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hey guys uh I'm here in my hotel room
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for the moment and I saw a story but the
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New York Times had an expose on Jared
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Kushner
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kerchner robbery say his name is tax
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returns and what a scandal it was so
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this is uh it's the misunderstanding I
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see constantly in the in the tax world
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so oh here's the thing income tax
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returns are on income which is basically
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a modified profit and loss statement
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wealth riches whatever you want to call
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it is a balance sheet concept those two
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are not the same so there are ways that
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people can you know build wealth balance
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sheet and not have any income and that's
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you know perfectly normal and within the
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parameters of counting principles that
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have been established for five hundred
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years
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so what here's a quick example so let's
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say you are an expert art collector so
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you've got this I guess this piece of
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art on the wall here let's say this
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piece of art is worth I don't know two
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million dollars right you are a good
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negotiator you have spotted the artist
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as an up-and-coming person before
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anybody else knows about it and you are
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able to convince somebody to loan you
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$750,000 and that's gonna be the
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purchase price so you have no money in
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the deal and you've spent 750 thousand
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dollars you have a liability on your
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balance sheet of this loan but then you
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also have an asset which is worth
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million bucks so the difference between
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assets liabilities is equity so now you
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have $250,000 that you've just added to
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your personal wealth zero income zero
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taxes so that's you know that's kind of
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what what the story is now in in
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Kushner's case you know he did real
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estate so
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you know real estate is a classic method
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for building wealth because it's a
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highly lendable it is high price so you
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want to do as much a volume in it
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and it has it has it does have favorable
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tax treatment so one of the points that
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the article was making was that you know
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the depreciation covered the income
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which is probably true I mean I haven't
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looked at this guy's tax returns but so
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for people who don't understand that
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concept the the Congress in the way they
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formulated tax code
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over the past 15 whatever years you get
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a a deduction in real estate activities
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and other business activities as well
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but you notice there's larger numbers so
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that you know a portion of the the price
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gets deducted every year so let's say
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you buy a single-family home for you
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know $200,000 and you can take a portion
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of that purchase and deduct it against
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any other activities so if you're
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renting it out for $1000 a month you
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know you have a thousand coming in
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twelve thousand for the year you know -
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taxes - HOA fees - repairs - you know
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mortgage interest things like that
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hey guys I just wanted to make a quick
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comment here while sitting in my hotel
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room I just finish up the rhodium
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weekend conference which is fantastic
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but I saw a story in The New York Times
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about how as another expose on
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presidential taxes this time was the
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son-in-law kushnir Kirchner I'm not
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exactly sure what his name is
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and they were saying how he you know
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didn't pay taxes because you know it was
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he used real estate and tax breaks and
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blah blah blah and it gave the
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impression that well this is unfair and
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it's not right and whatever so didn't
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didn't call I'm
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like they did with Trump but was
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definitely hinting that you know you the
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reader should be upset about this okay
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so I just want to take a second and
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explain the kind of misunderstanding
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that a lot of people have with this sort
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of thing so in what in income taxes you
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have your tax return which is
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essentially a modified profit and loss
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statement you have money coming in you
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certain allowed expenses and credits you
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know depending on things like you know
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family and education and now if you put
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in you know solar panels or there's a
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bunch of credits and deductions but
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basically that's it income expenses that
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are allowed net income for the year and
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then tax based on that okay so that's
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not what wealth is so wealth riches
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whatever you want to call it is a
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balance sheet concept the balance sheet
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is you know your assets minus your
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liabilities has nothing been with income
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income can't affect it but not
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necessarily so it depends on what you're
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doing so just quick example so we got
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this this artwork on the wall here and
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let's say you are an avid art collector
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you're really good at identifying
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underpriced art and you're good at
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negotiating with the artists and
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whatever else so let's say this this
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piece right here is worth a million
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dollars you find it first you negotiate
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with the artist and what have you and
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you get an agreement to buy it for
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$750,000 so you don't have $750,000 or
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you don't want to spend it so you go out
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to a lender in the art world and borrow
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$750,000 so the lender is willing to do
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it because it's worth a million so if
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you don't make your payments you know a
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piece of art and so now your income is
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nothing because you haven't sold
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anything the loan is not income because
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it's long if they back and then you
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acquire an asset worth a million dollars
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and you have a liability of 750,000 in
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the loan so your equity or your wealth
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in the situation is $250,000 so yeah
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that's that that would be a way to
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develop you know build your wealth and
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pay zero taxes perfectly legitimately so
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you know in in the commissioners case it
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seemed to be they were talking about
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real estate and real estate it has you
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know additional advantages that is
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common and in capital equipment kind of
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stuff so part of the tax code whether
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you know book pro after the Trump reform
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or befores the same story some numbers
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changed when you acquire capital assets
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for your business whether it's real
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estate or equipment or you know a
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manufacturing plant or computers or
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whatever a giant lists of possible
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assets you can depreciate them over time
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and what that means is you take a
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portion of the purchase and cut it up
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depending on what it is and what its
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lifetime will be and take a that that
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cut and it's a deduction each year so
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let's say you buy a house for $200,000
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single family home a kind of average
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price in the US and you decide to rent
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it out okay so you let's say it's rents
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for $1,000 a month or 12,000 a year and
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you're gonna have certain operating
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expenses with that you're gonna have
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property taxes you're probably gonna
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have a mortgage interest you are you
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might have an HOA homeowners association
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dues you might have some repairs to do
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you might be paying a real estate
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manager or or real estate agent you know
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commissions to find new tenants you know
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there's a big long list of expenses you
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might have so you have you know you have
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those cash expenses and that's going to
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subtract from your income so then so
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let's just say for the sake of argument
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that you're left with for the year 2000
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dollars worth
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of cash income from the piece of
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property so so you literally have $2,000
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more in your pocket but then you have
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depreciation so the the purchase price
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of that house is cut up into their
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simple numbers of you know one 27th of
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of the purchase so if you if you put 200
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into it your deduction is going to be
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seven thousand dollars a year so so
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you've cashed two thousand in your
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pocket on a tax basis because of
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depreciation you're actually a minus
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five thousand so you have zero taxable
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income
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you actually have negative taxable
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income which could offset other things
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that you might have or roll over to the
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next year and you're not gonna pay any
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not going to pay any income taxes on it
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so because real estate is so easily
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leverageable and that you can get people
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to lend you money for body houses then
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it's very common for real estate on a
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tax basis to run either very close to
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zero or negative and effectively you're
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not paying any any income tax on it and
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that is you know if you ever read Rich
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Dad Poor Dad II that's that's a big part
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of his strategy so depreciation is not a
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cash expense but it is attacked
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experience and you know I a lot of times
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I thought tax magic so the point of the
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article seem to be at least from what I
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read it is that you the reader should be
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really upset about this and it's unfair
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and whatever else and they didn't call
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him a fraud like they did with drunk but
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it was definitely in that same ballpark
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it's trying to stir up some some Envy so
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you know the part that bugs me about is
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like yes maybe maybe this guy had you
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know connections through his family
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maybe he had easier lending could be out
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but the point is these these are very
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basic tax strategies that are available
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to everybody so if you are in the
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business of providing
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capital assets to other people they
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don't like renting out renting out
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houses or if you put your car in tarou
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and rent out your car to other people or
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you know you're driving for uber or you
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I don't have a leasing program for tools
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let's say you know all different kinds
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of business activities part of the
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incentive to do that is that the tax
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code is written in such a way that you
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can depreciate things over time and the
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with the Trump tax reform tax cut and
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the JOBS Act
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you know they changed some things so
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that you can depreciate a lot of large
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amount of things a hundred percent the
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first year which is really interesting
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so the rationale was that they're trying
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to encourage investment in capital
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assets so if you are let's say let's say
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you're coca-cola and you want to build a
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new bottling plant well in under the old
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rules before the tax cut and Jobs Act or
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the Trump tax reform you had to stress
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that over a very long time and I mean
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the new rules you could take at least
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portions of that and expense at all in
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the first year through bonus
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depreciation so you know changes so the
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math and some of the incentives to do
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things now versus waiting so that was
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the whole idea whether it works or not
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just remains to be seen but but yeah so
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I guess my point here is that you know
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the things that they were talking about
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in this article were not unusual we're
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not rare we're not any kind of twisting
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of anything it's just you know those are
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the rules and you know it they do make a
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certain amount of sense because the when
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things depreciate it's because you are
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using up to use the useful life and you
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will have to replace them at some point
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so but because they're multi-year assets
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you don't replace them every year so you
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don't expense them every year that's
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that's the idea so um you know a house
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you know is it's useful life 27 and a
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half years and maybe maybe not maybe the
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timing is is not quite matched up on
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that one commercial real estate has been
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thirty nine years and I think that
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changes well actually not thinking about
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it a foreign real estate is depreciated
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at 40 years schedule so I don't know why
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the foreign real estate would be
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different but maybe they're just trying
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to encourage more domestic investment
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rather than foreign investments so so
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yeah I mean the the normal asset life
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for computers five years which might be
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kind of close I think if I'm if I
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remember off the top my head correctly
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they had mobile phones at seven years
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which makes no sense or telephone
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equipment at seven years which she knows
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just insane at this point maybe that was
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true when when that statute was created
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but not anymore people go through phones
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quite rapidly these days so so yeah
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there are some arbitrage to be made
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there on you know is the tax life equal
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to the real life and you know if the
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real life is longer than you were
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getting a tax advantage up front when
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you depreciate it faster than that so
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okay but the point is that this is
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available and you know if you want to go
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and you know help develop the economy
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and rent out you know houses or cars or
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whatever then great you'll get those tax
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breaks too