope this helps!

Jay Hinrichs · Answer

@Ashley Abramson  1031 is for long term buy and hold type properties. can't sue that for fix and flip

fix and flip is taxed at the highest rate or the highest tax bracket you are personally in.. as the LLC profits flow down to your personal return.

Mitchell Kane · Answer

I did listen to that one @Ashley Abramson, she was great.  I also really enjoyed Matt Aitchison ep. 166

Denise Evans · Answer

Make sure you understand the passive activity loss limitation rules and the at risk loss rules, which could prevent you from sheltering ordinary income from paper losses on your investments. Do you already know about this, or do you want me to explain?

Also, don't forget about Section 179 deductions, which lets you claim a business expense deduction for 100% of the purchase price of equipment used in your business, all in the year of acquiistion, up to certain dollar limits per year.  Also limits on vehicles. Most vehicles top out at a $25,000 deduction, but some (usually trucks with full size beds) do not have that limit.

Matt Aitchison · Answer

@Mitchell Kane thanks for the shoutout on my episode. Glad you got some value from it.

Lydia S. · Answer

@Mitchell Kane

My sense is that there's a confusion in terminology somewhere.  You're right that there is a tax on profits...that's a fact of life and no one can avoid it entirely, but investment dollars put into a rental property should lead to passive income that is getting a tax break.  The money your father might invest in your property is not an instant write-off, but the profits are taxed differently than ordinary income.

Alex Chin · Answer

@Mitchell Kane - It could be that the person is loaning the money out from a retirement account. If it is a self-directed Roth-IRA, that may allow them to invest money with you and not have to pay taxes on the resulting profits. I think you can do something similar with a 401(k) account, but it isn't something that I've ever taken a hard look at.

Mitchell Kane · Answer

As to them being on the loan or not, does it change anything one way or another? Originally I was imagining them just essentially giving me a loan and gaining a percentage of the profits (most of the profits most likely). I must have misheard information, regarding investment being tax deductible, it makes since you'd be tax on profits.

Jeff Rabinowitz · Answer

If you manage to lose your investors' money they will be able to claim the loss as a tax deduction. I don't imagine they will be too grateful to you for this. If they earn money they are supposed to pay taxes on the earnings.

Charles Moore · Answer

would your dad and his friend be on title and own the home with you? Or would they just make a straight loan to you with you being the sole owner of the home?

Borrowing money means less taxes?

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