Kim asks the following question about building wealth:

Q: One of your strategies involve borrowing on the appreciation of real estate property to use as down payment on the next real estate property. Is this the same as a refinance on the original property (in which case cash flow would be reduced due to higher monthly payments). Or is a loan (or line of credit) that we can request from a bank...based on a new appraisal.

A: Yes. Though your cash flow should be the same as when you purchased the property in spite of the refinance and additional interest payments. The idea is that, when properly purchased, rents should increase at least equal to appreciation. As long as the cap rate remains the same, this will always be the case with larger properties (both residential apartments and commercial property). The reason is because commercial property is valued based on the cap rate. If the cap rate stays the same, then the value of the property increases in direct proportion to the rent increase, as long as expenses also stay the same.

So the key is to look for those properties in areas where the rents are going up. Then, you have appreciation, which you can borrow out and you will have sufficient rents to pay the increase in interest on the refi, providing that your interest rate is less than your cap rate (which it should be or you shouldn't be buying the property in the first place).

I am intrigued by this, so I'm going to write a special report on it. Stay tuned for how you can get this report on how to increase the velocity of your money through rental real estate.

Warmest regards,

Tom

Keith wants to know if general business expenses, such as auto expense, cell phone and internet can be deducted in a real estate wholesaling business.

The rule for business expenses is that they must have a business purpose, be ordinary and be necessary. So first the expenses have to be incurred in the wholesaling business. Interestingly, the IRS recently gave in on cell phones and if they are provided for the convenience of the employer, the employee no longer has to track his usage.

Auto expense, of course, always is a percentage based on what portion of the mileage is for business and what portion is for the wholesale business.

Ordinary means that the expense is typical to your business. It would seem that Keith's examples would be typical to the wholesaling business.

Necessary means that the intent of the expense is to make more money. I would expect that Keith's expenses are being incurred with the intention of furthering his wholesaling business.

Remember that these are general answers. Each situation will be different as taxes are a function of your own facts and circumstances. So if you want to change your tax, you must change your facts. The best way to ensure you are getting all of your tax benefits is to meet with a qualified tax strategist who is a CPA and knows your business, e.g., wholesaling.

Warmest regards,

Tom

This is a follow up to Kim's question a couple of days ago on refinancing in order to increase her property holdings and therefore to increase her wealth. She asks the additional question:

Q: I have a commercial property that is fully paid off and currently has a tenant (good cash flow). I am interested in buying other properties without putting in additional money. Should I take out a loan on my original building (thus decreasing its cash flow) to use as down payment on a new building. What do I ask for (terminology to use) so that the bank would understand.

A: I would do exactly as you are suggesting. I want to have as little equity in a property as possible. The reason is that wealth is built through volume. The greater the overall value of my properties, the greater the overall cash flow and the faster my wealth is growing. The new property you purchase should generate more than enough cash flow to offset the reduction in cash flow from your original building. I will go through an example of this in the new special report I am writing. I'll let you know how you can get this.

The terminology you use for the bank is that you want to finance your original property. This is a cash out financing. Once you do that financing, you can use the money as a downpayment on any other property. Unless you have a really good relationship with the bank and you are working with the commercial loan department of the bank, I would probably not be telling the bank the purpose of the refinancing. That is not relevant information to them and may serve to cloud the issue.

Warmest regards,

Tom

I guess it's Kim's week for answers. She has another question following up on yesterday's.

Q: Your formula includes using earned income to buy growth assets. If I have a business, should I use the business income to buy growth assets (instead of distributing it to myself and then buying the assets post-income tax). Can I also use pretax dollars if my spouse earns a 1099?

A: How you use the money from your business to buy growth assets depends entirely on your tax and asset protection (TAP) strategy. Every investor MUST have a TAP strategy. Without it, your assets will not be protected from potential lawsuits or from the government. Begin by hiring a tax strategist who is a CPA and also who understands real estate (real estate is a specialty in the tax strategy world). Your tax strategist should be able to recommend a good asset protection attorney once the tax strategy is in place.

If you would like more information on tax strategies, please call Siggy at our office at 866.467.5809 or email us at cs@provisionwealth.com.

Warmest regards,

Tom

Lynn asks the following question

Q: I have started taking classes on trading and have done some in my retirement account. I have learned about some ETFs which are held as partnerships. These send out a K1 each year with taxes due even if no gains were realized. What happens when these are held in a retirement account? Are the taxes "contained" within the retirement account? or are there taxes due the owner has to pay?

A: There would be no taxes to pay in the retirement account until you take the money out. That is the nature of a "deferral" plan, such as an IRA, 401(k) or pension plan. A deferral plan generally pays no tax and you pay ordinary income tax when you take it out. While you are postponing the tax, you are postponing it to a higher tax bracket, since capital gains and dividends are taxed at 15% when earned outside of a deferral plan and at ordinary income tax rates when distributed from a deferral plan.

So, you pay fewer taxes today or more taxes later. Interesting choice, isn't it?

Warmest regards,

Tom

Lynn asks the following question

Q: I have started taking classes on trading and have done some in my retirement account. I have learned about some ETFs which are held as partnerships. These send out a K1 each year with taxes due even if no gains were realized. What happens when these are held in a retirement account? Are the taxes "contained" within the retirement account? or are there taxes due the owner has to pay?

A: There would be no taxes to pay in the retirement account until you take the money out. That is the nature of a "deferral" plan, such as an IRA, 401(k) or pension plan. A deferral plan generally pays no tax and you pay ordinary income tax when you take it out. While you are postponing the tax, you are postponing it to a higher tax bracket, since capital gains and dividends are taxed at 15% when earned outside of a deferral plan and at ordinary income tax rates when distributed from a deferral plan.

So, you pay fewer taxes today or more taxes later. Interesting choice, isn't it?

Warmest regards,

Tom

Charles has once again asked the question of the day.

Q: Can I go to Sterling Trust and ask who might be interested in investing in real estate? And, how do we make sure, when looking for equity partners, that we are not running afoul of SEC regs?

A: Sterling Trust is simply an adminstrator for IRA's. I wouldn't go to them for investors. The best answer I can give you for this is to join Robert Kiyosaki, Ken McElroy and myself in Sydney, Australia next week as we present our 3-day training course, "Unfair Advantage." This course will teach you what you need to do to attract investors, stay compliant with SEC rules and raise capital from banks, investors, friends and family. I know it's short notice, but this is a one in a lifetime opportunitity. You can sign up for it at http://www.provisionwealth.com/events.asp. Hope to see you in Australia. This is going to be an extraordinary, one-time event.

Warmest regards,

Tom

Investing in U.S. oil and gas developments is one of the few tax shelters available to employees and self[employed business owners. Currently, you can receive a tax deduction in the year you invest amounting to as much as 80% of your investment. So, if you invest $100,000 in a project, you may get a deduction of $80,000 this year. (Please speak to a qualified tax advisor before you invest as there is planning that must be done to be able to get this deduction).

Lynn would like to know if I have any good books describing Oil and Gas investments. At this time, I don't. I believe that my friends at Reef Oil and Gas are working on just such a book. I have also encouraged them to consider doing a class for Rich Dad Education on oil and gas investing. If you are interested in contacting Reef, please call our office at 866.467.5809 and we can get you over to them.

Warmest regards,

Tom

Richard has the following questions:

Q: Do you use cash-out refinancing in your real estate investments?

I have an offer in on a property that should have instant equity if our list-price offer is accepted, but it is my understanding that appraisers rely heavily on the most recent sale price when doing their appraisals. At this point it looks like it may be difficult to draw equity from home after we purchase it because the sale price will drag on the appraised value when we attempt to do a cash-out refinance.

Do you have any thoughts or advice? Will the weight of our sale price drag less on the appraised value if we wait a year or so?

A: The answer to your first question is a resounding YES. Cash out refinancing is critical to creating wealth. The challenge is always when and how. Doing a cash out shortly after a purchase from a bank is difficult these days. You may have to wait several months or even a year to do so. However, you may find an investor who is willing to finance this earlier. I'm about to release a paper on velocity, so stay tuned to my blog and our ProVision website for a more complete description of this strategy.

As for your sale dragging down the amount of your appraisal when you go to get refinanced, remember that appraisers are looking for comparable properties, not your property. It is possible, though, that your sale will drag down the appraisal of other properties in the neighborhood. If yours is an exception and there are others selling at a much higher price, then the appraiser should be using those other sales and it shouldn't hurt you so much.

Warmest regards,

Tom

Natasha and Ed, who recently attended our Rich Dad Tax and Asset Protection class in San Francisco, sent in the following questions prior to attending the class. I think they are good questions, so while I believe I answered all of them in the class, I'm going to answer them here for the benefit of the rest of you.

Q: Hi Tom,
We are happy to have you as our personal coach!
We live in California and are planning on incorporating a Real Estate business here. We paid for rich dad education and will have more business expenses coming up this year.
Questions:
1.How can we deduct our business, educational expense when filing our 2011 tax return?
2.If we incorporate our RE business before 2011 end and then will incur more business expenses, can we deduct these expenses as current in addition to start up costs (for 2011TR)?
3.If we incorporate a business before 2011 end, do we must have a transaction (sell/buy) this year?
Thank you,
Natasha

A1: Business expenses are deductible when they are ordinary, necessary and have a business purpose. If they are incurred prior to starting a business, they are considered start up expenses. Start up expenses are all of the expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. The IRS and courts seem to agree that your business starts when you are open for business (ready to be a going concern). So you would have to start your business before 2011 ends for any of the start up expenses to be deductible, including education expenses. Start up expenses generally are amortized (deducted pro rata) over a period of 15 years.

A2: Incorporating your business does not start your business. Your business begins when your doors are open to customers, not when you incorporate or form your LLC. Once you begin your business, all of your ordinary and necessary business expenses are deductible.

A3: The IRS says, yes. You must be open for business. If you are wholesaling or doing lease options, you probably need to get at least one deal under your belt before the IRS would say you are open for business.

In order to begin deducting start up expenses, two events have to occur. First, the business must begin. Second, the business must elect to deduct/amortize the start up costs.

In August of 2011, the Treasury issued new regulations stating that a business is deemed to have elected to deduct and/or amortize start up costs unless is makes an election not to. This means that unless you made a statement on your tax return that you don't want to deduct/amortize start up costs, then you have elected to deduct or amortize start up costs.

This also means that if you erroneously did not deduct/amortize your start up costs in a previous year when you should have (because you started business in that previous year), then you were using an impermissable method of accounting for your start up costs. So, you should file form 3115 in the current year and you will catch up the deductions that you should have taken in the previous year. Be sure to speak with a CPA about this. Don't try to do it on your own.

Warmest regards,

Tom

Annie in our San Francisco Tax and Asset Protection class asked a very interesting question about where to deduct start up costs when you have multiple businesses. Let's say for example that you have rental property and you set up a separate management company to manage that rental property. Do you deduct your start up costs under the rental company or the management company?

Of course, these are two different businesses, so you will have different start up costs for each. How, then, do you determine which business your start up costs relate to when the costs truly relate to both. Do you allocate them between the businesses (one possiblilty) or do you put them all to one or the other of the companies?

There is no clear answer on this. You should sit down with your CPA, explain your situation clearly, and let them do some research based on your facts and circumstances.

Warmest regards,

Tom

Charles asks the following question about setting up a property management company.

Q: If one were to develop a Property Management organization (there are few choices where we are), what entity would you recommend for its organization? LLC? C or S Corp?

A: Of course, the answer to questions like this is always, "It Depends." It depends on your level of property investment, how many properties you will have, and how much income there will be from the properties.

As a general rule, though, I like to use an LLC taxed as a C corporation for management companies. There are many tax benefits, including a couple of lower tax brackets, that apply to a C corporation. Be sure to check with your CPA on this question, though, since it really does depend on your own facts and circumstances.

Warmest regards,

Tom

Jean asks the following question about setting up entities.

Q: Is sunbiz.org the best way to set up llc and trusts or is legalzoom or an accountant a better way?

A: I would suggest using an attorney to set up any entity, including an LLC or a trust. We have had the most success with Garrett Sutton's office at http://www.sutlaw.com. The reason to use an attorney is simple. First, you need a good operating agreement and most websites will just give you a generic operating agreement. Second, it's important to counsel with an attorney.

You should also include your CPA in this discussion. Remember that it is your CPA's job to do the planning for your entity structure and your attorney's job to implement that structure. So start with a Tax and Asset Protection Strategy that involves both your CPA and your Attorney. You are in business now, so don't be doing this on your own or through the internet.

Warmest regards,

Tom

Here is a great question from Lynn about my favorite natural instincts assessment, Kolbe.

Q: Tom, I took the Kolbe test. How do I know what my score means?

A: The Kolbe A assessment is a nice, easy set of questions that determines your natural instincts. That is, how you naturally act in any given situation. Obviously, the first place to look is to review carefully the report that Kolbe gives you. However, there is much more to learn from your Kolbe score.

Your Kolbe score can provide great insight into which type of investing you should do, your role on your team, and how your team will react to you. Your team should also be taking Kolbe (we use it for all of our employees and clients) so you can understand how they will behave.

We have created to courses to help you better understand Kolbe. The first is Your Personal Role. The second is Your Team's Roles and Responsibilities. You can find both of them at http://www.wealthstrategyuproducts.com.You might also want to do a 1-1 consultation with one of our wealth strategists. If so, call our office at 866.467.5809 to schedule an appointment.

Warmest regards,

Tom

This is a great question from Ron:

Q: If you have a property held in a self directed Roth IRA and you do die with a large appreciation do you avoid income taxes on this gain?

A: No. Your basis would have been stepped up at your death if you owned it outside of an IRA. Inside an IRA, it doesn't get stepped up. Just another reason not to own investment real estate inside an IRA.

Warmest regards,

Tom

Luke is just starting out. He sent the following email to us to get some direction on his entity structure.

Q: I plan on placing each property I purchase for investment purposes as it's own LLC. If I have a partner who is investing much of the initial capital, could I place the property under it's own LLC and then elect to be taxed for that specific property as a limited partnership? 2. If I could, and did this with all my properties, assuming I had a different investor partner for each, wouldn't that become outrageously expensive to file all those tax returns? I'm very new at this and just need some direction.

A: Yes, each LLC will be taxed as a partnership, so you do have a tax return for each entity. I would suggest you meet with your CPA and develop a comprehensive tax and asset protection strategy with them ASAP. There are many ways to reduce the administrative costs of owning properties, including tax returns, and your tax strategist is the best person to get you this help as the number of properties, types of properties, and number and types of partners will affect this planning.

Warmest regards,

Tom

Ralph has an interesting question about investing through an LLC.

Q: We have an LLC. Can the flow thru LLC be used like a Roth IRA, eliminating tax liability by leaving a portion of profits in the company to be reinvested repeatedly?

A: Let me answer this question in two parts. Frequently I hear speakers talk about keeping money inside a business and reinvesting it and avoiding taxes that way. Assuming we are talking about real estate investing, we want the LLC to be taxed as a partnership or sole proprietorship (depending on number of owners). The LLC does not function like an IRA. All income flows through to the owner(s) regardless of whether or when the money is distributed.

Still, if you have a good tax advisor and you are regularly investing in additional rental real estate, you should never pay tax on either the cash flow or the gain from the sale of the property. Rental real estate is a terrific tax shelter with good tax planning. So it shouldn't matter that you are taxed on the LLC's income. In fact, with good tax and wealth strategies, your real estate should produce both positive cash flow and a tax loss at the same time that can be used to offset other taxable income.

For more information, please contact Siggy in our office at 866.467.5809 and she will schedule an appointment for you with a wealth strategist.

Warmest regards,

Tom