What Is a Tax Shelter?

What is a tax shelter? That’s today’s episode. Let’s dive into it. Hey, everyone. Welcome to the Investing
in Real Estate show. I’m Clayton Morris, longtime
real estate investor. This is a show where we help
you build passive income, we help you create tax shelters. After all, that’s what real
estate investing is all about. We used by and hold real estate
as the methodology, the vehicle that we use to get there. But remember, I don’t
care about real estate. Four walls and a roof. Care about the tax
shelter, caring about the passive income and the
cash flow from your properties, that’s the goal. That’s what we teach
you here today. So get a lot of questions around
the idea of a tax shelter. And I think a lot of people
don’t know or are not very aware of the fact that
real estate, yes, the cash flow is great, right? Cash flow is great from a
passive income perspective for your rental properties. But what you’re really
buying, the reason that real estate investors
pay zero dollars in taxes is they’re buying a tax shelter. And when you buy a
tax shelter, you’re mitigating all sorts
of other income. So I want you to think about
a tax shelter like a bomb shelter. What is a tax shelter? Think of it like a bomb shelter. It’s a way for you to
shield your wealth, your income from taxes. That’s it. That’s the bottom line. So picture that
1950s bomb shelter. OK, and you’ve
got your cash flow from your rental properties
and from your W-2 day job, and you’ve got
cash sitting there. You’ve got a rental– you’ve got a portfolio
of rental properties that are shielding you. Now, how are they shielding you? We’re going to get into
some specifics here. But does that make sense,
that it’s acting as a shield against you having to pay taxes. Now, the reason that real estate
investors pay nothing in taxes is because of a few
little tricks and tips that I’m about to give
you as we go through this. So as an owner of
investment property, you’re taking in
taxable income, right? So you own a $70,000,
$80,000 property. I just bought an
$80,000 property, and it’s cash flowing a
certain amount of money. That money is taxable
from my tenant, right? That’s taxable income, that is,
that my tenant is paying me, and therefore, I have
to pay Uncle Sam. However, the government
and the tax code enable you to take all sorts
of benefits and depreciation and deductions that basically
allow you to keep almost all of that cash flow
if you do it right, if you structure
your deals properly. So there’s a couple of ways
that the government will do this and give you money back. We’ll get to those in a moment. But what you want to focus on
is your net operating income, your NOI. Right, that’s your
net operating income. And that’s the money
that you’ll pay taxes on. OK, so let’s just throw out some
hypothetical numbers, right. Let’s say I bought
a $80,000 house. My cash flow was $1,000 a month. Now, I minus out my expenses. Maybe I’ve got mortgage
interest as well. I’m minusing out those expenses,
repairs, depreciation, mortgage interest. What I have left
over, maybe it’s $100, that’s what
I’d be taxed on. That’s my net operating
income that I’d be taxed on. So smart real estate
investors want to be able to mitigate
that net operating income with other expenses
and other deductions, so that it’s zero. And in some cases, it
can actually be negative. So you could carry that over
to other income like your W-2 income. And we’ll get into that in a
moment, if that makes sense. But just so you understand
NOI, it’s the money left over after you’ve accounted
for all of your deductions and all of the things that
you can take out of it, and then you’re going to
pay taxes on that NOI. OK, so there are deductions that
we as investment real estate investors, we understand, and
the beauty of the tax code is written for real
estate investors. It’s written for entrepreneurs. It’s written for the wealthy. And if you want to
be on that, if you want to be against, that if
you’re saying oh, you know, I wish the tax code were
written for the poor and the middle class,
you can wish it all you want, or you can
choose to play on the field where the tax code is written. And it’s written for
entrepreneurs and business owners. That’s the bottom line. And there’s so many
great tax benefits in the tax code for you
as a business owner. So I want to help you with
this financial intelligence. OK, let’s go through
some of these deductions that you can take away from
your net operating income that the government
fully allows you to do. Now, let’s say I bought
that $80,000 property, and I got a mortgage on it. Right, maybe I put
down 15,000 to $20,000, and I have a mortgage
on the rest of it. That mortgage interest
that I’m paying every month on that
investment property, guess what, yes,
it’s a deduction. Now, that would come
off of my net operating income, what I’d have to report
to Uncle Sam and pay taxes on. So mortgage interest,
that’s good debt. Right? There’s a difference between
that and credit card debt. Mortgage interest, good debt. So that’s a very powerful
tool in your quiver, as you’re looking to reduce
your net operating income. Next up, depreciation. I mean, come on. Is there anything better
than depreciation? And it’s your presumed
decline of the property, meaning that the government
presumes that you’re buying this large
earth moving digger, if you run a big
landscaping company, and you can depreciate that
as an asset in your company. The same is true
with real estate. You can depreciate
that asset over time. The roof, and now
the government has enabled you to deduct and
depreciate items in the house, like the roof and other
parts of– your HVAC system, and other things
inside the house are now able to be broken down
and separately depreciated if you do what’s called
a cost segregation. So now, that may
not apply to you if you’re just doing one off
small little tiny single family homes, but if you’ve
got a portfolio of 15 to 20 properties,
cost segregation, that’s the way to go. So depreciating these assets. The beautiful part,
though, of depreciation is that it’s a
non-cash deduction. So what does that mean? In other words, you don’t
need to write a check in order to get this deduction. It doesn’t affect
your cash flow. So it comes off of
your bottom line. You don’t need to like mail in
money, like a mortgage payment, in order to get this deduction. The government is basically
looking at your assets, saying, we’re going to allow
you to depreciate it over this amount of time. Bottom line, and
it’s that simple. What’s great about that
is that it’s a shield, OK, and this depreciation,
the mortgage interest, it shields you from the
money that you’re having to pay out to the government. So if you purchase a 200
or $300,000 unit property, and you’ve got a mortgage on
that, that mortgage interest plus depreciating, you
know, the HVAC systems, the roof in all of the different
units that you’re buying, now, what’s left over is the
cash flow from your tenant. The goal is to keep
acquiring real estate. Now, here’s the
real trick, and this is what rich people understand. This is what real estate
investors understand is that you can exceed the
amount needed in order to keep that cash flow going. So what I’m saying is if
you have one property that’s creating a tax
shelter for you, you can then take and buy
additional properties that will then help you exceed
your net operating income expenses. So let me break
it down this way. It can get a little
complicated, OK. But let’s say you’ve
got a W-2 job. So every year, you’re
making $200,000, you get cash flow
from your day job. We know that paycheck
employees, they’re taxed the worst
by the government. You get no incentives. In fact, under this tax
law, you’re hit the hardest. Well, what if you purchased
real estate that enabled you to mitigate that income? OK, that’s the beauty
of the tax shelter. So now you’re making $200,000
a year from your day job. You’re getting taxed
to the hilt, right? The cash flow you have
left over, you know, that’s what you’ve
got left over. But what if you can reduce your
taxable burden from the day job with real estate. That’s how it works. So again, let’s say I purchase
a couple of properties, and after deducting the
depreciation, the mortgage interest, repairs, expenses,
other items, and I put into sort of a
negative space now, negative money,
meaning that I don’t have to pay any
taxes on the rent that I’m getting
from these tenants, but I’ve got 15% left over now. Guess what. Now, I can offset the
income from my day job with real estate with the tax
shelter that I’ve created. So there are a lot
of entrepreneurs, and I have multiple businesses. Now I have a certain
business that I make a certain amount of money on. But now that cash flow is offset
by my real estate holdings. And it’s a totally
different company. I purchased my properties
in LLCs, right? So when I purchased that $80,000
property or $90,000 property, those depreciation,
those deductions can carry over to
the income that I’d be making either from a day job,
a W-2 job, or another business, right? And that’s the beauty
of this passive income strategy under the tax shelter. So you’ll hear it’s hard for
some people as a new investor to wrap their head
around this idea that I’m getting started
with real estate investing, I can’t wait to buy my
first rental property, because I want that $800
a month in cash flow. That’s great, but what
you’re really purchasing, the power of what you’re
purchasing is a tax shelter. Just drill that in your brain. When you’re at dinner parties
with friends and family they’re asking you
that you’re getting involved in real estate,
and they’re like, well, I hear that’s a risky thing. First of all, it’s not if
you buy smart, like I do. And when you talk
to them about it, let them understand
that yes, I make a lot of money in my day job. But now I’m paying
way less in taxes, because I’m a real
estate investor. And that really starts to
hit people upside the head. And they start to
scratch their heads and go wait a second,
oh, how’s that work? Well, exactly the way
we just explained it. Share this video with them. Share this podcast
with friends and family that could benefit from learning
what this tax shelter really means. You know, and I just
scratched the surface. You can go much, much deeper
in the deductions and the way in which you can mitigate
your overall income using real estate as a tax shelter. I mean, think about it. I’ve had friends– I’ve had investor friends who
love repairs on properties, and I do, too. Why? Because it adds to
their tax shelter. They get excited when they
have to replace a water heater, when they have to
do extra repairs. Those things are
depreciable, and they’re able to then further
increase their tax shelter. I have investor friends who
love when their property gets destroyed in a storm. Why? Because they can take a
FEMA claim on the property, and now it’s a
permanent tax shelter for the rest of their life. They’ll never pay
taxes on that property, becomes its own tax shelter
within a tax shelter. You know, when you start
to understand and unravel the beauty of
this, it really can become a powerful tool
for you to increase your overall net worth and
your financial intelligence. So thank you so much
for subscribing. If you’re not already a
subscriber, please do. We love having you
here on the show. We love your feedback. We’d love you joining us on
our live shows as well, which we do on our YouTube channel
every Wednesday at 11:00 AM Eastern time. So just come over Morris
Invest YouTube channel and join us there. Until next time, everyone. Go out there, take action,
become a real estate investor. It’s the number one
way to build wealth. We’ll see you next time.

26 thoughts on “What Is a Tax Shelter?

  • I've done a bit of math on that topic and it is for sure a thing I'll do when I'm 18 and have a job. Just maybe $200 dollars of negative cash flow every year can give you over $1000 in negative taxable income. So while some people would be like "are you stupid, you are losing $200 dollars every year on that rental" I would just answer "yes, but I pay $600 less in taxes, so what?". I am really sorry for people who don't get it.

  • Why do I have to live under government's laws ? Is there possibility to be exempt from them ? If life under government is so great why all the world (people under government) are getting deeper and deeper into debt ??

  • Very informative video for those who cares to create wealth and take advantage of existing laws created by the elite politician who benefits immensely by channeling these deductibles into there wealth war chest. Bravo Morris and keep the information out there for those interested to learn and be informed.

  • Most of real estate incomes are passive so you can only offset passive activities not W-2 source income. If your wife is real estate professional, yes then you can offset W-2. Good to have someone with real estate license 🙂

  • hi mr Morris, i heard from a CPA that, once we sell a property, all the depreciation that we claim over the years from that property we have to pay back to the tax man, is that true?

  • Great video! Love the new set. The audio sounds better as well. Thanks for all you do to help others. God Bless

  • So excited to jump into the world of real estate investing and your videos have motivated me ten fold! I really appreciate you!

  • Great video!
    Question, when you say “interest becomes deductible” does that mean the ENTIRE amount of interest I pay on a mortgage payment can be deducted from my taxable income?

  • Clayton, I have a question. So all these deductions are great and I understand the concept that you are talking about. But in my case, I just started my LLC and my loan officer and I just had a conversation not too long ago when I was signing papers for my 2nd property, that if I deduct all my income to where it shows a negative balance, then my LLC won’t have a history of making Money. It won’t have the history to prove that it’s a healthy business, thus I won’t be able to get bigger loans as an LLC from bankers. I was wondering if I should just be taxed for couple of years and bite the bullet to create that history or what I should do.. thanks!

  • NOTES:

    The reason real estate investors pay no taxes is because buying real estate is buying a tax shelter. Think of a tax shelter just like a bomb shelter. A bomb shelter protects you from bombs while a tax shelter protects you from taxes. There are a number of ways investment properties accomplish this. Rental income is definitely taxable income but if you manage properties correctly, you won’t actually have to pay taxes. Net operating income is taxable (everything after expenses) but you mitigate the income by using and finding other write-offs.

    MY TAKE:

    NOI is the critical metric for real estate. You should make all decisions based on the net operating income. From there, your expenses that are real (mortgage interest, management, etc.) as well as theoretical (depreciation) manage your tax requirements 😊

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