Imagine this – you walk into a bank. You write a note, hand it to the teller, and they give you $100,000 of someone else’s money – KNOWING that it’s not yours. Then on the way out instead of someone trying to arrest you, they stop you to give you an award for taking someone else’s money. Sound crazy? Believe it or not, it is not far from what you can do with the right knowledge.
DISCLAIMER: I am not currently certified as an investment real estate agent. I am not a tax expert. I am not an attorney. If you want to do what I write about here, 1) Consult with a certified investment real estate expert. 2) Consult with an accountant who is thoroughly familiar with the concepts we are discussing. 3) Consult with a tax attorney. 4) Consult with all these folks all the way through the process – not just the beginning.
Now with warnings like that, you must know this is juicy stuff, right? Yes it is. Grab a chair and let me tell you a story.
Back in the 1970s, my dad started specializing in investment real estate. Starting with helping others buy 4 to 8 units at a time, and then putting together limited partnerships where a group of investors would go in together and buy 20 to 100 apartments at a time.
He had a certain way he worked. Let’s say that he raised 2 million. He would buy a run down apartment complex for 7 million. Then he would fix the apartments up one at a time and raise the rents. After a year the apartments often went up over 20% in value. So, he would refinance them, pull out maybe 1 million and buy another complex for 3 million. Again, it would be a fixer upper and again he would fix up the apartments one at a time, raise the rents, etc.
Sounds good, right? Well, like the infomercial says “But wait – there MORE!”
You see because it was investment property, you got to depreciate the building. Back in the day there was a 20 year straight line depreciation available. That meant that if 4 million of the 7 million value was attributed to building, you could write off 200,000 of that each year. So let’s say you made a profit off of the rents of 100,000, you could offset income by the depreciation.
Sounds even better, right? Well, like the infomercial says “But wait – there MORE!”
After owning the apartments 5 to 7 years, they would place them up for sale and buy other units that needed fixing up. HOWEVER, instead of selling them, taking the money and buying something else, this was all done through a 1031 tax deferred exchange. Thus delaying the tax bill.
Sounds too good to be true, right? Well, like the infomercial says “But wait – there MORE!”
There was one set of apartments that my parents bought, fixed up, exchanged out with a 1031 into something bigger, fixed it up, exchanged up into something bigger (all the while writing off the depreciation). Now at the end of this money-making train, there was a bill due. Uncle Sam wanted his money. When they sold the final apartment complex, I believe pretty much every penny was going to have to go to Uncle Sam on April 15th. So, what they did is use a tool called a charitable remainder trust. In this tool, they donated the apartments to a local charity. Because they were donated, that in itself became another tax deduction. And the punch line? After they were donated, my parents still got to collect rent from those apartments for another 20 years.
Imagine going to a bank, they hand you stacks of cash that Uncle wants and they call you a hero for it.
This story is missing many details and laws change year to year and state to state. Do not take me as the expert here. Consult your own. Many agents use real estate as their retirement income. Extremely few really know just how many benefits they can reap. Oh, by the way that charity STILL treats my family like gold all these years later.
If this interests you, I suggest that you follow an expert that I follow here on the Rain. Her name is Celia Moore. Her blogs are clear and concise – not confusing and longwinded. She can show you far more detail about what can be done today and probably even far better strategies than I have ever heard of.
See you at the bank!