Transcription
Welcome to Part Two in this special two-part video series about taxes. Now, if you're new to wholesaling and flipping, and as you start to increase your income flipping houses, learning ways to save on taxes is a smart move. But once you start to really make a lot of money from flipping houses—which I hope you do—you're going to fall into the higher tax brackets and owe a lot of money in taxes, like me.
On this video, I'm going to show you what the rich do to make millions and not pay any taxes, and why I strategically don't do what they do to avoid taxes. And why all that and more—coming up. This video is brought to you by Fast Track, a partner program where Jerry Norton will fund your deals and mentor you. Learn more at fasttrackwithjerry.com.
If you're new here, I'm Jerry Norton. I went from dead broke to millionaire flipping houses, and after doing a thousand deals, I created this channel to help you master the art of wholesaling and flipping real estate so you can live your dream life. Be sure to subscribe and click the bell icon to get notified when new videos are released. My 2020 combined federal and state income tax was 1.4 million dollars. So, as you can—I'm good, Tyler, I'm good, I got it today. All right, thank you, though, for the stress reliever.
But as you can imagine, guys, my tax planning and tax strategy is a big part of my overall business and life planning. While tax strategy and tax planning is not something that you need to worry about too much until you start making a lot of money, planning for that now can have a huge impact on the decisions you make right now, today, even if you're just starting out. Now, I hope this video will help you avoid making big mistakes that you'll regret later. Too many people follow the wrong advice early on, even if well-intended.
If you don't plan on becoming a millionaire, then disregard this video. But if you plan on creating financial stability, then financial freedom, and then long-term wealth, especially generational wealth, so that you can live the life God intended for you, then keep watching. This video is for you. In Video One in this series, I covered a simple breakdown of the IRS tax code and how you can create deductions to lower your taxable income. I also talked about how, if you're really successful flipping houses—which I hope and pray that you are—even after taking all of the deductions, you could end up paying as high as 60% of your taxable income to the IRS.
Now, if you missed that video or need a refresher, stop this video right now and go and watch that, and then come back. I'll put the link to that video in the description below for you. On this video, I'm going to break down and hopefully simplify a complex yet powerful tax strategy that allows you to defer taxes from purchasing certain types of assets by taking a non-cash depreciation write-off. I'll explain, so keep watching. And I'm also going to explain why, up until now, I intentionally haven't used these methods to save on taxes and why I don't think you should either.
Now, you see, I'm going to let you in on a little secret that the rich do that I'm sure you're probably aware of, but you don't quite understand how it's possible. Most of the really savvy wealthy make millions of dollars yet pay hardly any taxes, if any at all. And I'm not talking about professional athletes or movie stars; most of them are morons when it comes to wealth retention and are bankrupt the minute their careers are over. My CPA calls this lightning in a bottle income; I call it flash-in-the-pan income. According to the Webster dictionary, the definition of flash in the pan is: one, a sudden spasmodic effort that accomplishes nothing; and two, one that appears promising but turns out to be disappointing or worthless. In other words, money that did not require sound business practices to create or retain and has gone as fast as it came.
What I'm talking about is smart wealthy people who, after years of discipline and hard work, have learned how to not just make money and grow money, but retain most of their wealth. What this class of wealthy people understands that nobody else understands is the power of acquiring assets that allow them to write off the depreciation. Now, to understand depreciation as a tax benefit, let's say that you own a delivery business and you purchase a $70,000 delivery truck. Well, since that's an expense to the business, as the business owner, you want to deduct the cost of buying that truck, and rightfully so; it's a cost of doing business. However, the IRS says, "Wait a minute, that truck has a lifespan of seven years," or in other words, it depreciates in value over seven years. So, instead of expensing the entire purchase all at once, let's spread it over the life of the vehicle and then expense $10,000 a year for seven years.
Now, think about this for a minute, and then I'm gonna use real estate as an example. Let's say that, after the cost of buying that truck and the operating cost of the business, that truck allows you to make $10,000 in annual net taxable income from doing deliveries. That means it makes you $10,000, but you were able to create a non-cash depreciation write-off of $10,000 that year, thus eliminating any taxes owed on the income that that particular asset produced. Now, I hope that makes sense. If it doesn't, go back and listen to that part again. Let's use real estate and keep it simple with single-family homes. Let's say that you buy a rental property for $135,000, and let's say that, of that $135,000 purchase, $25,000 is attributed to the land value. Since land doesn't depreciate, the IRS requires that you back out of the purchase the land value, and you look at just the structure, or the house, which now has a baseline value of $110,000. Now, the IRS tax code says you can depreciate that $110,000 house over 27.5 years. So, if I take $110,000 divided by 27.5 years, then $4,000 per year can be depreciated, thus creating a non-cash deduction from your taxable income every year for 27 and a half years, just for buying that one asset.
Now, keep in mind, depreciation write-off is only a tax deferment. If and when you sell the property at any point in time, you would recapture the depreciation write-off and owe all the tax. And I'm only talking about the tax benefit of depreciation; I'm not even talking about cash flow from renting the property or appreciation gained over time. Those are different benefits to owning rentals. And here's the best part: it doesn't matter if you finance the asset; you still get to write off the entire depreciation based on the purchase price less the land value. So, think about it this way: I mentioned in Part One of this video series that my 2020 combined tax bill was $1.4 million. So, understanding what I just explained about non-cash depreciation tax deduction, how many single-family rentals would I need to own to completely wipe out my $1.4 million tax bill? Watch this: assuming they were all identical and I purchased all of them for $135,000 and the land value was $25,000, making the baseline depreciation $110,000, that means I could write off $4,000 per property every year for 27 and a half years. If I owned 350 of those babies, I would not owe a penny of the $1.4 million I just paid in taxes. Why? Because 350 rentals times $4,000 in annual depreciation per property is $1.4 million in depreciation write-off, which would completely eliminate my taxable income.
Now you know why the rich don't pay taxes. I'll never forget, during the 2020 presidential debates, what Donald Trump said when he was getting drilled for not paying taxes. He said, to the effect, "Some years I pay millions in taxes, and some years I don't pay any taxes." He said, "That's not my fault; that's how the IRS tax code is set up." Now you know what he's talking about. He buys and owns enough depreciating assets to wipe out his taxes. And honestly, like him or hate him, you can't blame him for using the IRS tax code to not pay taxes; that is flipping genius.
Now, guys, depreciation can get pretty complicated with the IRS. Certain assets, like multi-family and hotels, can have a cost segregation analysis where you can depreciate certain things faster than others and take even bigger write-offs. And check this out: there are some assets that the IRS gives a bonus depreciation, which allows you to accelerate the depreciation write-off really, really fast. Ever wonder why rich dudes have private planes? Because of the super depreciation write-offs. As of this recording, if qualified, you can depreciate the entire purchase of a plane in the first year—oh, $5 million in taxes—instead of paying the IRS, buy a $5 million plane and write off the entire purchase and don't pay taxes that year.
So you may be thinking, "This is a no-brainer. I got it, Jerry. Make millions of dollars by depreciating assets and don't pay taxes. This is easy." Not so fast. There are two huge considerations when buying any type of asset. Number one: an asset needs managed, which, if done correctly, can make money, but if managed poorly, it can be an expense and cost you a lot of money, defeating the whole purpose of acquiring the asset in the first place. And the second consideration is: don't forget, if you ever sell the asset, you recapture the depreciation write-off, and you owe all the taxes, also defeating the purpose of buying the asset in the first place. Bottom line: you better know what you're doing when you start acquiring assets for the purpose of creating depreciation write-offs. That's the part no one wants to talk about.
Why did I pay $1.4 million in taxes in 2020? I'm going to tell you, and this is going to go against all of the conventional wisdom that real estate investing experts will tell you. They all say, "Buy a rental, earn cash flow, get the depreciation write-off, and over time it will appreciate in value, and you do it enough times and you'll become wealthy." I completely disagree and think this is terrible advice for most people, especially early on. Here's why: all wealthy people understand a fundamental principle, and that is their first priority is to create massive income. Most build businesses that produce a lot of cash. I refer to this as printing money. Wealthy people hyper-focus on creating a printing press that kicks out a ton of cash, and that business is like a golden goose that, if taken care of well, keeps laying golden eggs, and they do not take their eye off the ball.
Until recently, I have not put any attention into acquiring depreciating assets. Why? Because buying assets requires management of those assets; it takes brain space and bandwidth and people and processes that are outside of my wheelhouse of flipping houses. In other words, buying and managing depreciating assets is a distraction from my printing press. Now, I've been flipping houses full-time for 17 years and teaching people how to flip houses for 11 years, and I make millions of dollars a year doing it. Although I could buy a plane, write off the purchase, and not owe any taxes, now I would have a plane to take care of that needs a pilot and a hangar and maintenance and so on. It's an asset that needs attention, and the attention I would have to dedicate to manage that asset would distract me from the golden goose. And if I managed it poorly, it would be a very costly asset to own.
Here's what I'm trying to tell you: I know a lot of people are going to disagree with what I'm about to say, which means I'm going to get a lot of heat for this, but I don't care. If you don't yet have your very own golden goose, if you're not printing so much money you don't know what to do with it, then stop trying to acquire assets like rentals and instead hyper-focus on making massive income first. And just so you know, rentals do not print money. Making $200 or $300 a month in cash flow is not printing money. Flipping 100 houses a year, making a million dollars in profit—that's printing money. Then, once you have your very own printing press, then maybe, then consider acquiring assets.
Years ago, when I started making a lot of money, here's the conversation I had with my CPA: he said, "Jerry, you have two options to handle being in the highest tax bracket. Option number one: stop focusing on what you're really good at and stop creating more taxable income, and instead divert some or most of your time and energy into buying and managing depreciating assets to lower your taxable income. Or option two: keep doing what you're really good at and do it even better and don't get distracted by the managing assets, and instead print even more money, pay the super high tax, save all the brain damage of owning and managing assets, and stop pissing and moaning about taxes." So, up until recently, I've chosen to follow that strategy, which has been the best decision for me, and that's the advice I would give you. First, figure out how to create your very own printing press. Now, if it's wholesaling and flipping houses, dedicate everything you've got to master that business. Start by watching all 650 videos here on my channel. Sign up for my partner and mentor program called Fast Track, where I show you how to build a six-figure business and then how to scale it to a seven-figure business. To learn more, go to fasttrackwithjerry.com to register for a free training. And then, when the time is right—and you'll know when the time is right—then acquire assets and eliminate taxes.
For me personally, paying $1.4 million in tax in 2020 was just too much to swallow. I need to start making room in my life and start to acquire and manage assets. This year, I bought my first long-term non-flip asset, a million-dollar lake house in Montana that I'll use as a vacation rental. And over the past 30 days, I bought 14 single-family rentals. And guess what? I'm having to put attention into those assets, even with a really good team and good property management; those assets still need managed, and I'm seriously questioning the opportunity cost of my time, energy, and effort to do so.
Now, I'd love to hear your opinion. Should I continue on the path of owning and managing depreciating assets, or scrap it and instead just print even more money flipping houses, pay the huge taxes, and call it a day? Leave a comment and let me know what you would do. And if you found this video series insightful about taxes, leave a comment and say, "Jerry, thanks for the perspective on taxes; you are a flipping genius." And guys, if you haven't yet, be sure to subscribe to my channel. This is the number one channel on YouTube for all things wholesaling and flipping, and I'll see you on the next video.