A wealthy person borrows $500,000 against five rental properties instead of earning it, avoiding the $175,000 federal tax bill. Loan proceeds aren't taxable income. The strategy works if investment returns beat the interest cost, and the interest may be deductible against rental income.
Questions this video answers
Five rental properties.
Approximately $200,000 of equity on each property (speaker says "If I have $200,000 of equity on each of these five properties").
$100,000 borrowed on each property.
$500,000 of cash proceeds.
Example uses a 35% tax bracket, calculating 35% of $500,000 = $175,000 federal income tax.
So I'm going to give you guys another strategy that rich people use to pay way less taxes. So this is just one video in a series of many. But today we're going to talk about how you can use debt as income and avoid taxes on that. Now, before we get into all the details, I'm not a tax preparer. You should definitely check with your CPA or tax attorney before you implement any of these strategies. I'm just sharing what I know I've seen clients do. Many, many wealthy clients do, and I've done myself personally. So I'm just sharing the experience with you and hopefully this will help. So here's what we do. When interest rates are low, we use debt to our advantage. You take out debt against assets that you own and you can use this to invest and you can actually even use it as income. So let me break this down for you. Let's just say that I have five rental properties. Now, over the last years, the tenants have been paying down the mortgages and also the properties have continued to appreciate. For example, If I have $200,000 of equity on each of these five properties, let's just say I want to borrow a $100,000 of that equity on all five properties. I can do a refinance to take out $100,000 of debt on each of the five properties. That produces $500,000 of cash directly to me. Now, because this is a loan, it's considered debt, not income, therefore it's not taxable. You have to pay this money back to a bank, right? So while you do have interest expense associated with this debt, if interest rates are low, that expense is very minimal. But here's the kicker. If you're investing that money and you're getting a higher rate of return than what it costs you to to borrow that money, then you're actually ending up ahead. So let's just say that you're investing that money and you're getting a double digit return that far outweighs the single digit interest rate that you're paying to the bank. Not to mention the tax savings are huge. The fact that you don't have to pay tax on this $500,000 is a huge amount of money saved. Here's the comparison. Let's just say you earned $500,000 of additional income and you were in one of the top tax brackets, say 35%. 35% of income tax on $500,000 is, is $175,000 of tax that you have to pay to the federal government. That doesn't even take into account if you have to pay state taxes, like if you live in California or another state that has state income tax as well. So when you look at the benefit of earning higher interest on the money invested, also the tax savings of paying zero income tax on this 500k, it's a massive savings to the individual who took out the debt. Another cool thing is the debt that you've taken out against those income properties is now a deduction against the income that you receive from those properties. So. So you can write that off as well. Now I've personally done this to fund future investments and I've also seen wealthy investor clients use this to fund their lifestyle too. So they would take out a bunch of debt on their portfolio of properties, they would use some of that debt to invest in more properties, which grows their net worth overall, continues to build momentum and scale, and then also they use some of that money just to live day to day. They fund their businesses, they fund their lifestyle, they fund their primary expenses for their primary home. So, so there's just a multitude of ways to use the funds. And the great thing about it is, again, you don't have to pay any taxes on the debt. So again, this is just one of many strategies that I've seen wealthy people use to pay way less taxes or to avoid taxes altogether. If you guys have questions or comments on any of this stuff, leave a comment below and I'll be happy to answer it. And also, like I said, I produce several more videos on this, so stay tuned for that and I'll see you guys on the next video. La.
