Frustrated by how long it’s taking to achieve legitimate real estate financial freedom? There is a shortcut thanks to a little known provision in the IRS tax code that was slide into the 2017 Tax Cuts and Jobs Act. And there are 3 key components you'll need to have working together in order to make this shortcut work for you. Learn all the details here:
This is the biggest shortcut to real estate freedom we've seen in our lifetime. The changes in section 179 of the Tax Cuts and Jobs Act allow up to 100% depreciation for most of the renovations or improvements you make to a rental property. This is so significant because now any improvement you make to a rental property, which could pay you for a lifetime, can be deducted in that calendar year. For more details, the below link directs you to where the IRS describes this in greater detail:
Many of the most successful real estate investors have been taking advantage of this shortcut, including big companies like Amazon. Amazon has been able to drastically reduce their corporate income taxes while expanding their industrial real estate portfolio building massive distribution centers across America. They're deducting many of the building costs thanks to section 179 and these specific changes. But you're not Amazon. So how does this impact you and become your shortcut to real estate freedom?
Compound Interest: You were probably told that the earlier you start saving and investing the better. And that was primarily due to compound interest. The longer the time horizon you invest at a certain annual interest, the greater the power of compound interest. If you start at age 20, by the time you get to age 70, it's a whole lot bigger than if you start at age 40 and you end at age 60. That's true, compound interest is more powerful the longer the time horizon. But our lives are short. We want to get things accomplished as efficiently as we can so we can have time for ourselves, our family, and other pursuits. My problem with compound interest is you need to wait 40 years for the payoff.
The Graduated Tax Trap
Even before this provision came out, I would agree that young people have the best chance at saving money and building wealth if they start earlier. However, I’m coming at it from a different angle. It has to do with our graduated tax structure here in America, where the higher your income the higher your tax percentage. It's the graduated tax trap. Young people have less responsibilities which means they have less expenses, so even at a lower income they can sock away more savings. It's a lot easier to pull it off at a lower income because they are in a lower tax bracket.
But as you get older you have more responsibilities which leads to more expenses. Even though you might be earning more money as you get older, you have higher taxes and you’re not making any actual progress. That is, of course, until the update in the 2017 Tax Cut and Jobs Act where they slid into section 179 this 100% depreciation. That's the context as I dive into the three key components required to work together and make this tax provision your shortcut to real estate freedom.
Shortcut to Real Estate Financing Freedom: 3 Key Components
1 - Generate High Income
The first key component is to generate high income because unless you make a lot of money there's no need for a depreciation provision in an IRS tax code. It doesn't matter to you. You need to have a lot of income to even have a need for a tax provision.
Another reason to generate high income is because with rental property, you're using money that you have and you're trying to generate a return on investment on that money. (There are “no money down” deals we use as a short-term strategy to create cash) And creative real estate investing and flipping houses is a great way to generate high income. I would argue it's the best small business in America. That said, regardless of how you earn your income, generating high income is how you will have the fuel to acquire rental property.
I believe the best way to generate high income is with creative real estate investing and flipping houses. If you want to learn more about how that works, I have a book I give away for free called How to Be a Real Estate Investor, or you can learn more about my apprentice program. I also have a great playlist on the acquisition of rental properties that I strongly encourage you to watch as well.
2 - Real Estate Professional
The second component is that the IRS must recognize you as a real estate professional. And the IRS code requires you have 700-plus hours to qualify as a real estate professional. For you to take advantage of this shortcut; earn a high income and then deduct the expenses from your rental property against your income, the IRS requires you to be a real estate professional. If you're not a real estate professional, this isn't such a great shortcut because all the expenses generated, all the depreciation you create from your renovations can't be used to offset your active income. Instead, it sits there for years into the future to reduce against your passive income from your additional rental activities and you don't get the power of this shortcut.
So, you need to be a real estate professional. Some of you think you don’t have 700+ hours a year to put into real estate, but many of you spend more time than that sitting on your phone, reading political blogs. If you are serious about financial freedom through real estate, then you should put the time into this.
3 - Distressed Trophy Rental Properties
The third component is crucial for bringing all this together. You will no longer look at rental properties based on how quickly they will be net positive cash flowing, where you simply put the down payment down and have instant cash flow. That is not going to help you get this shortcut. You need distressed trophy rental properties that require work or upgrades.
It could be as simple as turning a single-family home into a vacation rental, where you invest in $20,000 or $30,000 of improvements in upgrades and furniture which can all be deducted. Or it also could be a property that legitimately needs to be fully rehabbed. Either way, that's where the magic happens, because now most of your renovations and improvements become tax deductions. You create a huge loss from your acquisition of your rental property, and that loss goes against your high income because you're a real estate professional. That's the combination. That's how these tax provisions become a shortcut to real estate freedom.
Shortcut to Real Estate Freedom
If have all three of these components, you can apply this shortcut year after year and drastically accelerate how fast you acquire rental properties. Now you're not in the graduated tax trap where you make more money but give more to the IRS. Instead, you get to generate as much money as you want and buy as much real estate as you can with that generated income. It's an awesome shortcut.
Disclaimer: For tax advice or legal advice you need to consult your CPA or your accountant. I can’t give you advice, but I can give you general ideas. This is for information purposes only.