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