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How Rich People Avoid Paying Taxes - Robert Kiyosaki and Tom Wheelwright @Tom Wheelwright - YouTube
Channel: The Rich Dad Channel
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- Hey guys, welcome back to part two
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of Advanced Lessons in Millennial Money
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where we answer all your questions
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about taxes with Robert
Kiyosaki and Tom Wheelwright.
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If you missed part one you can watch it
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by clicking the link in
the description below.
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For the rest of us, let's get started.
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Robert and Tom talk about the
three most important terms
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you should know if you want to understand
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how taxes can work for you.
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Let's listen.
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- There are three basic accounting terms
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you must know in why I do this here.
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So when I have debt, okay,
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which is over here.
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Liability.
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The reason I want a lot of debt is because
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my hamburger business
is paying for my debt.
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What is that called?
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- It's called amortization.
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So you're paying down the
debt with other money.
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- That make sense to you?
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- Yeah.
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- So let's say I have
$20 million in debt here.
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Every hamburger that's being
sold is paying down my debt.
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Is that tax free?
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- That is.
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- It's amortization but
if you're on this side
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and you have a house is amortization tax.
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Well not really but who
pays for that amortization?
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- Well you pay for it.
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- Yeah, these guys here are
the suckers in this whole deal.
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They have a big house.
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That's why most sports stars are bankrupt
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because they got the $20 million contract
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and they buy a big house
for mommy and daddy, right?
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- That's right.
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- But they don't get this bit here.
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The other word that is
important is this word here.
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And that's called.
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- Appreciation.
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- Appreciation. So what
does that mean to you Tom?
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- Oh, well that what that means
is this is the asset column.
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It means that as the real
estate goes up in value,
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it's appreciating and you get the benefit.
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What I love here is where the debt goes.
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It's the bank's money,
that's the banks money,
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but you get the appreciation on your money
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and the bank's money and
that's what's magic to me.
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- Yeah, so let's say I have
one million dollars of my money
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in here, by levering up I
got six million dollars.
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Now this thing goes up in multiples of six
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but it's the bank taking out that money.
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- They get none of it.
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- Debtors are winners, yeah.
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And then we have the third word.
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So you get the amortization, appreciation,
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and this is the magic word here
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that most people don't understand.
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It's depreciation.
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And this is where it gets tricky.
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See.
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Why is that actually both sides?
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- Well because what
happens is depreciation
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is a deduction for tax purposes
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but it's no money out of your pocket.
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So, because of that,
what's really happening
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is you're lowering your taxes,
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you're lowering your taxes
with the depreciation,
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okay, because your
paying net income right?
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So you lower your taxes with depreciation,
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which increases the amount of cash flow.
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- Yeah, so let me say this much.
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So let's say I have $100,000 okay,
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that goes to taxes but
because I have depreciation,
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I don't have to pay the $100,000 in taxes.
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So that means my income goes up
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but it also means my expenses went down.
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This is number one of all the things
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that's hard to understand
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is this is simple.
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Everybody knows appreciation.
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Everybody knows amortization.
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I paid my car off, I
paid my student loan off.
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But this here is the trick here.
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See, depreciation means
instead of paying a 100,000
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in taxes to the government
I keep the income
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but that's why it goes up.
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- Let's say that outside of this,
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let's say you didn't have this
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and you have all this income
from your business, right?
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Or from this business, either one. Okay.
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- This person can do it it too if--
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- This person sometimes can do it, okay.
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But this person can do it, this person.
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Let's say that you have
all this income coming in,
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you're paying all this tax.
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Let's say you have $100,000 of tax.
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Okay, now you go out and
buy a piece of real estate.
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Well, why does the government
give you an incentive?
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Well because they're--
- Not a house, now.
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Not your residence.
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- Not your personal residence.
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This is investment.
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So, this is housing for other people,
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or--
- Apartment housing.
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- Or this is commercial
property for a business.
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- This is an office building that I own.
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- Exactly, an office
building or hotel, okay.
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Any kind of business real estate.
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- That's bought with debt too.
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- Now we add the debt.
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So, now let's say that
we had a million dollars
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of your own money and five million dollars
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of the bank's money.
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Well we get depreciation deduction,
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a percentage of the six million dollars.
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So the bank doesn't get any of that.
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We get all of the depreciation
six million dollars.
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That could be as much as $500,000 a year
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and because we've got
that much depreciation,
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that's just a reduction
of our tax expense.
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- Right, so it's 500,000 extra in income
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but it's actually called phantom income.
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- Right so what happens
is because we've got,
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now we have less income
for tax purposes, right?
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- We don't have to pay the--
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- We have less income for tax purposes
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so now what happens is we
have to pay less taxes.
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Okay, because we're
taxed on our net income.
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We're taxed on our gross income
minus our business expenses
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and in this case the business
expense of depreciation
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is like magic because it's
not money out of our pocket.
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We're still appreciating.
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We're still making money here and here
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and cashflow from the property.
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Okay and at the same time
we're reducing our taxes.
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Well anytime you can reduce an expense,
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I'm an accountant and so
I love reducing expenses,
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and every time you reduce expenses
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it's like putting money in your pocket
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because now you have more
that you didn't spend.
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- Right, so this is the same number.
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So let's say it's 500,000,
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that means 500,000 in income
we didn't have to spend,
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but it was caused by 500,000 in expenses
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you didn't have to spend.
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So you paid nothing for taxes.
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- Oh my gosh, don't
worry guys I'm still here
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but that was a really long
clip but very important.
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Next we discuss the most
important lesson of all
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and that's financial education.
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Then, Tom and Robert wrap
up our discussion on taxes
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and where you get the most benefit.
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For example, a lot of millennials,
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the first thing they would
do when they get a check,
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is go spend it and I think
that is the big difference.
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- If their parent's did the same thing.
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- Yes, because they didn't
get the financial education
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but then I see you--
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- No, but I bet your economy
teacher does the same thing.
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- Yeah, and then I see people
like you that the moment,
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I mean it's like you said what
do I do with all this money.
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I have to find the next investment,
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and it's just that's a
really impactful lesson.
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It's not spending it,
it's investing it again.
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- So as this goes up, I've
got to borrow more of this
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so I can buy another asset here
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so I can get more depreciation this way,
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more amortization, and more appreciation
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and I just get richer
and richer and richer.
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Is this legal, Tom?
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- It's legal, and you know,
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I was just thinking as you
were talking about this,
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that, you know, the depreciation sometimes
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it's got a cost recovery
or has other terms
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in different countries,
okay, and sometimes,
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and the rates are different
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and how much the depreciation is,
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but the concept is very consistent
from country to country.
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It's one of the first things I look for
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when we go to a new country
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is how does depreciation
work in that country.
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Sometimes it works only on new property,
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sometimes it works on used property.
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You know, sometimes, you
have to build it yourself.
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So whatever it is the tax laws are there.
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Here's what's going on, we
talk about this all the time.
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The government's your partner.
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Well if you're unemployed
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your government's taking
40% of your money.
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They're your partner,
they're a silent partner
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and they're giving you
nothing back for that, okay.
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If you're a small business
they're taking 60% of it,
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but what happens is that
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if you start doing what the
government wants you to do,
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big business, investor,
investing energy, and--
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- Real estate.
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- and real estate.
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- Food, water.
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- Food, water, all those things.
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You start doing research, okay.
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You start new things the government wants
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they'll say 'Look, we
know that that's risky.
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As your partner we will
contribute to that cost'
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and that's really all
that depreciation is.
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Depreciation is just the
government's contribution,
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okay, to your real estate investment.
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That's all it is.
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- Yeah and in kind of the cliche term is,
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between Tom and I, is I
want more phantom income.
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Phantom income means money
that stays in my pocket
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or doesn't go out of my pocket.
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So the same money.
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- Right, and you make a good point
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that if you're buying your own house,
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for example, you're not
gonna get that tax benefit.
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There are some countries
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that have small tax
benefits for your own house.
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What they really want is
for you to build housing
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for other people, okay.
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Then you're being generous and
then you get the tax benefit.
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- Thank you guys so much
for joining us on this video
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and I hope you guys loved
it just as much as I did
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and if you did give it a thumbs up,
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comment if you have any questions,
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and subscribe to our channel.
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(foreign language)
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Oh my gosh I almost fall asleep
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but that was a very long (laughs) clip.
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Oh my gosh I'm still awake.
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That was really.
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(laughs)
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Thank you guys so much for
joining us on this episode.
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I spit.
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(laughs)
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The most important lesson of all.
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Whoa.
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(laughs)
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