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169: Wealth 2.0: Leverage Your Deductions!

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At a recent investor conference in Tenafly, NJ, I spoke on the topic of what I call Wealth 2.0. This is my preferred paradigm for investing that can be simplified into the the following equation:

Wealth=Leverage(Mass X Velocity)

Mass is simply the amount of money that is actually deployed into investments. After all, it doesn’t matter what kind of return you get if you aren’t investing any money in the first place. You’ve got to deploy enough to move the needle. The good news is that mass, like all variables in this equation, can be manipulated by the savvy investor.

For example, paying attention to the tax implications of your investments can actually decrease your tax burden and free up more money to invest. Case in point, I have invested a significant sum of money into projects that we have presented through our Investor Club this year. I am estimating that, in addition to creating equity through my investments, I am simultaneously significantly reducing my tax burden for this year—up to 80 percent of all my invested capital should be tax deductible!

How is that possible you ask? Well, It’s because I am a real estate professional and can utilize bonus depreciation on all of my real estate investments (even those done passively in syndications). If you navigate the tax law thoughtfully, you will have more money to invest. It’s that simple.

Now let’s look at the next variable—velocity. People often talk about a certain cash on cash return when they think about investing. That’s useful, but I prefer to ask the question,  “How long before I get my money back?”. You see, 10 percent cash on cash is great but that means that for the first ten years of my investment, I’m just getting my own money back.

I prefer investing in opportunities that get me ALL of my invested capital back within 5 years and yet still allow me to keep my equity in the asset. In that case, my cash on cash return is not five or ten percent—it’s infinite! Think about it. If you have all your initial invested capital back in your pocket and still have equity in a deal, its like recycling capital and using the same money in multiple deals. That certainly speeds up the wealth building process—another reason to call this variable velocity!

The last variable in our equation may also be one of the more underrated—leverage. Leverage is critical to building wealth. In fact, infinite returns as I have described above, are virtually impossible to attain without the skilled use of leverage. Most people familiar with real estate understand instinctually that leverage is important to making money in real estate. But when you do the math, the numbers can be staggering and explains why so many real estate investor have become so darn wealthy.

However, leverage is not just about borrowing money from the bank. Inherently, the word leverage simply implies the use of a tool that amplifies ones efforts. Certainly bank money fits that description but there are many other creative uses of leverage that often go underutilized.

For example, what if there was a way to leverage your charitable giving? In other words, what if you could support your cause by donating a certain amount of money that had the simultaneous benefit of amplifying the size of the deduction on your tax returns? Wouldn’t it be great if you could donate $10K but get the benefit of donating 50K on your returns? Believe it or not, there are ways to do things like that.

My guest on this week’s Wealth Formula Podcast is in the business of land conservation. It’s something that, in my opinion, is a very important cause that I would support even without the financial benefit. However, there happens to be some pretty significant leveraged benefits to this kind of giving so it’s even more appealing.

Suffice it to say, this is an interview that you simply cannot afford to miss!

Jim Sullivan is the President of Terra Optima LLC, a Florida based real estate and tax specialty firm that provides education, consulting and opportunities in tax efficient real estate. As President of Terra Optima, Jim intersects with Family Offices, Tax Advisers and the broader business and “Impact Investing” community relating to “all things real estate and tax efficient”.


  • What are Conservation Easements?
  • Who does valuation for Conservation Easements?
  • Are Conservation Easements a loophole for the wealthy?
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