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The Myth of Tax Deductions

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Math doesn’t lie. When you add 1 + 1 you get 2. Subtract 1 from 2 and you get 1. Big surprise right? One of the most common things that I hear people mention when it comes to owning real estate is how important tax deductions are to their financial health. If you employ simple mathematics to this myth, you’ll see how ridiculous the logic is that tell you tax deductions make sense, because they don’t.

Let’s say you owe the bank $100,000.00 with an annual interest rate of 5%, and your income is $30,000/year. 5% of $100,000.00 is $5,000.00. That means at the end of the year, when you file your taxes, you’ll be able to reduce your taxable income from $30,000.00 to $25,000.00.

On a $30,000.00 annual income, you fall in the 15% tax bracket. $5,000.00 of your annual income was paid to the bank, and you’ll never see it again. The real savings to you in this example, since your tax bracket is 15%, is 15% of $5,000.00 which is $750.00.

In short, you spent $5000.00 to save $750.00. Your net result is a loss of $4250.00 in real cash. If you think that keeping your home mortgage means that you’ll benefit because you’ll be able to take a write-off, I’d be happy to pay you $750.00 as soon as your check to me for $5000.00 clears the bank.

Cash is King: Lower the Rate

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(Note: I’ll preface this by letting you know that a credit card is the devil.)

Today, while using a credit card that I usually use, that I’ve had for over 10 years, which has a limit over $20,000, to pay an important bill, I was declined.

What?  Declined?  How can that be?  Here’s how.  My credit card company (AT&T Universal Card), in their infinite wisdom, made an executive decision to tighten my credit line to the balance on my account.  In a time when Cash for structured settlements
is king, and required to continue moving the parts of the machine that allow me to make an income, the last thing you want to have happen is this, as it completely eliminates your cashflow.  When I asked them why, they told me they ran a check on my credit report.  Why would they do that?  I don’t believe they did it.  I think they’re just telling us that and the real story is that they’re scared to death that they’re too exposed.  That’s fine and dandy and all, and they have every right to do so, but let’s be reasonable here!  No letter, no phone call, no notification at all.  Ask forgiveness instead of permission right?  Get this…I was paying my AT&T phone bill with my AT&T credit card!

As a 100% commissioned sales person, my income depends on the closing of the next sale.  Expenses that have a return on the investment, such as placing sign posts, sending out cards, subscriptions to various marketing services, and oh yeah, my monthly cost to the brokerage, are typically floated on my “business line of credit,” or, the credit card that I choose to use to fund my operations.  Whether it be a small monthly fee to DocuSign, or my brokerage fee, the credit card is a critical cashflow tool that makes it much easier to manage my monthly expenses.  One payment at the end of the month, easy to track, no problem.

Closing a sale results in me paying off the balance in its entirety at which point I realize my profits and recover my operating cash.  Due to the recent (pardon my french) banking bullshit that we the little guy have been forced to feel through the disgusting practices of some extremely greedy people at the top, many of us are no longer able to pay the very bills that we need to pay in order to continue making money.  How can a credit card company cut off my purchasing power…the very line of cashflow that I need to generate income?  Well, they can and they do.  But that’s just one part of the story.  The interest rates that credit card companies charge are yet another piece of this idiotic puzzle.

Interest Rates are Criminal

After a long phone call, I was able to get my rate reduced from a criminal 29.99% to 12%.  Others have not been so successful.  One colleague recently called the credit card company to have her rate reduced and instead, they eliminated 90% of her purchasing power.  They dropped her from $20,000 to $2,000, and didn’t even giver her a rate reduction.  I was rather shocked to find that I had been increased to a criminal rate.  I’m tempted to never pay them back at all, but that would not be the right thing to do.

I’m not sure how I managed to get the rate reduced, other than being good at sweet talking the operator, but I did get it reduced, and thankfully, they also went back 6 months and credited me the difference of 29.99% and 12% because I had overpaid unjustly.  Missing a payment by one day will screw you so hard your head will spin, and they usually just apologize at you and say there’s nothing we can do.  “You’ll have to contact Experian,” they say.  “They’ll be able to show you why we made the decision.”  No maam, they will not.  They will not be able to show me why your credit card company decided to limit my purchasing power.  They will not be able to show me why my rate cannot be reduced to retain my future business.  All they can do is show me my credit history.  They have no idea how to read your mind anymore than I do.  I have no idea what your executives were deciding when they made the call to cut off my cashflow.

$1000.00 at 30%

I’ve written about this before, but there’s no doubt that it needs to be known by all who use a credit card (which I will reiterate takes extreme financial discipline, which most people don’t have.)

A card with a balance of $1000.00 usually requires only a minimum payment of $15.00/month.  You can buy that new laptop for only $15.00/month right?  Not so fast.  Let’s assume you pay $25.00/month instead of the minimum of $15.00.  At 29.99% annually, you will be paying somewhere around $4300 for that $1000.00 laptop and it will take you 15 years to pay it off. CRIMINAL!  If you fall into this trap once, that’s okay, get yourself out as fast as you can.  If you fall into it more than once, you’re an idiot.

The real lesson to learn about finances is that when you owe someone money, you become enslaved to them and the freedom to experience life as you were designed to experience it is virtually eliminated.  If you can, at all costs, and all interest rates, avoid credit cards entirely.

Man Buys House, Raises Annual Income

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I frequently find myself in conversations with people who are unaware that they could in fact purchase a home.  There is a misconception that homes come with more bills than apartments, and that owning a home locks you in to living in one place forever.  Ownership doesn’t mean you’ll incur additional expenses if you choose the right place for you.

On the latter point, if you’re planning on making a move and you’re hoping to get rich quick, don’t hold your breath.  It costs more to sell a home than it does to buy a home because of the marketing costs involved, so you’ll want to make sure you stay in your home long enough for the value of the home to exceed the brokerage fees you’ll incur when selling.  So, yes, you would probably be looking at a longer stay in a home if you own it than if you rent it, but here’s why it’s a better financial decision for your long term financial growth.

Owning real estate builds wealth.  Renting builds someone else’s wealth.  How can this be?  Let’s look at a simple example.  We’ll take two single adults, Joe and Larry, each making $30,000/year.  (Note: I am not a lender and cannot be held responsible for the accuracy or realism of these calculations, but I’ll do my best.)

Joe Makes $30,000 year.  He rents.  His monthly rent is $1000.00.  For the sake of simplicity, we’ll assume he has no other expenses.  I know, not too realistic, but it cleans the canvas for the brevity of my point.  Joe pays the government based on a 15% tax bracket.  His tax bill for the year will be roughly $4099.00.  That means that of Joe’s $30,000 salary, he takes home $25,901 and of that, he spends $12,000.00 on rent, leaving him with $13,901 for the rest of his discretionary and non-discretionary expenses.

Larry also makes $30,000 / year.  He bought a $160,000.00 home at roughly 6.25% for 30 Years, fixed.  (No idea how mortgages work?  Check out one of my sponsors, Michelle Minnoch.)  His mortgage payment is about $1000.00 / month, but the key difference is that part of the mortgage payment is interest to the lender, and the rest pays down the balance of the loan.  Over the course of one year, where Joe would be throwing away $12,000.00 in rent, Larry only “throws away” $10,100.00 and the difference of $1900 becomes equity in his home and increases in value over time.

So, while Joe has thrown away $12,000.00, Larry has saved nearly $2000.00.  Not only has he saved over the course of the year, he can also reduce his taxable income because the interest paid to the lender is tax deductible.  Where Joe found himself in the 15% tax bracket, Larry can reduce his taxable income by the amount of interest paid out during his first year of ownership which amounts to about $10,000.00.  Larry is still in the 15% tax bracket but he is taxed on only $20,000.00, which means his tax bill will only add up to $2599, a savings of roughly $1500.00 over Joe.

Joe pays Uncle Sam $4099 and throws away $12,000.00 on rent.  Larry pays Uncle Sam $2599 and throws away only $10,000.00 on tax-deductible interest.

When Larry bought his house, he gave himself a $3500 raise.  Joe is still renting.  They both spent $12,000.00.  Which one do you want to be?

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Realty Executives Referral Network

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Many real estate licensees have chosen not to be active in the marketplace. The costs associated with running your own business can be more than many wish to handle. What if, even though you aren’t actively selling real estate, you were able to collect a referral fee just for bringing business to the table?

Realty Executives has a referral program for the licensee who doesn’t actively sell real estate but wishes to keep their license. If you’re one of these people, and you still want to make a great income without actually working in real estate, give me a call and I can discuss how it works with Realty Executives.

The basic premise is this. When you come across a potential client, you pass them on to me and I’ll take care of them. As long as you’re part of the Realty Executives referral program, you will receive a referral check. Their program allows you to hang your license in such a way that allows you only to participate in referrals, and it’s very inexpensive.

Interested? Give me a call today and I’ll point you in the right direction.