A thread on how real estate investors, developers and operators can make millions a year and pay almost nothing in TAXES by using depreciation, bonus depreciation, and 1031 exchanges.
How it works:
It makes 30% of our cashflow tax free.
Very powerful but there is much more to it...
We'll have a cost segregation study done to split up the depreciable lifespan of different parts of the building. The raw land can't be depreciated so you have to give that a value.
The IRS has a depreciation schedule for each type. Some parts are 5 yrs. Others 15 years...
Now you can get 5 or 6% of the value as a deduction in the early years...
But wait... theres more.
So the doors, sidewalks, HVAC, walls, latches, curbs, security, gates, etc.
A % of this stuff goes in Yr 1
But then Trump got elected and he enacted the Tax Cuts and Jobs act. Moving this percentage to 100% from 2017 to 2023
So now 30% of your asset cost can be DEPRECIATED IN THE FIRST YEAR.
The cost segregation study came back. 30% of the asset cost can be depreciated on a 15 yr or faster timeframe. This is 100% deductible THIS YEAR...
https://t.co/FEt1sBoSWS
A $900k tax deduction. In year 1.
The facility will produce about $260k in NOI and $200k in free cashflow after interest expense.
So while $200k goes into the bank account the tax LOSS is $700k.
But wait there is more...
You can also carry these losses forward into eternity.
On these new properties we won't have a tax liability for 4+ years because of Bonus Depreciation...
INSANITY.
This is how real estate owners, operators, developers make millions a year and pay 0 taxes.
But if you've owned it longer than 12 months its taxed at capital gains...
And you can do whats called a "like-kind exchange" (1031 exchange) which allows you to use the proceeds to buy a new asset and shield the taxes and push them further down the line.
Powerful stuff.
You can even cost seg your vacation homes or small rental properties and its often very cost-effective.
Thanks for following along!
More from Nick Huber
Don’t have much cash but want to invest in real estate?
Want to get SBA loans and special loan programs so you can buy real estate investments with only 5-10% down?
One word for you:
Don’t.
Here’s why
👇👇👇
Leverage can be a beautiful thing.
Appreciation takes over and all that value you bought with debt grows and you amplify your returns.
But there is another, darker side of debt.
Values drop 5 or 10% and you’re underwater. You have zero equity or negative equity.
Ask the folks who were over-levered in 2007 what happened on 2011?
Real estate is a frothy space right now. Money flying everywhere and values higher than they’ve ever been.
Debt is cheaper and easier to get than ever.
Will it continue?
Probably.
Money could stay cheap for a long time. There is a ton of negative yielding debt abroad and liquidity ready to flood our market at the drop of a hat.
Rates will likely stay low. Gov will probably keep subsidizing these loans. You’ll probably be okay.
Want to get SBA loans and special loan programs so you can buy real estate investments with only 5-10% down?
One word for you:
Don’t.
Here’s why
👇👇👇
Leverage can be a beautiful thing.
Appreciation takes over and all that value you bought with debt grows and you amplify your returns.
But there is another, darker side of debt.
Everybody I know loves LEVERAGE when it comes to real estate.
— Nick Huber (@sweatystartup) October 18, 2020
It\u2019s a beautiful and scary tool, kicking appreciation, depreciation, and cashflow into overdrive.
It amplifies everything. You can make a lot of money really fast and go broke in months.
Here\u2019s how it works\U0001f447\U0001f447\U0001f447
Values drop 5 or 10% and you’re underwater. You have zero equity or negative equity.
Ask the folks who were over-levered in 2007 what happened on 2011?
Real estate is a frothy space right now. Money flying everywhere and values higher than they’ve ever been.
Debt is cheaper and easier to get than ever.
Will it continue?
Probably.
Money could stay cheap for a long time. There is a ton of negative yielding debt abroad and liquidity ready to flood our market at the drop of a hat.
Rates will likely stay low. Gov will probably keep subsidizing these loans. You’ll probably be okay.
More from Business
This is a GREAT argument to pull up when talking to people about minimum wage. Some others nested below
A large number of new jobs being created are minimum to low wage, so looking for a new job generally won’t increase pay.
Raising minimum wage helps things not directly related.
Helps Infant mortality? Yup.
Lowers Suicide? Yup.
Reduce smoking rates? You bet.
It also boosts the local economy! Minimum to low wage earners spend more % of their money, so an increase means more is spent, often in community!
Low paying jobs are often in sectors which would gain from this. More people spending money in your shop makes your business more money! Now you have more profits and increased labor costs are covered.
"it doesn't affect me if companies pay low wages"
— Dan Price (@DanPriceSeattle) February 11, 2021
In reality, you're paying for it. Over 50% of people on food stamps are actively working. The leading employers are Walmart, McDonald's and Amazon.
As taxpayers, you're subsidizing corporations to pay literal poverty wages.
A large number of new jobs being created are minimum to low wage, so looking for a new job generally won’t increase pay.
Raising minimum wage helps things not directly related.
Helps Infant mortality? Yup.
Lowers Suicide? Yup.
Reduce smoking rates? You bet.
It also boosts the local economy! Minimum to low wage earners spend more % of their money, so an increase means more is spent, often in community!
Low paying jobs are often in sectors which would gain from this. More people spending money in your shop makes your business more money! Now you have more profits and increased labor costs are covered.
