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168: Multidimensional Investing with Tom Wheelwright!

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast well he needs little introduction he’s been on the show a few times before he is a Rich Dad Adviser on taxes to Robert Kiyosaki and his organization and he’s the author of the most thrilling book on taxes you’ll ever read called Tax Free Wealth which is now in its second edition. Please welcome my CPA the Michael Jordan of taxes himself Mr. Tom Wheelwright. How are you doing?

Tom: Good, Buck, how are you?

Buck: Good, good. So you have been traveling a ton this summer has it been a leisure or have you been spreading the good word on tax-free wealth?

Tom: Spreading the good word around the world been in we were in London we were in Poland we were in Bucharest Romania. We have been a lot of places and then we head to Mexico later this month and next month the country of Texas and after that we go to we actually go to Asia in the fall.

Buck: So is this sort of like big Caravan with you and Robert Kiyosaki and does Kenny come along too, Ken McElroy?

Tom: Ken does not. Ken doesn’t come along typically it’s me, it’s usually me and Robert and then an assortment of other characters so yeah it’s pretty much always me and Robert but otherwise we take two is available at the time and yeah so this last one was me and Robert and we had them a few others we had a financial planner with us.

Buck: Oh really? interesting. Yeah it’s just well that’d be fun to see sometime. Let’s move on to some of the topics today you know you’ve been on the show a few times before and we’ve kept it pretty basic you know and since then you know since the show started a number of our listeners actually become clients of Wealthability but few of them actually become your personal clients so I want to talk a little bit more about some of the topics that I think may qualify as slightly more advanced and that might seem it might seem a little piecemeal but I think that would be the things that are kind of recurring in my group. This one if you’re I would love to hear you talk about this concept which I love and I heard on your show can’t remember the name of the guy you had on from UCLA but he talks about this concept of buy, borrow and die what is this concept and why is it so powerful?

Tom: So so this is actually from USC you may not admit that these from USC scandal that’s going on down there, he may wish you were from UCLA but the concept something that we’ve actually talked about for years. And the idea is that you know they’re a couple of really big tax benefits in the US tax law and that people don’t typically take advantage of and the first one is that debt is not taxable so that’s a really big advantage that’s not taxable. so that means that anytime you take out your equity from an investment whether it’s stocks or real estate or a business and you take it out by virtue of a loan, it’s not taxable. So the idea is you know buy it by assets because buying assets is always good buy assets borrow instead of selling the assets borrow against the assets and then eventually when you die the tax that’s inherent in the appreciation is becomes tax-free it basically goes away, what’s called a step up and basis and there’s no more capital gains tax when you die so you can do it actually in any type of asset the easiest one is real estate because in real estate we have what people understand is the light kind exchange or a 1031 exchange so you can actually switch out your real estate for other real estate and as it appreciates and/or instead of taking the money out as you know selling the real estate people always tell me they say well I don’t want to do a 1031 because I want some of the cash and going well great so borrow the cash you know are only borrowing and paying interest excuse me as far cheaper than paying the tax so you know I don’t want to pay the interest well why not you know you’re paying the tax you’d rather pay a 20 to 40 percent tax and pay yeah you know then paying 5% interest that makes no sense.

Buck: Yeah no agree a hundred percent and it’s an interesting concept because like you know initially when I heard that of course the first thing I’m thinking about is real estate and that kind of thing but I also you know I’m involved in cryptocurrency world and you know Bitcoin so there’s not a whole lot you can do with Bitcoin if you believe this stuff’s gonna hit all-time highs at some point you’re and you’re just sitting on you know Bitcoin you can actually borrow against your Bitcoin can borrow up to fifty sixty percent against it and you know use that to buy another asset so there it’s it’s really interesting. But you know what this this concept you know it makes me think about some of the conversations you know and I have had lately and also there was a Gloria Vanderbilt died right she was and she left Anderson Cooper 200 million dollars or something like that. In her case obviously she had a big estate planning issue I’m sure she covered herself well for that but that buy borrowed die thing only really works if things are in your estate right and then there’s this whole issue of like people who are doing estate planning and then those worlds start to collide so how do you navigate that?

Tom: Well first of all that’s why you have a tax advisor help you know you don’t do this by yourself right it’s a very important point. Well it doesn’t have to be in your state your it doesn’t have to be in your state tomorrow so you can still do the borrower part now and maybe buy borrow and then eventually it goes away when your children die or when your grandchildren die right so eventually it may go away but you can also defer forever. So let’s say for example that you decide okay I’m going to do some estate planning so you form a family limited partnership before your assets are too much right you give away to your kids in trust you give them a limited partnership interest and then but you’re the general partner so that means that you have access control over the money so you just borrow from the partnership like you would if you wanted so it doesn’t have to be in your state for you to borrow against it the only thing that in in order to eventually completely eliminate the tax yeah it has to be in your estate but eventually what’s going to happen is is you’re gonna have children and grandchildren and that estate actually dissipates typically right because you have more and more real heirs you know eventually over the over the decades or generations you end up with less per person eventually probably what happens is each person ends up with less than the exemption amount yeah they die and that tax goes away it’s still even though you know even if you might have two hundred million dollars or two billion dollars or whatever there’s still things you can do that will really effectively have the same soul.

Buck: Right so obviously really interesting concept and you know as I mentioned I’m trying to apply that in a lot of different ways different things that I’m doing in our group particularly in our credit investor group you know the majority of the investments available to people and and frankly the ones that people are probably putting most their money in are limited partnerships largely in the form of say real estates indications right where you know because most of the people in my group are pretty busy professionals they’re doctors or dentists working 40 50 60 hours a week they’re making a lot of money and they want to deploy it into good investments and they find that limited partnerships are a good way for them to go. How do you apply this kind of thing or can you you know in situations like that because most syndications almost everyone I’ve seen even you know even ones like where Kenny says that’s buy and hold forever it’s not really hold forever it’s eventually there’s a sale and there’s a capital gain. So are what kinds of strategies can people who do predominantly limited partnership invest look at in lieu of that?

Tom: Well there are two really good strategies right now with the current tax law one is you have bonus depreciation so you may have gain and it may be capital gain tax to 20%. You may have gained from your set of the sale because you’re not gonna be able to do it like an exchange at 1031 you’re gonna be able to do that no no almost no syndicator wants to go through that that is a massive headache something like that. So you’re gonna have gain okay we’ll take the proceeds and invest in a new deal right because the new deal should give you a write-off equal to your investment or greater to your investment with bonus depreciation so you’re still you’re gonna get a lot of that money back when you invest in the new deal. The other thing you can do of course is you can take the gain and you can roll it into an opportunity zone. So opportunity zone so you don’t even have to roll being you know the full amount you can just roll the game portion of it and frequently the gain is less than your cash you just have to roll the gain into an opportunity zone fund and and that’s deferred and that’s typically it could be deferred forever. So there’s lots of opportunities in a business. In a business you can roll one business let’s say you’re a private equity fund and you’ve got a capital gain you can roll that capital gain into an opportunity zone you know or you might decide well I’m going to get to another business and that business has a bunch of expenses early on and you get deductions for that or it buys equipment or some other bonus depreciation so there’s always a way to deploy that money the key is that basically the government says if you consume the money other than through debt if you consume the money we’re going to tax you. If you redeploy it and you invest it whether it’s in a business real estate commodities whatever we’re going to give you a tax deduction you’re not gonna have to pay tax on it so it’s actually a pretty simple concept.

Buck: Yeah and to the extent you know then in that basically kind of what I was getting at is basically you got bonus depreciation you’ve got opportunity zones um I’d love to get your perspective on compare and contrast but my own you know sort of on the ground look at that has been that you know bonus depreciation in my view still continues to be probably the best option because you have a lot of freedom in terms of investing in quality assets that you actually want you know you feel good about where as opportunities owns a lot of them are funds first of all our blind funds but they’re specifically focused on areas that need development and then there’s a significant and we actually talked about this in Scottsdale with Ken McElroy and Dave Steel but they actually require significant amount of investment into the property and so it creates a little bit of a I would just say that you know my concern would be that in theory it sounds great but in execution to be seen.

Tom: I would say that’s true in real estate sounds great but the execution it depends on how well you execute. What are you talking about two guys Steel and McElroy who have been doing multifamily real estates indications for many many many years so they know what they’re doing. Well we have had opportunities owns for a year now so of course they’re new and everybody’s new to them. Now here’s the thing though you they’re they’re called opportunity zones for a reason it’s an opportunity right it’s an opportunity to improve an area of town that needs improvement and you have to actually improve it you can’t just buy into it you have to improve it right you’re right that there are fewer opportunities and opportunity zones than there would be with bonus depreciation you can get bonus depreciation anywhere okay so it’s certainly more flexible to use bonus depreciation. I think too many frankly I think too many people dismiss the idea of the opportunity zone. I think that because when you’re looking, take Ken right so Ken’s always looking for value add right he’s always has a bite. Well what better place to do value add than an opportunity. So to me I still think that people who don’t pay I think it’s a mistake not to pay attention options owes you will you find something that’s right for you I don’t know you know it’s a much smaller pool of assets right much smaller pool of investments, that doesn’t mean it’s not you know a real serious opportunity to do something good.

Buck: So we had a handful of guys in our group in our accredited investor group that are having or have had significant liquidity events this year from selling practices mostly dental practices for the most part and a couple of them have actually decided to become real estate professionals and take these you know these large liquidity events and turn them into opportunities to really just invest in real estate full-time and to take you know take advantage of the tax law there. What do you think you know can you explain what they’re doing and you know whether you like that strategy?

Tom: Well of course I always think that you should start with what’s your investment strategy first right and then worry about the taxes second I never like the tax tail wagging the dog. Let’s say though that you want to invest in real estate right what we all know is that professional investors always are more successful than amateur investors just like the professional business owner is always more successful than amateur business owners or professional basketball players are always more successful than amateur basketball players. So you know becoming a professional is a really good thing from an investment standpoint. So I’m a big believer that it doesn’t matter what you’re investing in you need to become a professional. So if you’re investing in the stock market and you’re doing trading or you’re doing options become a professional if you’re getting into business I mean look you’re gonna be a doctor you’d better be a professional right I mean you know I’d be you know MBA something you know kind of sometimes doctor I mean yeah well I mean like those commercials that say right well yeah you know we’re okay well it’s the same type of thing so you become a professional now for real estate from a tax standpoint personal is specifically defined that’s when I’m talking to somebody with over seven or 50 hours in real estate more time in real estate and all their other business interests combined if you’re a full-time in it that’s easy if you’re if you have a full-time w-2 job that’s difficult now it can be either you or your spouse who’s the real estate professional so if you if you have a full-time w-2 job and your spouse doesn’t then maybe your spouse you know can do it because you’re finding a joint return it counts for both of you so it’s a fairly simple test to me is basically 15 hours a week. What I like about the test this is my point from earlier buck is that when we become the test actually forces you to become a professional investor forces you to spend the time in so it’s actually forcing you to be a better investor so those who qualify as real estate professionals who truly qualify because if you truly qualify you’re probably spending a thousand hours or more unrealistic well if you spent a thousand hours in real estate on real estate in a year you should become a professional pretty quick cuz you’re spending twenty you know twenty to thirty hours a week you should you know you’ll get your time in and you’ll figure that out pretty cool external states not rocket science I mean it’s it’s you know it’s not like heart surgery right it’s much it’s much simpler than that but it does take time and takes becoming a professional so this is another case where the tax law actually promotes good investment behavior.

Buck: So in this case say somebody had a you know an eight million dollar liquidity moment and then all of a sudden they have you know capital gains to pay on that they turn around they decide you know what I’m just gonna do full-time real estate now because I’ve been dabbling in this and now I don’t have a job because they sold my business and they invest six million dollars of that into real estate utilizing bonus depreciation what that allows them to do in that situation is to activate those passive losses for that year isn’t that correct?

Tom: Right so the losses for that you’re not for previous years but for that absolutely so what that means is that actually with six million dollars you could take six out of that eight million chances are you invest that and you leverage that you could end up with an 8 million dollar loss completely offsets that game so you may not pay any tax.

Buck: Right yeah that’s basically exactly what you know these guys are doing but I thought it’s you know it’s it’s a really interesting play for some people who are already investing in real estate who who have a big waterfall and they don’t even think about this but it’s a great opportunity to get involved with something and you know have a second career and by the way save on a bunch of capital gains so shifting gears I do want to go back a little bit to what we were talking about we touched on it a little bit before there’s an interplay between you know people on your team you got your tax professionals your other team and we’ve talked a little bit about this offline here but specifically as it relates to things like asset protection or an estate planning I have found this as a you know as a as a person trying to deal with these different members especially when everybody’s really smart is actually really different difficult on the end of the client to sort of to that it’s a difficult terrain to tread let’s put it that way. Would you talk about some of the different dynamics specifically as it relates to asset protection estate planning and taxes that are kind of opposite forces that sometimes become issues for clients when they start you know trying to make some planning

Tom: Well the biggest issue is most attorneys can’t speak English that’s the biggest issue. They speak legalese but no English you you really do need somebody on your team who can interpret that.

Buck: By the way you’re that guy for me Tom so.

Tom: You’re not the first person. I had a client that’s specifically her the way she gives me primarily was to interpret what the attorney was saying yes okay so what’s that what’s he saying again what’s he saying because they don’t speak English so you gotta have an interpreter. But it’s the one of the biggest challenges is that attorneys are very specialized so they tend to be really good at one thing and that’s all they’re good at quite frankly a lot like you know most physicians right you’re very specialized in an area which makes you. So in estate planning attorney typically doesn’t understand anything about income tax okay that seems like what you’re a tax attorney no you’re an estate tax attorney because there are income tax attorneys and their estate tax attorneys and then you have asset protection attorneys who typically don’t understand the state planning and they don’t understand income tax and so what you have to have is you do have to have somebody on the team who’s a generalist right who can actually bring these forces together and make them work together and that’s obviously something that I do for you Buck is that you know I’m talking I and it takes it than you seen it takes me two or three times to with them right. Last time we talked to an attorney I think I finally go oh okay now you get it the third time we talked to this guy and I’m like you know just speak a little bit of English. So it does take somebody to kind of coordinate all that right and that can actually speak English that you understand hopeful you know I think frequently that’s your account sometimes it might be your financial planner frankly and every once in a while you run into an attorney who I should speak in English they and they can fulfill that role it’s just pretty rare it’s more common that and accountants don’t always speak English either. So it’s a matter of having somebody’s got to put the whole package together somebody’s got to look at the income tax the estate tax the ass protection you know the investment side and really understand that whole big picture and that’s a frankly I mean you know that’s a challenging person to find.

Buck: Yeah absolutely and and again they have different sort of ideas too right I mean what’s good for estate planning or what’s good for asset protection may not be a good move…

Tom: For tax purposes right so you and I were on the call the other day and you know I had to get I finally got the attorney to indicate that you know what the reality is is that there was no difference from an income tax standpoint well there’s no difference and we do whatever we want right but sometimes there’s big differences from an income tax and then there’s other times where there’s big differences from an estate tax right so I mean fortunately this attorney we were talking to you did understand both estate tax and asset protection so that was very very helpful to have an attorney who understood said both but it is there are competing interests and so you have to balance out what do you want to and they all compete with what you want to do yeah right I mean that’s the challenge is then you have to take it and say because really your question your question as the investor as the taxpayers the client is how can I do what I want to do yes really the only question you have and so it’s it’s actually very important to learn to ask that question that way because if you ask an attorney can I do this like more likely than not they will say no right if you ask them how can I do this they’ll say well if you made this this and this change now you can do it are you willing to make that change that’s a whole different that’s all different dialogue.

Buck: Yeah and sometimes we just kind of do what we you know what we understand the lens that we look at life through and one of the exchanges I had with this guy who’s actually no really good at what he does and he’s very well-known, but he’s but he wrote back something to the extent that you came you wanted me to you know keep you from death taxes and now you’ve changed your mind. And the reality was I never went with the intention of you know estate planning I’m hopefully I’m 45 and I still got a long run here so I’m not quite ready to start thinking about that as much but that’s the lens he was kind of looking through everything and that’s what got me kind of spooked and wanted me to get you involved. But anyway Tom we’re looking forward to having you to hit our next meetup in Dallas. Doug Lodmell’s gonna be there too who’s actually one of these attorneys who does speak English.

Tom: Doug actually does speak English, he’s great.

Buck: He’s great and actually recently interviewed him as well. But by the way you know thanks for all you do you’ve made a big impact obviously on in my life and even just from reading the books etc but now as my CPA so it’s kind of full circle for me and that’s cool in the book of course and I joked about this before that this thrilling book but this is a really good book everybody who in my group here who actually sits down and reads tax-free wealth you will really enjoy this it may sound like a tax book how could that be enjoyable but I’ve read it a couple times and I would feel like I always get something out of it every time and it’s on the recommended reading list for wealthformula.com. But Tom you know a number of people are already a part of you know who are looking for somebody who’s a higher level CPA if they want to find somebody and they want to get in touch with Wealthability and go through that process how do they do that?

Tom: It’s really easy just just sign on to wealthability.com there’s actually a pop-up that will let you schedule a call with us we have as you know but we now have a network yeah CPAs and tax advisers not even all of them or CPAs so some people are just starting out and they go I don’t feel like I really need a CPA you had you mention this to me a couple of years ago but you were kind of pounding on me insane Tom what about these guys who aren’t quite ready or you know what you have offer but would really like somebody who’s actually knows at least trained and can do a lot of the good fundamental work and so we start building a network about a year ago the Wealth Ability Network we have I think fifteen members now we’re going pretty rapidly and by the way if let’s say that some of your listeners have a CPA that they like but they’d like them to be trained we will train them. So we’re actually in that that position now where we can take on members into our Wealth Ability Network and train them so people used to always tell me well but I like my CP great them now I can say now let us train them. So if you’d like to have kind of your cake and eat it too you want your current CPA but you’d like them to be trained to learn how to do this stuff just send them over to wealthability.com we’re happy to talk to them so it whether you’re looking for a CPA or you just like your CPA to get better please join us at wealth ability calm people up to happy to have them.

Buck: Well that’s definitely interesting and especially for people who like I’ve heard that before right I use a CPA that my parents used and I just feel bad so at least this helps them get into the right century and all that kind of thing so Tom thanks again for being on Wealth Formula Podcast and we’ll talk soon.

Tom: Always. Thank you Buck.