How landlords making $75,000 a year could end up in a millionaire tax bracket. In this episode,
I'm going to address the question. How Biden's
proposed capital gain tax changes will hurt many people? Especially those who own
rental properties. Get ready, you may not be aware of these changes and how much they could damage
what you have been saving and accumulating in your rental income properties.
So, my name's Doug Andrew I've been a financial strategist and retirement planning specialist
now for more than 48 years. But I've helped many many people not only optimize their financial
assets but minimize taxes and so many times as I meet with people across America to help them
prepare for retirement. I have noticed that many Americans will draw from up to four
income buckets where they've been accumulating money. Not everybody accumulates money in all
four buckets. But I'm going to summarize these real quick and then I'm going to show you the
real estate one. Now, a lot of people unfortunately approach retirement and they're way too top heavy
in what I call the investment bucket money in yet to be taxed IRAs & 401ks and they have
too much money in those yet to be taxed accounts and I would recommend that no more than 30% of your
money at retirement. Because at retirement planning is something totally different than maybe what you
did for retirement planning. I would recommend no more than 30 percent of your money still be in
that bucket. So, this requires that during the final five years before retiring that people perform
what I call a strategic rollout, not a rollover. See, a rollover is going from the frying pan and
the fire. This is where people take money out of 401ks and roll it over to IRAs and they continue
to postpone until they're 72 and then they're told to take out RMDs or require minimum distributions.
That's the worst advice for most Americans in my opinion. The next bucket is real estate. Now, some
people only own their home but there's a lot of people who have non-owner occupied rental
income properties. Whether they're single resident rental homes, duplexes, apartment complexes, maybe
commercial properties. Now, before I come back to that one because that's what I'm going to focus on
in this episode. Some people have defined benefit pensions, they're a school teacher, a police officer,
a firefighter, and so they have these guaranteed amounts. Some people just rely on social security
which I would consider social security to be a bonus not the basis of your retirement.
Because frankly, social security is in trouble in this country, the government owes about 130
trillion in future social security medicare benefits and they only have about a nine-month
cushion of that. If they don't collect or withhold it from new workers they'll be broke. So don't
rely on social security as your basis it should be just a bonus. My favorite vehicle
is the tax-free bucket and out of those. I prefer what is called the laser fund and this
is where a lot of savvy real estate investors will keep their working capital because it's tax
free. Now, when you own real estate you get tax advantages. In a nutshell, when people buy a
rental property. There are three big categories of deductions that you take on a schedule e
or maybe an LLC. If you have it in that kind of an entity and that's where you're writing off
the interest on any debt you have or mortgage and you're able to write off any of the maintenance
and the repairs and so forth. But then you're able to depreciate it down. Well, the problem with that
is you buy a property let's say 30 years ago and it was a duplex for 250,000 and you depreciate it
down and to where over 26-27 years whatever. You depreciate it down to just the value of the land.
Well, that means, when you turn around and sell it you're gonna have to pay a capital gain tax
on what you sell it for over and above what you've depreciated it down to and this is where people
get bit. All those tax benefits that they enjoyed now catch up with them and so what do they do to
avoid paying the capital gain tax? They continue to go from the frying pan of the fire by buying like
property and inheriting new headaches. They have to do 1031 exchanges. Now, they have another property
and they're still a landlord taking out the trash, fixing toilets, evicting tenants,
and a lot of them are pretty tired. They thought in retirement, "Oh, this is going to be
my retirement nest egg", but they're really tired of managing and I could tell you horror stories
of many who then hire real estate managers and many times those management companies embezzle
money. They don't manage it as well as they did and and so people just go I've had it. So, they
don't sell because they're going to have to pay a big capital gain. They painted themselves into this
corner and they think, "Well, if I hang on to these properties. When I die my kids will inherit it and
now it's worth a million dollars", there are many people who bought property for 250,000 30 years
ago and now it's worth a million. In California, I've had many people in the San Francisco Bay Area
that bought homes for 230,000 30, 35, 40, years ago and they're now appraised for 4.8 million.
Well, you sell them you have to pay a capital gain tax. So people hang on to them thinking their
children will inherit them and get a step up in basis. Well, it sounds like President Joe Biden may
want to get rid of that and he may be successful. But he also in order to fund his initiatives
of you know medicare for all and student loan forgiveness and free college tuition
and all of these stimulus packages. He's increasing income taxes, estate taxes, but one of the big ones
is not only the the corporate tax rate is a 33% increase. It went from 21 up to 28 percent people say,
"That's only 7 percent more", now, on every million. Now corporations have to pay instead of 210-280
thousand which is 33% more in tax and this is why corporations they can't afford that. They lay
off people or they increase the price of their goods and services. But let's get back to this
capital gains tax. A lot of times the capital gains tax I feel is unfair. I'm gonna explain
why next. Why would a capital gain tax be unfair? Because many times you're being taxed
for inflation. When you sell a highly appreciated asset if it's property for example, it appreciated
because of inflation. Inflation maybe averaged five percent and maybe it went up in value seven
percent. So, five of the seven percentage points was just the cost of living going up and the
government is taxing you for the cost of living increase. That's really unfair. That's why many
times when you have a republican who is in office they will lower the capital gain rates down to
0 or 15 or 20 percent. So, for example, I sold a commercial building under the Trump administration
and what a lot of Americans don't realize is that you sell the property
the capital gain is added on top of your income to calculate what income tax bracket you are in.
People think, "Well, I'm in the lowest bracket. So, I'm not going to move up to the 20%".
No, your capital gain is added on top of your income which forces most people sometimes into a
millionaire status. So I had to pay 20% plus another 2.8 for the ObamaCare. So, capital gained tax rates
under Trump were just about 23% federal and another 5 percent to the state of Utah. So I paid about 28%.
I know, I experienced that on a commercial building. Now, under biden, he loves to tax people when
there's money being transacted and so his proposal is number one to change it to ordinary income tax
rates. The highest tax rate for couples making over 400,000 individuals making over
200,000 is 39.6 percent. So it's moving from 20 up to nearly 40 plus the 2.8 percent ObamaCare tax.
It's going from 23 up to what 43 plus the state rate. He is basically doubling the capital gain tax
rate and that capital gain is going to force many people into a millionaire tax bracket. So, I read an
article in the wall street journal that sort of inspired this episode. So this article grabbed my
attention it actually came out of the wall street journal the last day of July in 2021. It was titled
how a landlord making 75,000 a year could end up in the millionaire tax bracket. This was authored
by Rachel Louise Ensign and she gave an example of how this gentleman had worked very very hard
to acquire these apartments had been paying them down. He still had a mortgage on it. But this was
his retirement and all of a sudden under Joe Biden's proposal. He realized that now if he sold
these for a couple of million dollars that he was going to be pushed into a millionaire tax bracket.
39.6% plus another 2.8 percent ObamaCare. He was going to be shelling out to the federal government
about 43 percent and on top of that the state tax and so it forced him into the highest tax
bracket. He didn't realize that's what was going to happen this is what I'm talking about. So the
other part is if President Biden does away with a step up in basis on long-term capital
gains. What does that mean potentially? Now, if this is alarming you and you can think of somebody
who maybe is in this situation be sure and share this video click like you can post a comment.
But I would encourage you to subscribe to this three-dimensional wealth channel.
I post an in-depth answer to a financial question almost on a daily basis.
Click on that little bell so you'll be notified every time I do post a new educational video
and stay with me a few more moments to the end. I want to gift you a copy of my most recent
best-selling book called the laser fund and you'll see this is where many savvy real estate investors
keep their money for liquidity safety and to earn predictable rates of return. Even if they choose
to just sell their real estate, pay the capital gain tax in today's lower rates, and then they go,
"Where do I put this money?", they're shocked when we can create cash flow equal to or greater
than the rental income. They were experiencing from their properties and they don't have to be
a landlord anymore taking out the trash fixing toilets and evicting tenants. Oftentimes they go,
"Where have you been?", they had their blinders on thinking that real estate was the cat's meow.
So, what's this step up in basis? See, tax revenuers again like to be there with their
handout when there's money being transacted. The estate tax sometimes called the inheritance tax
is what they assess when people pass away. The husband and the wife and leave behind assets to
the children. President Biden is proposing they raise those from about 40%, 46 up to 67%.
Because they love to tax people that are sort of six feet under because they can't complain
about it. What about capital gains? So many people have been hanging onto these properties. They've
been doing 1031 exchanges until they die and their children inherit it and get a step up in basis.
So going back to my example. If your folks bought a rental property for 250,000 30 years ago and now
it's worth a million and they die and they leave it to you. Unless you move into that especially in
the state of California. You have to move into it or else you do not get the tax break or the step
up in basis. In fact, California will probably tax you on a capital gain on an annual basis now.
But let's say that you're in other states and you think, "Oh, you hang on to it for a year and now
it's worth a million one hundred thousand and you sell it", under the previous law you get a step up
in basis. You would only have to pay tax on the last hundred thousand that it appreciated since
the day that you inherited it. When you inherited it was worth a million you hung on to it and now
it's worth a million one. You pay a capital gain of 20% on a hundred thousand that's 20 grand.
You could potentially by doing away with a step up in basis on long-term capital gains be forced to pay
how much? 40 percent on the entire million. Because if they do away with a step-up in basis depending
upon your tax bracket and other factors you could potentially go from paying 20,000
to maybe 400,000 in tax with one stroke of a pen if that legislation is passed. So if
this is alarming you what should you be doing? Unless you really love those rental properties
I would recommend you strongly consider perhaps liquidating those, selling them while the market
is hot, paying the capital gain tax at a lower rate, rather than thinking they're going to be lower in
the future and reposition the after tax money into a portfolio of laser funds. Where you will be able
to accumulate the money from that point forward totally tax-free. You can create tax-free income or
cash flow that often is equal to or greater than the rental income on the properties and you don't
have to be a landlord anymore and at the end of the day, when you die every million would blossom
to maybe two and a half million. If I died I'm 69 every million would blossom to about two and a
half-million right now and transfer tax-free. That reimburses you many fold for any tax you do pay by
liquidating the properties. If this is intriguing you claim your free copy of this book it's 300
pages. It will show you how to diversify and create the foundation for a tax-free retirement.
This side is about 200 pages that gives all the charts and graphs and explanations.
When you turn it to this side there are 12 chapters and there's one in there specifically
about real estate investors and why they use the laser fund as their working capital account
and their repository when they sell highly appreciated properties, pay the capital gain tax,
and where they invest what's leftover into here and you'll see how people generate cash
flow income that equals or exceeds what they were getting in rental income. Claim your free copy go
to laserfund.com click on the link below. Contribute a nominal amount towards the
shipping and handling I'll cover the rest of that and I'll fire out a copy for you. There's options
also there to listen and learn watch and learn. But this is the beginning of your brighter future.
I don't want you in some horrible capital gain tax trap without you being aware of
what's coming down the pike and what you could have done to prevented paying unnecessary tax.