8/19/12: Surviving the Fiscal Cliff – Ramifications for Real Estate Investors

What do the ancient Mayans and today’s financial pundits have in common?

They both predict doomsday at the end of 2012.

Perhaps you’ve heard about “taxmageddon” and the “fiscal cliff” the U.S. economy is headed toward? It’s when the expiration of Bush-era tax cuts converge with across the board spending cuts effective January 1st, 2013.

As you may recall, during “The Great Debt Ceiling Debate” last summer, Congress and the Obama Administration couldn’t agree on how to reduce the deficit (much less balance the budget). But they needed to raise the debt ceiling or (gasp!) Uncle Sam’s checks might bounce.

So, they raised the debt ceiling anway (shocker) and agreed to form a committee (great…we were just running low on committees) to come up with a deficit reduction plan.  Funny, we thought it was Congress’s job (not some 12 person council) to come up with a budget, but maybe their budget building muscles have atrophied.

Anyway, the deal was that if the commitee / Congress / Obama Administration didn’t get a it done by December 31, 2012 then the Bush
era tax cuts would expire. This is a defacto tax increase heaped upon the Affordable Healthcare program (“Obamacare”), which was deemed a tax by the Supreme Court.   In short, more taxes and more money going to the government.

So that’s the revenue side.

On the spending side, there’s an across the board cut which indiscriminately reduces discretionary government spending. While we’re tempted to comment on this, it isn’t the topic of this episode, so we’ll bite out tongues (ouch!).

So what in the world does all this mean? And most specifically, what does it mean to real estate investors?

To find out, we take our mobile microphones to Scottsdale, Arizona.  Sharing perspectives on the impending end of the financial world:

  • Your main Mayan, host Robert Helms
  • Your sheer drop off in talent, co-host Russell Gray
  • Special guest, CPA and Rich Dad Advisor, Tom Wheelwright

The topic for this episode came up while we were attending a Rich Dad Advisor retreat.  Now, we’re not Rich Dad Advisors…more like
groupies…but our friend Robert Kiyosaki is kind enough to let us hang out with his team from time to time, so we found ourselves in
Scottsdale in August.  But don’t worry, we packed our parkas.

Our most burning …get it? Scottsdale in August…burning…?  Okay, that’s dumb.  So, our hottest question for Tom is: with only 4 months to go until the end of the world, what final preparations should real estate investors be making?

Tom cools us down by assuring us these tax increases largely apply only to those who actually have a tax liability. Then he
reminds us that real estate investors who are properly set up should have next to no liability.

Huh?

That is, Tom says that the tax rates mostly apply to TAXABLE income, not ALL income.  So if you use all of the great deductions available to real estate investors you can actually conform to the IRS code and still largely avoid any personal exposure to the tax increases.  Cool.

He goes on to say that most real estate investors shouldn’t be paying any income tax at all.  (But don’t worry, we make up for it with lots of property taxes!).

Of course, there are still the concerns about the overall impact of more money being sucked out of the private sector and into the public sector.

Just like running a business, if you pull resources away from the departments that generate revenue (marketing, sales and production) and spend it on those that don’t (accounting, legal, administration, etc), your business grows slowly.  Too much and it shrinks.  Keep it up long term and you’re out of business.

Now some argue that the spending cuts offset the tax increases, so the net affect on the private sector is minor.  In other words, even though businesses and individuals have less money to invest and spend,  government is using less.

But that doesn’t make sense to us.

Think about it.  If you’re spending more than you earn (which Uncle Sam does by over a trillion dollars per year), and you cut your
spending (which is good), but only by a fraction of your deficit, then you’re only going further into debt more slowly.

It’s like bailing water in a sinking ship. Unless you can bail it out faster than it’s coming in, you’re still sinking. Not that you shouldn’t try, because thinking slowly is better than sinking fast.  But it’s foolish to think that you’ve solved the problem.  You’re still sinking.

More importantly, if the government is taking more away from the private sector (tax increase) and recycling less to the private sector (spending cuts), then it’s a double whammy on the private sector while the public debt continues to grow.

So what’s the answer?  We don’t know.  We’ll leave that to the politicians and bankers (feel safe now?) since we can’t directly control it anyway.

The point is that for the forseeable future, the American economy is likely to struggle.

But you don’t have to.

Using effective tax planning, Tom says you can substantially reduce your taxes.  Then (we say) you can use the money you save on taxes to invest in helping heal America one property at a time – all the while improving your own financial strength.

Abraham Lincoln said, “The best way to help the poor is to not become one of them.” Brilliant!

As people in American get poorer, they will need affordable housing. Right now, there’s a ton of inventory in disrepair in the wake of the foreclosure crisis.

But investors can step in and purchase these properties well below replacement cost and the outstanding loan balances. This gets the bad debt out of the way, and allows the property to be re-habbed and put back into service. That ‘s good for the the tenant, the community, the economy and the investor.

Plus, with each property you acquire, you also pick up a fresh depreciation schedule to mitigate your tax liability.  You get more properties, more income and less tax!

Very cool.

So listen in to CPA Tom Wheelwright as we talk taxes on The Real Estate Guys™ radio show!

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