Why Tax Reduction Isn't an Earned Income

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Why do you want to invest in real estate? Maybe you're thinking of it as a means to supplement your retirement income or get your family out of debt.

Or perhaps you have dreams of owning your own home and are willing to do whatever it takes to make that happen.

Whatever the reason, you have probably been impressed by the number of self-proclaimed real estate gurus who are eager to teach you how to make money in real estate. They promise to show you how to make fast cash, how to make tons of it, how to turn just about any property into cash in just days. You believe them, and you decide to give real estate investing a try.

You get out the pad and pencil, and you begin the investing education yourself. You learn the basics, and you also learn some more advanced techniques. Perhaps you've even attended a seminar and learned the answers to all your questions, and you are ready to leap out of bed in the middle of the night to find a property in your area or a property nearby. That's when the investing guru says to you: "Buy that house now! You'll be a millionaire by tomorrow morning!"

As promised, tomorrow morning, you wake up with a slight panic in your stomach. You look around, and the house is gone! The guru had you "buy" a $50,000 property, and you spent three months and all your savings on buying a house with a much lower purchase price, but with the same amount of improvements! 

So you go back to the guru and complain about the $50,000 purchase price and the missing house! This time, the guru is willing to go easy on you and give you a break on the costs of the property! After months of investing and sweat, you get the hang of real estate investing, and you are now an expert in a matter of months!

But wait... you were all set to be a millionaire after only a short period of time of investing, and you were getting regular income each month from your investing, but then the market went south. The house had already depreciated by 50% from its purchase price. And while you can afford to pay the loss on the property, you can't afford to pay the losses on the loan you took to buy the property! So the guru says to you: "Sorry, buddy, but you've hit a brick wall! You need a break and a moderate mortgage loan!"

This is when the real estate guru says to you: "Now hold on there! Why are you getting a break on loan? The money you are making from your real estate investing is already considered income for tax purposes. 

The loan you are getting is considered an income reduction for the interest and points! And those are not deductible for the taxes either! So I'm going to make it up to you from equity given to you by the government!" And that's precisely what the government does.

"Tax reduction is also given to you in the form of equity! And you will be given the opportunity to sell your equity after some time. The equity you receive is treated as capital gain! This capital gain is treated as ordinary income and is taxed at a capital rate - 33%! This capital gain will be treated as interest income and is deductible for the taxes!"

This is a very simplistic explanation of tax reduction, but you get the picture. And this is a simple explanation of what is happening.

When a property depreciates in value, its tax basis has actually increased. And this tax basis increase is treated just like the interest income (for taxes). So you would see a change in gross rental income and depreciation. 

When the property depreciates, the amount of depreciation you have will be higher. And this increase in tax basis will also increase the tax basis. Instead of having a tax basis of $100,000, you will have a tax basis of $110,000 (increase in tax basis) $120,000 (increase in gross rental income). You will have more taxable income, which is taxed at 33%. This tax bracket is for taxable income for the current year and then taxed for three years.

I hope you found this article helpful? As you continue your quest for wealth and financial security, the investment strategies laid out in Think Like a Tycoon by Dr. W.G. Hill is the resource you should seriously consider. 

Think Like A Tycoon by W.G. Hill

How to Make a Million in Three Years or Less

I am a real estate investor for 10 years now and personally involved in 40 real estate transactions. With that said, this is the book to read. Read this book if interested in real estate investing. Don't if you aren't.

(Michael - Real Estate Investor)

…NOW is your golden opportunity to turn bargain property deals into 1 MILLION in just 3 years…

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What you have to do to secure your future and avoid becoming another government statistic

It’s simple: Make your fortune from “distressed property”. And Dr. W.G. Hill can show you how.

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