1873: Pay Zero Taxes (Legally!) Rich Dad CPA Tom Wheelwright: Tax-Free Wealth

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Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

It is my pleasure to welcome a returning guest back to the show, my good friend Tom Wheelwright. Of course, you know him because he is the author of this book that is very well known, Tax Free Wealth. He's one of the rich dad advisors, but he's out with a new book entitled Win Win Wealth Strategy. And that's what I want to talk to him about today. We're going to go into, you know, investments the government will pay you to make. Tom, welcome back.

Hey, thanks, Jason. Great to be on your show. Always. Thank you very much.

It's good to have you. So tell us about your new book. This is really exciting.

It's very, very exciting. You know, I started writing this book several years ago, really focused on how can taxpayers really do what the government wants done and get a tax break for doing it. Right. That was the original goal. In the meantime, we've had all of this discussion in the media, in politics about how the rich don't pay tax. And so this is really, maybe we should retitle this book why the Rich Don't Pay Tax Legally. Because that's really what it's about. It's, it's about why the rich don't pay tax, those who don't pay tax. And it's about how any person can use those tax incentives for themselves. And it's also about what the government gets out of doing it. Why does the government do this in the first place?

Right, right. So they're incentivizing the behavior they want to incentivize to achieve certain goals, to get the economy to grow, to provide something people need, whatever it is. And so kind of give us the broad strokes here, how many sort of areas Are there here? Of course, being a real estate guy, I know you love real estate. I of course love real estate and most of our listeners do. That's a very incentivized thing. I always say income, property is the most tax favored asset in America because the government wants people to provide housing. Right. So they incentivize investors to do that. They've got a bunch of other incentives beyond depreciation or other write offs at 1031, exchange, et cetera. But what are the other sort of big areas here besides real estate?

Yeah, so we actually looked at seven. And we didn't just look at the U.S. we looked at 15 different countries. And so it's interesting you say that real estate is, you know, highly incentivized from a tax standpoint in the US it's actually highly incentivized in many countries. So we actually do charts and tables on 15 different countries to show this is not a US specific phenomenon. And there are other really big ones. The biggest one is frankly, business. The great thing about real estate is you get to combine business and real estate.

So you actually get a lot of investors. Don't think of it that way. Your investments are a business. This is like a side hustle. So go ahead.

Yeah, right, it's. And actually you get better benefits if you treat it as a business than if you don't from a real estate standpoint. So we looked at seven particular segments, which includes business, which includes real estate, also includes things such as food and energy. I mean, you think about what does the government need? What are they trying to incentivize? I guarantee you, no matter what country you're in, if the government wants something, they're going to give a tax incentive. This actually, Jason, all started back really with John F. Kennedy. So it's not a Republican phenomenon. I want to be really clear about this. It is not a Republican phenomenon. John F. Kennedy was the, he wasn't the first president to use it, but he was the first one to really make it a part of everyday life. And what he was trying to do was incentivize manufacturing. And so what he did was he gave an investment tax credit for new manufacturing equipment with the idea that, well, wait a minute, if we give a little bit of an incentive, will that have an impact? It was really a test. And what they, what the government found was, wow, a little tiny incentive like a 10% investment tax credit really goes a long ways and produce an enormous result. So then, and you know, it doesn't surprise any of us now because nobody Likes paying taxes. Even people who say the rich need to pay more taxes don't want to pay more tax. Right. I laugh at these people, Jason, who say that rich need to pay more tax. And some of these are rich people. And I'm going, you know, there's actually a box you can mark where you can voluntarily pay more taxes. So I'm going, I think Warren Buffett.

Needs to mark that box because he has complained very publicly about how he doesn't pay enough tax. And I don't know why he doesn't check the box and just pay more. That's.

That's my point. You know, check the box, pay more tax. You know, it's always.

It's.

To me, it's like, you first, right? If you really believe that, put your money where your mouth is. I don't think anybody believes it. I think what people really say is we want somebody else to pay the tax. We just don't want us to pay the tax. So what this book is about, Jason, is. Is really about not just real estate, but real estate's a big part of it, business. These other areas where the government has really good, strong social incentives, whether it's clean, renewable energy or whether it's oil and gas, frankly, I mean, they're actually both pretty equivalent right now as to government incentives, whether it's business. We actually talk about debt and how debt is actually incentivized by. By the government. Actually using debt is incentivized by the government. And so, you know, you have to look at, well, why is this? Why does the government do this? And what we actually went through in this book is actually that we ran numbers and showed the government actually makes more money providing an incentive than doing the work themselves. I mean, for example, you. You've probably been around some housing projects in your lifetime, and housing projects are not fun places to go.

When you say that, you mean government.

I mean government housing projects, whether it's in the US I've been to government housing them in Poland. I've seen them in Paris, France. They are not pretty places to be. And so the government doesn't really want to do that as a general rule. They want to incentivize individuals to do it instead. And it's actually cheaper for the government because if you think about it, the government spends a dollar for a government employee, they get a dollar's worth of services back, but if they spend a dollar in a tax, they might get $10 back. So it's a very leveraged way for the government to get what they want. And you know, the problem with, I find, with most people is most people are so afraid of the irs, and they're. They're going, well, wait a minute, I need to. I need to pay my fair share of taxes. I'm going, well, you get to pay your fair share of taxes. You just get to choose what that fair share is.

Right? Yeah. Very interesting. I want to go back. I don't want to forget to ask you this, Tom. At the beginning, you said real estate investing as a business, right? Now, is there something people need to do to have their real estate investing be considered a business versus not? What do you mean? There Is there?

Absolutely. So for some people, for example, you get into it because you heard there were some tax benefits, and you never have a profit motive. You don't get to get your deductions, okay? You have to have a profit motive. So you need to look at. So expenses are deductible when the reason for the expense is to produce income. That's when they're deductible if the reason for the expense is to get a tax benefit, not deductible. So you really have to look at this. What the government wants you to do is remember they're your partner, right? You just this way. We have to keep in mind, this is what I talk about a lot in the book. You're partners with the government. You can be a silent partner. You can be an active partner. What the government's saying is we are your partner. So therefore, if you think of having a partner and you have a business partner, right, they are your business partner, like it or not, then they expect certain things, they expect certain behaviors. They. They expect you not to cheat on them. They expect you to document your expenses. They expect you to report, you know, properly. They expect you to do a lot of things. And so what we want to do is we want to make sure that we're doing all of those things that really treat it. If it's not a business, frankly, if the deductions are not for a business, they're not deductible. So you really have to treat it as a business to get the tax benefit. And the more active you are in the business, as you know, when you get to the point where you're a real estate professional, the more active you are in the business, the more deductions you get, and the sooner you get the deductions, right?

But treating it like a business, I mean, that's just good bookkeeping and good record keeping and so forth. That's what everybody, hopefully is doing. You can certainly use our software, property tracker, or many other software products out there to help you do that, make it easy. Is there something else, though, Tom?

Yeah, for sure. For example, a good business owner would own their business within some type of an entity, an llc, limited partnership, or a corporation. Right. A good business owner would have an income statement, a balance sheet, a statement of cash flow, and a general ledger. Right. A good business owner would have a corporate book where they have shareholder minutes and they have shareholder meetings or owner meetings. They would do those things on a regular and consistent basis, and they keep track of them. And all of those things is part of running a good business. As you know, you run a very good business. So. But I will tell you, you know, when the IRS talks about the people who cheat, it's really the people who don't function or don't treat their business like a real business. For example, you want to get. You want to have a much higher chance of getting audited. Don't have a separate tax return for your, you know, do it on Schedule C or do it on Schedule E. That's how you get. You're much more likely to get audited. Why? Because the IRS is looking at you and saying, well, you're not really treating this like a business. You're kind of a casual business owner. But the real business owners, and they also look at, are you preparing your tax return yourself? For example, are, you know, do you have a team around you? The same things that you would look at, Jason, when you're looking at, should I invest with this person? Should I invest with these people? Those are the same things that the government looks at. And they're saying, well, look, is this a good partner? Is this a bad partner? That's all they're doing in an IRS audit. They're just trying to determine are you a good partner or a bad partner.

Okay, So I don't want to get stuck on this too long, but I do have one more thing based on what you just said, and we'll move on right after this. When you talked about people who are using the Schedule C, where they're basically filing their personal tax return and they're adding a Schedule C that shows their. Basically their profit and loss for their business activities. And a lot of independent contractors do this. Real estate agents, freelancers, whatever, they do this instead of forming an entity like an llc.

Correct.

And then having that entity file a tax return. And one other reason, I think they become an audit target, Tom. And I have a feeling you're going to agree with me on this is that, look, you know, the irs, if they're doing well and making some money, you know, the IRS doesn't think anything of it. If an LLC or a corporation makes a couple million dollars or many millions of dollars, that's normal, right? For a business that's treated like a business. But when an independent person is making 500 grand and they're using a Schedule C, the IRS goes like, wow, this is kind of a big fish. Why doesn't he have an entity and why doesn't he formalize this business? Right. You're more of an audit target because you're a high income earner, Right, Versus someone who's got it segmented into the business bucket.

Is that a truth? I think that's part of it. Of course. I'm an accountant, so I look at this from an accounting standpoint, right? The reason we have double entry accounting means that, meaning that we have both the left side of the ledger and the right side of the ledger. Right? We have a balance sheet, we have a left side of the balance sheet or right side of the balance sheet. We have an income statement. Left side, right side. The reason we do that is because that actually gives us some assurance that this has been done correctly. The problem with a Schedule C or Schedule E, which by the way, is what you do for rental properties, same thing. The problem with those is it's only an income statement that you're only looking at one side of the ledger. You're not looking at both sides of the ledger. You have no balance sheet. You're not reporting a balance sheet on a Schedule C. You're not reporting balance sheet on a Schedule E in an, in a, in a partnership, in a corporation, you know, in an LLC taxed as a partnership or corporation, you have a balance sheet. And so what the IRS is saying is how likely it is, is it that this person is cheating? And what they're saying is if they're using a Schedule C or a Schedule E, they're much more likely to be cheating because they're not showing us the whole picture.

Right. Okay, very interesting, Very interesting. Now does that matter if they have multiple entities and they sort of roll them all up to one entity and file a return for that one? Or should they be filing individual for each entity? That's.

Oh, no, no, I'm, I'm a big fan of rolling them up. I like less work, not more work for.

And you're an accountant, you can charge more for that.

So you're you know, my job is to reduce, is to increase my client's bottom line. That's my job. And part of that is reducing my fees. If there's a way to do that in such a way that makes sense, rolling them up to a holding company, like, let's say you've got 20 properties, you want them, let's say you want them all in separate llc, that's fine. Do a holding company do a single tax return because there's no benefit doing multiple tax. I don't think there's a benefit.

I'm glad you said that. See, we've got it. We've got an honest guy here. That's fantastic. Okay, good, good, good stuff. All right, let's move on to some of those other areas though. You, you identify seven in the book, right? I do. Okay, got it.

Yeah. So, so like I said, business is another one. Right? So business. You know, one of the questions I get most frequently is somebody else. Like, they'll say, okay, I've got this coffee cup here. Is this coffee cup deductible? And I always want to say, well, can we change the question? And let's change the question to how do I make that coffee cup deductible? Ah, better question, better question, better question, better result. Right? So in business, anything can be deductible. Anything can be deductible. But the, the job of your tax advisor, your job and the job of your tax advisor is to figure out, do you want to take the steps the government requires in order to make that deductible. So, for example, could I make my entire house deductible? Yeah, I could do. I want to take the steps to do that? No, I don't. Because the whole thing would have to be business related and I would never. I'd literally be doing a business 24 7. I'm not interested in that. Because that would be the rule for doing that. Now, the government says, well, wait a minute, if you have one, you can take a tenth of your home as a deduction if you just set aside one room. I'm going, I'm willing to do that. So I made a choice to take a 10% deduction instead of 100% deduction because of a lifestyle choice. But what the goal is, the goal is to look at, okay, what can I do to get the best tax benefits based on what I want to do? So if I want to be a real estate investor, what, how do I get the best tax benefits if I want to be. If I want to do airbnbs how do I get the best tax benefits? If I want to do long term, multifamily, how do I get the best tax benefits? And then look at what those tax benefits are. So businesses always number one. Every country has business tax benefits. It is universal. So real estate's really good. Business is even better. Real estate that is being treated as a business is phenomenal. And you can add one more in there. You can actually add the energy, which is another big incentive by the government. You can add energy, energy onto your real estate, which is being traded as a business. The goal is not to use one of the seven investments and to invest in one of them. The goal is to invest in all seven.

Oh, yeah, right.

I mean, let's do it all. I would say the seventh one is probably, to me, the least important one. That's, that's the one where you're putting money into a 401k or a pension plan. But there are times when that absolutely makes sense. And I was actually surprised, Jason, when I ran the numbers, just how much it makes sense for certain people to do a 401k or an IRA or, or a PENS pension or a profit sharing plan. If you want to be really active in your investing like you and I are, Jason, then you don't want to be do a pension and profit sharing plan because they're not even close to being as good as say, real estate or a business. Yeah, but if you want to be more of a silent partner with the government or a passive partner with the government, you just want to invest in the stock market. It's a really good way to do it. The numbers prove out. So, you know what you want to do is you want to look at all of these and what happens is the last chapter. My book, the Win Win wealth Strategy is how to get the government to pay for your Ferrari. So this is actually a true story, Jason, of a client of mine. We ran all the numbers and sure enough, the government's paying for his Ferrari. And the reason is it's not the government wants you to buy a Ferrari. You don't get huge tax benefits for having a Ferrari. What you could, if you could lease it, but generally you don't. What the government's saying is if you do what we want you to do and you actively pursue the social issues that we want to pursue, the economic issues, the type of investing we want you to do, if you're willing to not spend your money or save your money, but rather invest your money directly back into the economy, if you're willing to do that. We will reduce your taxes so much that literally, you could buy a Ferrari. And that's the message of the book, is that, look, it's your choice, you know, once you get the education. The reason I do what I do, and people ask me all the time, why do you spend your life out there talking and speaking and writing books and so forth? It's because the rich, they have advisors like me that know all this, but their advisors aren't telling anybody else because they want to be paid for their advice. I'm one of the few people out there that I want everybody to know it and, you know, pay 25 bucks for a book. And I'm happy to share it with you. Right. I. I don't need you to pay me thousands and thousands. I mean, my clients.

I'm very expensive. Okay, let me put it that way.

So I know you brag about being expensive.

What's that?

And you brag about being expensive. I love it.

You know what? I am really expensive. I'm not looking for a lot of clients. I have great clients.

But you can get a lot of this stuff right? In your books and your materials and YouTube videos.

That's exactly right. I mean, the idea is the first thing that we have to do is change our mindset, right? You talk about this a lot. The first thing we have to do is we have to change our mindset. And the most important thing about tax is change our mindset. From taxes are this horrible burden that the government is out to get me to. The tax law is a partnership between us and the government. And it's a game. And we get to choose how we play that game. And if we play the game the right way and the way the government wants us to play the game without cheating, we do it ethically, legally, and morally. And then the government will reward us for doing what they want us to do. And I mean, we're talking about food production, energy production, jobs, housing. I mean, there's all sorts of things. Anything you think of that the government wants done, I guarantee you there's some tax incentive to do it.

I agree with you totally. And I've heard some really obtuse ones you wouldn't even think of. You know, any specific examples, Tom, on like, food and energy production that the government incentivizes you? You know, I always see these ads, put, put solar on your house, get it for free, etc. I don't know. You're probably talking something more in depth than that.

Well, solar is a right now I mean, solar is amazing because if you put it on your business, not your house. Okay, so here's the key. It's that combination, right, of you need to own the real estate, you need to have a business and you need to put solar. And so there's three different things that you're doing, three different incentives you're taking advantage of. What happens is when you put solar on your business property, you put it on your house, you get a 26% credit. That's awesome. But if you put on your business property, you get a 26% credit and an 87% deduction. So you're basically paying about a third of the cost of the solar. Which when you look at, okay, if you're in a, like I'm in Arizona, right, we have sun 300 days a year. So that means that 300 days a year, I'm actually getting the benefit of my solar panels. I've got bath batteries to store so I can use it at night. And so that benefit that I'm getting, that's my return on investment, right. So I put the money in. My return investment is reduced utility costs. Because the purpose of an asset, remember, the purpose of an asset is to either increase income or decrease an expense. In this case, solar panels, the purpose of that asset is to decrease an expense. And that's where your return comes from. The good news is you don't have to put in 100 of it, but the government will put in two thirds of the cost. You only have to put in a third of the cost, so your return triples by virtue of the government putting in so much of the money.

So what do you think about these? I mean, we see them all the time, right? These oil and gas deals where you get these huge tax write offs. I know our mutual friend Robert Kiyosaki, of course, everybody knows him, he seems to like those. But then Ken McElroy, it doesn't seem to like them very much when I talk to Ken about it. So they've got a difference of opinion there. Curious what you think.

Well, Ken's a real estate guy and Robert's an oil guy. Robert worked for Standard Oil. Ken builds real estate. I mean, that would be logical, right? Right. I mean, think about this. When Donald Trump was in office, we got big real estate tax benefits. When Joe Biden came into office, all of a sudden the benefits started shifting towards renewable energy. Right? So it's not like they're different. One's using the tax law this way and one isn't. They're Just using it for their own preference items. So Kenny's preference preferred investment is real estate, and yours is too. There are people who, their preferred investment is oil and gas. I started my career in oil and gas and I remember a client that their entire life they invest in oil and gas and they never pay tax and they invested only in oil and gas and they always had money, okay? So that was their investment. Now, oil and gas is different from real estate in that it wears out faster because you're selling it out of the ground. Where real estate, you're just renting it, you're not actually selling it. And that's, that's the difference. You can't, you're not going in outside of fracking, you're not really going in and making more oil.

Right.

So there are ways to, you know, they call them secondary and tertiary recovery. I mean, I actually do know quite a bit about oil and gas because of my background, but it's, to me, it's more about what do you want to invest in? Choose that area. Because if you find an area like one of these seven investments, you say, okay, here's the strategy that I like. I like strategy number four. Okay, strategy number four happens, I think, to be real estate in this case. So I like strategy number four. I'm just going to do that. That the people who focus on one type of investing are a hundred percent more likely to be successful in the investing than the people who scatter themselves around a variety of different investments. So I, I'm just, I'm a big believer in focus. If you're going to do real estate, do real estate. If you're going to do oil and gas, do oil and gas. You're going to do, you know, if you're going to be a farmer, be a farmer, you know, if that's what, if that's how you're going to make money. I'm a business guy. I don't, I do real estate as part of my business, but it really is connected to my business. I'm not out there doing real estate deals separately from my business deals.

Got it, got it. Good stuff. Just before we wrap up, Tom, I think when you mentioned the home office deduction, a lot of people were probably thinking in the back of their mind, because I've heard a lot of discussion about this one for decades now. You mentioned 10% and you talked about one room. But a lot of people are probably thinking, how much can you get away with?

You know, if you've got a house, how much of it can you call your business. You know, is there any guideline there there?

Absolutely. So the rules for a business deduction, there's four rules. The first one is you have to have a business purpose. That's pretty easy. The second one is it has to be ordinary. In other words, it needs to be typical in your business. So, for example, typical home office, you're not going to have 40% of your home as a home office. But I do know people that have 40% of their home as a home office because it's typical in their business. They need it for their business. My wife, for example, has employees in our house. They have their separate. Their own office in our home. Okay, well, that's typically an accounting business. She's another. She's an accountant as well. An accounting business would have an office for her employees. So that would be typical. That would be ordinary. The third one is it has to be necessary, meaning that it's going to be profitable for you. In other words, you're not just taking as a deduction to reduce your taxes. This is actually something. It's room that you need set aside in order to produce income. I'll give you a perfect example. I am in a studio that is in a building that is on my residential property, okay? I build a separate studio just for doing what we're doing here. And so it's 100 business. So 100% of this building is business because it's the only thing I ever use it for. And then, of course, you have to document it. But the rule is, think of it this way. If the reason you're doing it is to make money, it's probably deductible. So that's really the goal here. So it's not how much can I get away with? Do remember, though, with the home office, two, two things. First of all, it's not a red flag if you do it right. That's the important thing. Because a lot of people think it's a red flag. It's a red flag, by the way, if you have a Schedule C, but the Schedule C is the bigger red flag than the home office.

So don't do either one, right? Don't do a Schedule C with a home office. Do a partnership with a home office. Do an S corporation with a home office or a C corporation with a home office. The second is, remember that when you have home office, you're also increasing other deductions. You might be increasing your automobile deduction because now your commute is from your kitchen to your home office as opposed to from your kitchen to your place of work. And so that increases. And then remember, also, there's more than one way. The IRS has three different ways of computing your home office. So you do have to know all the details. That's why you hire people. That's why you hire tax advisors like me. But. But the important thing is I can't change your tax until I understand your facts. And you're going to have to change your facts in order to change that tax. So that's. That's the important thing to remember is that your CPA really cannot do it for you. We can do it with you.

Yeah. And change your facts, change your tax. I like that a lot. That's very memorable. And what you said earlier about the coffee mug. Right. It's not a question of is it deductible? It's a question of how can I make it deductible. Right. And that's the paradigm a lot of people have to think. And that's obviously why you are so successful. Tom Wheelwright, thank you for joining us. The book is available in all the usual places, right?

Absolutely. Barnes and Noble, Amazon, and our own website, winwinweltstrategy.com Excellent.

Tom Wheelwright, thanks for joining us.

Awesome. Thank you, Jason.

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