This Issue: Deduct All You Can

When I’m writing a book, which seems to be most of the time these days, I will spend up to seven or eight months putting together notes, collecting articles, and dictating stories and ideas before I even begin to actually put it all together. It’s a long process, and it requires patience and perseverance to see it through to the finished product. I will admit that sometimes I wonder if it’s worth it, because it’s not an easy endeavor. But when the book is done, it’s a great feeling. It’s an accomplishment that has taken painstaking time.

People won’t see the work that goes into a book, but anyone who has written one will tell you that diligence is a must. They don’t just materialize out of nowhere. If you’ve been working towards something for years, I’d say you have a goal in mind too. You’ve probably focused on that goal. Hopefully you’ve been diligent in pursuing it. If your work pays off, which it most likely will, people might say you’re just lucky. Maybe so, because you’re lucky enough to have the brains to work hard!

Recently, while working on one of my books, I spent some time thinking about the “entitlement mentality” that seems to have afflicted this country. I think we can take it back a few decades to the emergence of what was called “instant gratification,” as personified by the superstars and rock stars who emerged and made tremendous amounts of money, which very much impressed young people. Suddenly, everyone thought they should have what those very few people had, or that they were overnight stars, and that it should happen that way to them, too. In reality, it happens to very few people and rarely does it happen “overnight” to anybody. Those are the exceptions to the rule, not the norm. But they received so much media attention that people who had to struggle a bit or work for long years at something had the feeling they were being left out or that they were being treated unequally. They began to feel that the world owed them something.

Not everything works out as we might hope it will, and certain fields require a bigger dose of luck to succeed in than others, but a very good way to pave your own way to success is simply to work hard, be diligent, and to look at what you have going for you, versus what you don’t have going for you - the old cup half full vs. half empty test. Here’s where I bring back my tried-and-true theory that you have to think big - because if you’re diminishing your own prospects, then it’s not likely you will run into a lot of luck.

And part of doing your due diligence is to know what you want for yourself, not what other people want for you--which in many cases turns out to be not much! Take the time to move yourself forward. In other words, think, work--and be lucky. Good luck!

There are very few business opportunities that allow you to build wealth without paying taxes  - and then subsequently pay reduced rates when the time comes to settle up with Uncle Sam.

Real estate, however, is a prime exception. Today I will focus on two strategies that can slash the taxes you pay when real estate investing - and put a lot more money in your pockets at the same time. Set up properly, both of these wealth-building tools will result in little to no tax due until your property is sold.

Tax Strategy One: Offsetting Rental Income

Let's assume you purchased a rental property for $100,000 and you found a tenant who paid $1,100 rent per month. Your monthly out-of-pocket expenses averaged $1,000. This would include mortgage payments, repairs, management fees, and so on. While this scenario does generate some positive cash flow (cash inflows greater than cash outflows), this will most likely result in a tax loss.

The reason for this is that when you file this activity on your tax return, you are entitled to depreciate your property. Depreciation allows you to recoup the purchase price of your property over time through annual tax deductions. In other words, depreciation is a noncash expense. Combining depreciation with other rental expenses may very well mean that your total expenses exceed the amount of cash you have actually spent out of pocket on the rental activity. In some situations, this tax loss can be used to offset other W-2 income. The bottom line to you is that you receive valuable tax benefits. The wealthy realize this, which explains part of the reason that they are so actively involved in real estate.

Tax Strategy Two: Make the Most of Property Appreciation

The second wealth-building aspect in this example would be the appreciation of the property itself. Over time, real estate values tend to increase. Let's assume that over a three-year period the property you purchased has increased in value to $120,000. The monthly mortgage payments made on the property have reduced the outstanding debt to $95,000. You now have increased your net worth by $25,000 without paying a dime in tax. Are you starting to see why the wealthy are involved in real estate? They're not in real estate because they are wealthy, they're wealthy because they're in real estate.

Another exciting part of this scenario is that when you sell that property and turn that equity into cash, the majority of the gain will be taxed as a long-term capital gain. That means preferential tax treatment! Currently, the maximum long-term capital gain rate is 15 percent.

In my book Trump University Asset Protection, I stress the fact that ultra-wealthy people apply strategies to that allow them to dictate the type of income they receive. Consider that if you went out and got a second job that paid $25,000, you would probably be paying much as to 40 percent in taxes, depending on your tax bracket. But using this wealth-building real estate tool that I am recommending, you would only be paying around 20 percent  - assuming you live in a state with state income tax. That's half the tax on the same dollar amount of income.

It all boils down to solid tax planning - which in turn boils down to a solid increase in the amount of money in your pocket.

When we hear that somebody has a habit, we immediately think that he or she smokes, or drinks too much, or is a compulsive gambler. I wonder why the word “habit” has taken on a negative meaning today.

Some habits are truly negative, but there are good habits too. If your mom makes an entry in her checkbook register every single time she writes a check, that is a good habit. Or if you record every tax-deductible expense immediately, that is obviously a very good habit too.

Here are some I would like you to consider adding to your routine:

1)      Bookmark all your critical investment accounts online and visit them at the same time every week. The best way to spot an earthquake is to notice the tremors ahead of time.

2)      Schedule a monthly call to your tax preparer/CPA. Keep a folder in your top desk drawer and use it to hold any documents or notes that you need to discuss in this regular talk.

3)      Get in the habit of paying all your tax-deductable outlays with one credit card that issues you an itemized year-end report of all transactions. It’s an effortless way to keep your records organized.

4)      Pay your bills on time - especially your credit card bills. For recurring bills, schedule automatic payments through your bank’s online services so you will never miss a payment.

5)      Start saving today. Even a small amount from every paycheck will add up more quickly than you think. Start now - your age doesn’t matter.

6)      Since we don’t live in a paperless world - not yet, anyway - set up a system of file folders to store all your receipts, paycheck stubs and other tax-impacting documents in an orderly way.

7)      Get in the habit of having regular financial discussions with your spouse or significant other. When you decide on financial priorities and practices together, the result is that you operate as a team. That doubles the effectiveness of any financial strategies that you implement.

So what is wrong with being a creature of habit? Nothing. At least, not where your tax-reducing and financial healthiness are at stake.

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