07/26/15: Tax Reform and Real Estate Investing with Steve Forbes and Grover Norquist

Tax policy can be a VERY polarizing issue.  Just think about what happened in Boston in the late 1700’s.

However, tax considerations play a big role in the decisions real estate investors make when choosing markets, financing structures and hold terms.  All diligent real estate investors spend a lot of time with their tax strategist to manage their portfolios for optimum tax benefit.

But most of that work is done inside the tax code…which grows out of the tax statutes passed by Congress…which grow out of tax philosophy, AKA tax policy.

Working backwards… tax policy is what gives birth to the tax code.

So if tax POLICY changes, then it will directly affect the tax CODE…and YOUR strategic investment decisions.

And it’s not just you, the small time real estate investor, who’s affected.  There’s also the big REITs, hedge funds and mega-millionaire real estate investors.

But it’s even BIGGER than that.

Consider how tax strategy impacts the decision making of corporations, small businesses and bond investors (where much of the money we borrow to buy real estate comes from).

So any proposed tax reform, whether we agree with it or not, has the potential to DIRECTLY impact the flow of capital, the expansion of supply and the formation of jobs…in YOUR local markets.

To talk about the current state of tax reform as the U.S. heads into a major election year:

  • Your well-formed host, Robert Helms
  • His deformed co-host, Russell Gray
  • Tax reform activist and author, Grover Norquist
  • Billionaire, author, former presidential candidate, Steve Forbes

If you’re familiar with our guests, you already know they share a particular slant when it comes to tax reform:  smaller and simpler is better.

You may or may not agree.  That’s okay.  While Steve Forbes and Grover Norquist may want to persuade you to their particular philosophy, that’s not what this episode is all about.

The fact is that we’re headed into a major election year.  It’s one that promises to include heated debate about how best to improve the state of the U.S. economy.

And a big part of the discussion will include what to do about the enormous and complicated U.S. tax code.

If Donald Trump is right when he says all the politicians do is talk but nothing happens, then maybe you don’t need to pay much attention.  After all, the tax code hasn’t changed much since Ronald Reagan pushed through the Tax Reform Act of 1986.

BUT…if you’re a geeky student of economic history like we are, you may recall that quite a few MAJOR events occurred in the wake of the last major tax reform…such as the Black Monday stock market crash of 1987 and the real estate bust of 1989.

However, we’re not here to dissect the 1986 tax reform act.  We encourage you to go back and study it for yourself.

The point right now is that MANY inattentive investors…both real estate and stock…got CRUSHED by the ramifications of tax reform.

squeezing-balloonIt’s called The Law of Unintended Consquences.  We call it the “squish” factor.

If you’ve ever squeezed a balloon in your hand, you know that under pressure the volume of the balloon will move…sometimes very rapidly…and pop out someplace.  But you can’t always predict when and where.

Sometimes politicians mean well (stop laughing…sometimes they do)…but the road to you know where is often paved in good intentions.

Again, we’re not saying tax law should or shouldn’t be reformed.

But if tax reform actually happens, it often means good and bad things happens…some anticipated and some not.

All that to say, we think paying attention to the potential for serious tax reform is an important use of time…especially when political change is in the air.

So we decided to sit down with two of the most outspoken proponents of tax reform, Grover Norquist and Steve Forbes.

Grover Norquist is the President of Americans for Tax Reform, an organization that was formed in 1985 at the request of then President Ronald Reagan for the purpose of advocating for the tax reform which was eventually enacted in 1986.

In a nutshell, the objective is to reduce the burden of taxes on the private sector so those resources can be redirected to more productive uses.

The thesis is that less tax means more growth, so even though the percentage of tax is a smaller part of GDP, the actual taxes collected are higher.

Does it work?

For our purposes, it doesn’t matter.  What we want to know is how businesses and individuals respond to it…or are likely to.

Norquist advocates for a lower corporate tax.  He says at 35% (which is higher than both Greece and France), the current corporate tax rate is a de-motivator for economic growth and job creation in the U.S.

So Norquist wants to see the corporate tax pushed down to 20%, which he says is about “average” among the major developed nations.  At this rate, he says, the U.S. is on a level playing field to attract and retain major employers.

Our question is…and if you know any CEOs or if you are a CEO of a major company, please let us know…what do CEOs think?  Will a lower corporate tax motivate corporations to stay, expand or move in to the U.S.?

We want to know because where jobs are likely to grow and stay is a very important consideration when choosing which geographic markets to invest in.

Norquist also favors the elimination of taxes on savings and investment.

This is the exact opposite of the reported position of presidential hopeful Hillary Clinton.  She’s calling for an INCREASE in capital gains tax…to nearly 40%.

However, Clinton says this will only affect the .5% who earn more than $412,000 a year.

(Note: You should go look up how many people the original income tax was supposed to affect…and compare it to how many are affected today…)

But if you flip houses, it’s easy to get over $412,000 a year in total income.

Think about how paying DOUBLE the capital gains tax would affect YOU.  Would you be able to do more…or less?  Would create more work for your teams…or less?  Would the higher tax create more jobs…or less?

Our next guest, Steve Forbes has a very simple proposal…one he’s been advocating for nearly 20 years.  One thing you can say about Forbes…he’s persistent.

Steve Forbes’ proposal is to simply implement a flat tax.  It’s an idea that GOP presidential hopeful Rand Paul is advocating for.

Forbes’ contention is that a flat tax frees up about 6 billion hours a year currently dedicated by businesses and individuals dealing with today’s highly complex tax code.  He believes when this time and effort is redirected into innovation and production, job creation wouldn’t be far behind.

We don’t know which, if any, tax proposal will ever see the light of day…or if one does, what at the actual effect will be.

But we do know what of the four largest states in the Union…which are New York, California, Texas and Florida…two have gained the MOST jobs over the last decade while two have LOST the most jobs.

According a data we say presented by economist and former Wall Street Journal editor Stephen Moore…New York and California are the losers, while Texas and Florida are the winners in terms of both job growth AND net migration growth.

And it so happens that the losers happen to have the HIGHEST tax burden, while the winners have NO state income tax.

Coincidence?  Maybe.

But if you’ve been watching TV lately, you may have seen ads for StartUp NY, which is a state government sponsored initiative that “offers new and expanding businesses the opportunity to operate tax-free for 10 years” as a way to create jobs in New York.

They say imitation is the highest form of flattery.  So perhaps this is New York’s way of tipping its hat to Texas and Florida?

We don’t know.

But we do know that two of the BEST real estate investment markets have been Texas and Florida.  Not surprising since people and jobs are the two biggest factors which drive real estate.

The bottom line is that tax policy affects real estate investors…so it’s worth paying attention to.  Especially in a major election cycle.

So tune in and listen to what our expert guests have to say about some of the current tax reform proposals being floated around…and consider how any such reform might affect you and your real estate investing.

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02/22/15: New Tax Regulations Every Real Estate Investor Must Know

It’s said the only things which are certain are death and taxes.

We think this could be modified to DEBT and taxes….especially when you consider the relationship between the two.  BUT…we’ll put our tin-foil hats in our lead cased fire-proof safe and focus on the tax…er, task…at hand.

We were out in the Phoenix area to visit Robert Kiyosaki and decided to pay a quick visit to a nearby friend and tax guru.  We’d heard there was a new regulation all real estate investors need to know about…

Talking taxes in the top of office to Tom’s tower…

  • Your regular host, Robert Helms
  • His irregular co-host, Russell Gray
  • CPA, best-selling author and Rich Dad Advisor, Tom Wheelwright

Let’s face it…taxes are NOT the most titillating topic.  After all, we’d all much rather focus on MAKING money, than spending dozens of hours and thousands of dollars tallying up how big a slice to send to the tax man.

And of course, just when you think you’ve got everything dialed, the tax man changes the rules of the game and hopes you’re not paying attention.  It’s a constant and unproductive game of cat and mouse.

SO…

If you decide to play, you’ll need to find a way to keep up on the changes.  And then organize your activities to utilize EVERY deduction you’re entitled to.  That’s why you want a great tax advisor on your team.

Robert Kiyosaki makes a lot of money.  The guy he depends on to minimize the tax bite is Tom Wheelwright.

Tom Wheelwright CPA is the author of Tax Free WealthTom’s a bit of a nut job.  He actually LIKES taxes.  Weird.  But there’s no accounting for taste.

But thankfully, guy’s like Tom are out there.  And he pays attention to all the things that affect real estate investors.  So when he called and told us about some new tax regulations, we wanted to learn more.

Of course, we brought along our microphones and captured the conversation…because that’s what we do.

Keep the Main Thing the Main Thing

When it comes to taxes, it’s so easy to focus our efforts on paying LESS.  Sounds good, right?

Of course, the easiest way to pay less tax is to make less money…so be careful what you wish for.

Tom says your focus should be on MAKING MORE MONEY…and that’s also true when selecting an advisor.  That is, your advisors are investments…just like your real estate…and you should select them based on their potential to MAKE you money.

It’s a subtle, but important difference.  Otherwise, the temptation is to think of them as an expense…hire the cheapest, and get costly results.

The goal is to INCREASE the amount of money you pay for advisors, taxes, interest and insurance…and have those investments decrease as a percentage of your income.

To Change Your Tax You Must Change Your Facts

This is no different than the person who buys a horrible property in a terrible area and rents to the tenant from hell…then shows up at some poor property manager’s doorstep with a problem they need fixed.

In other words, if you want the property’s performance to improve, the conditions and circumstances need to change.  A property manager can only do so much with a bad situation.

The same is true for your taxes.

To get a beneficial tax result, you need to create better factual circumstances.  But it’s much harder to rewrite history, so it’s wise to understand basic taxation principles in ADVANCE, and then conduct your affairs in such a way that you create the most favorable tax result as you go along.

Obviously, this means getting an education and working closely ALONG THE WAY with your tax advisor.

Duh.  But knowing you need to do it and actually doing it are two different things.  So DO IT.

This Promises to Be a Crazy Tax Year

Tom tells us there are a number of items which are making tax filing a little more…taxing…this year.

The biggie is the new repair regulations.  Without getting lost in the weeds, the short version is that the IRS has issued new regulations designed to clarify a specific area of tax law which affects ALL real estate investors and most small business owners.

It has to do with how certain expenses are classified and whether they are treated as capital or ordinary expense.

Yeah, we don’t get it either.  That’s why you need a guy like Tom.

The point is that if it affects you…and if you own investment real estate, it probably does…then you’ll have to file one (or more!) of Form 3115 Change of Accounting Method.  So be sure to ask your tax advisor before you file for 2014.

The Affordable Care Act is making things more complicated for individuals and small businesses this year also.  But that’s been all over the news, so you’re probably aware of it.  If not, your tax advisor will help you.

A couple of other items Tom says to keep an eye on are President Obama’s proposal to charge capital gains tax at death (yes, it’s true…death and taxes together again);  and a proposal to change the “carried interest rule”, which would effectively cause real estate developers to pay ordinary income tax on certain items which are currently classified as long term capital gains.  Ugh.

So listen in to CPA Tom Wheelwright and find out what’s happening and how it affects you!

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9/21/14: The Big Picture – Structures for Protecting, Preserving and Passing Your Wealth

Part of successful investing is good organizationMost people we know (ourselves included) would like to be more organized.

When it comes to investing and wealth management, great organization is more than just a convenience.  It’s a necessity.  Otherwise you risk losing everything you’ve worked so hard to build.

So while doing deals and chasing profits is exhilarating, there’s a bigger picture every investor should be proactive about attending to.

Because the worst time to find out your asset protection and estate planning strategies are inadequate is when you need them.

In the very organized mobile studio for this episode of The Real Estate Guys™ radio show:

  • Your very adequate host, Robert Helms
  • His inadequate and disorganized co-host, Russell Gray
  • Returning guest, new Summit at Sea faculty member and estate planning attorney extraordinaire, Jeffrey Verdon

When we were little boys, we played a now classic Hasbro board game called Chutes and Ladders.  

The premise is simple.  Your goal is to climb up the ladders to the top of the board.  You get opportunities to climb up when you land on “good decisions”.

But if you land on a “bad decision”, you slide down a chute to the bottom of the board…effectively wiping out all or part of the gains made from your good decisions.

Yes, it’s true…Chute Happens.

It reminds us a lot of real estate investing.

Because it’s easy to get excited about the thrill of climbing the ladder of investing success…finding deals, organizing funding, managing cash flows.

Heck, for hard core real estate enthusiasts, even dealing with some of the land lording hassles is actually fun.

A good entity structure and estate plan can take your portfolio from chaos to orderBut because investors and entrepreneurs tend to be optimists, we are prone to procrastinate about paying attention to protecting, preserving and passing on the wealth we work so hard to accumulate.

It’s just not as fun.

However, negatives can’t be ignored.  Because sooner or later, EVERYONE has to deal with negatives.

Real estate is the most litigious of all asset classes, but even if you’re among the fortunate few who never end up in a lawsuit…eventually everyone dies.  And it’s hard to think of anything more negative than that!

But estate planning is more than just organizing your affairs in preparation for your death.  It’s about risk mitigation, tax management and wealth preservation.

The good news is it’s a lot like constructing a building.  It takes a lot of planning and effort on the front end, but once it’s built, the maintenance is fairly manageable.

So what does that look like?

Well, it’s far too big of a topic for a simple blog or podcast.  But our guest Jeffrey Verdon gives us some important pointers.

Like designing a building, first you need to decide what you want the finished product to look like…how you want it to function.  You don’t have to know all the details.  It’s just a big picture design.

Then, you get the “engineers” (attorneys and tax advisors) involved to design it according to your big picture plan.

And just like a real life construction plan, you’ll probably have to make concessions between what you want, what is structurally sound, and what is cost effective based on your budget.

Once it’s designed and engineered, then it can be constructed.

To switch metaphors, think of it like a closet organization project in advance of a shopping spree.

First, you lay it all out.  Then you build it.  Then you put the stuff you already have in the correct places.

Now when you go shopping and come home with all your treasures, there’s a proper place for everything.

And if you are disciplined to keep up on the maintenance, you can keep it fairly organized all the time.

Coming back to real estate…

With a proper entity structure and estate plan, you know where everything goes when you come back from a shopping spreeWhen you have your structure in place, and you know how to use is, when you go out shopping for properties, signing documents, receiving checks and conducting business, you know where everything goes.

Jeff says the most common mistake most real estate investors make is either holding all their properties in their own name, or holding them all in just one entity.

Another common mistake is holding them in a corporation…even an “S’ corporation.

Remember, the time to find out your entity structure isn’t well designed to protect your wealth from creditors, predators and over-zealous taxation isn’t when the challenge is upon you.  When it comes to asset protection, tax management and estate planning, it's best to be proactive

It’s best to prepare for the inevitable storms of life before the dark clouds roll in.  And it starts with getting educated.

So listen in as we talk big picture planning with attorney Jeffrey Verdon!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

3/14/10: Hedging Your Real Estate Bets with Life Insurance

Are you kidding?!?  Life insurance?  What does life insurance have to do with real estate – and how can it help a real estate investor succeed?  Good questions!  So we turned to one of the foremost experts on the creative uses of life insurance and learned how to add another powerful financial tool to our investor’s tool box. Check it out!

Backing the hearse up to the studio doors:
•    Chief Undertaker and Show Host, Robert Helms
•    Pallbearer for Hire and Co-Host, Russell Gray
•    Hearse Driver and “The Godfather of Real Estate”, Bob Helms
•    Non-traditional Financial Planner, Kim Butler

Let’s face it.  Most people would cross the street to avoid a life insurance salesman.  Who wants to spend a bunch of time talking about dying?  Worse, who wants to spend money on a product you hope you never use – and when you do, all the benefits go to someone else? Yuck!

That’s what we thought until we met Kim Butler.  Kim calls herself a “non-traditional” financial planner, which had us liking her right away.  If “traditional” means turning your money over to the Wall Street Wizards to play with, we’re not fans.  So we’re very interested in what Kim has to say.

Kim teaches what she calls “Prosperity Economics” and what it means to real estate investors.  Sitting here wallowing in the Great Recession, “Prosperity Economics” sounds pretty good!

The first thing Kim tells us is that life insurance “done right” means benefits to the LIVING! What a great concept!  She says rather than waiting to die to “enjoy” (we use the term loosely) the benefits of life insurance, she explains how life insurance is a powerful financial tool in the here and now. We like it.

One of our FAVORITE parts of the discussion is when Kim reveals how one particular type of life insurance has amazing similarities to real estate as a financial tool.  Even better, she tells us how savvy investors actually use life insurance not as an investment, but as a cash management tool.  Very interesting!

We came away with pages of notes – and are still hungry for more!  Look for a follow up show on this intriguing topic in the near future.

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1/24/10: Practical Tax Tips and Insight with CPA Tom Wheelwright

It’s the most wonderful time of the year….

Not Christmas. Tax time!  This is the time of year when all the bills from the holidays show up in the mail, along with your 1098’s, 1099’s, W2’s, 1040’s and our personal favorite, the K1.  Let the fun begin!

Before you tune out, we invite you to listen to our recent interview with CPA Tom Wheelwright.  He promised us he could make taxes fun, to which we said, “Great!”

So we broke out some month-old eggnog, stoked the fire in the fireplace, and tossed a few chestnuts into the pan for some good old fashion roasting.

Huddled around the microphones to talk taxes:
•    Your Host, Robert Helms
•    Co-host and Financial Strategist, Russell Gray
•    A man who has probably paid more taxes than everyone else on the show combined, The Godfather of Real Estate, Bob Helms
•    Certified Public Accountant, Tom Wheelwright

Like little kids on Christmas morning, we came into the studio to open up gifts of tax wisdom from one of the brightest real estate tax advisors we know.  After a few opening comments, we got Tom Wheelwright on the phone and started the grilling.

Tom opened up with some paradigm breakers as he explained that taxes are not only fun, but actually a very powerful tool for wealth creation.  Wow! Sounds good to us!

Then we asked him, “What are the most common and costly mistakes most real estate investors make?”  One of his answers astounded us when he told us about a special form every investor should know about, but few use properly.  Getting it wrong can cost you many thousands of dollars!

It would be sacrilegious to talk taxes and leave out 1031 exchanges, but for most experienced investors, the 1031 is old news.  And in today’s challenging economy with so much equity in hiding, who cares about a 1031 anyway?  So Tom gave us some great tips on why we might NOT want to use a 1031 exchange.  What????

Now that the eggnog was kicking in, we got into some of the tax changes for 2010 (and beyond) that affect real estate investors.  Then he gave us the inside scoop on how to find a great real estate CPA.

Before we knew it, the show was over!  Time flies when you’re having fun.  The topic wasn’t as taxing as we thought!

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