Investing Your Cash Flow

[Matt Morgan]

Wondering if any investors are investing their cash flow to maximize the return they get on their money.  I'm not currently living off my cash flow and would like to invest it in something liquid, and relatively safe so if I needed it, I could pull it out without paying large fees like a retirement account would charge.  Thanks in advance for any help.

[David Faulkner]

Let's try to twist your mind a bit ... you have to pay tax on cash flow ... if instead of collecting cash flow as it trickles in, paying taxes on it, and then DRIPing it into index funds, etc. if you don't need the cash flow and do need the tax write off, what if you were to pull excess equity out via cash out refinance ... use that larger lump some to redeploy into another investment property or any other investment you choose. Then the extra interest you pay is tax deductible, the excess cash flow is not there and you therefore don't pay any taxes on it, and in fact the property shows a small loss (on paper only) so you actually get a tax break on it. Now, here's the best part ... that small paper loss is not really a loss at all (except on paper) in reality you really are putting cash flow in your pocket each and every month, but on paper you are taking a depreciation expense on the rental property ... this creates "phantom cash flow" that goes into your pocket while legally avoiding the tax man. Now, if/when you ever sell the property without 1031 exchange, that cumulative depreciation will be recaptured and you will owe taxes on it ... but you won't do that because you are too smart. Instead, you will hold the property without selling or you will 1031 exchange and transfer that cumulative depreciation to a bigger, better, newer, higher quality property, again tax free ... then one day you will pass and your heirs (that little bundle of joy in your arms in the picture) will inherit this property, at which point they will magically get a stepped up cost basis and can sell it the very next day if they like, 100% tax free, all that depreciation never gets recaptured, 100% legal. How's that for a magic trick?

As for semi-liquid reserves, I like to keep those in a Roth IRA ... if you qualify you can contribute up to $5,500/yr (and another $5,500/yr for your spouse if you are married) ... since it is a Roth IRA if you've held for more than 5 years you can tap the principal any time without taxes or penalties, but in the meantime if you don't it is growing tax free and protected from creditors or frivolous lawsuits. Have your cake and eat it too ... another nifty magic trick :)