Case Study — Video

Case study — this is ongoing real life, real time. It illustrates what’s possible when multiple strategies are professionally combined to create serious synergy. Have you thought about this?


Transcript:   Hi this is Jeff Brown the “BawldGuy”. Today we’re going to talk about a case study of a young couple in their twenty’s. They make a lot of money. Not a ton, but over $100,000 apiece. They love their jobs and they plan working until normal retirement age, sometime sixty-five, sixty-seven years old. They’ve already bought three multifamily properties, small duplexes. I’ve sent them to Dave Schaeffer to get part of their plan executed, which is known as an EIUL. That’s an investment-grade insurance policy. We don’t need to talk about that here, other than to note its results, which is tax-free income at retirement. Not tax-sheltered, tax-free. It goes for life. What we’re going to do now is approach the subject of depreciation and tax-shelter. Since they make over $200,000, well over $150,000 threshold, we can use what’s known as cost segregation. All that is is a term that describes the ability to massively increase the annual depreciation available for your cash flow on property. They can’t use any depreciation to tax shelter any of their ordinary income. The IRS defines ordinary income as your job income. What will happen is they’ll have cash flow on their duplexes, but it won’t be nearly as much as the amount of annual depreciation they have utilizing this strategy. This will cause a whole bunch of unused depreciation every year being put on the shelf. There is a reason we do this on purpose. What will happen is they won’t begin using other sources of income, whether it’s their job income, the cash flow from the properties, whatever source they have available that keeps them in their comfort zone to retire one of their duplex’s loans early. The plan is to do this over a five-year period. In five years, they would have free and clear’ed this duplex from all loans. They can sell it now and they’ll probably net about $250,000, about what they paid. If it appreciates, we’ll all do the happy feet dance, but we never project that. They have $250,000, but wait, they may have capital gains tax because even though they didn’t sell it for more than they paid and they, for sure, are going to have what’s known as depreciation recaptured taxes on the special depreciation they took. Wait a minute, let’s not forget all that shelved depreciation, waiting on the side lines just to offset taxes like these. We offset the taxes with the unused depreciation. They now have a quarter million dollars after tax money to do with what they will. What will they do? We don’t know. It’s five years down the road. My crystal ball is still to come from the repair shop. What we will decide is what the market gives us at the time. Maybe it’s turning that one duplex into three. Maybe it’s buying another duplex or a fourplex and splitting the rest of the money up in maybe another EIUL, or more likely, maybe some discounted notes. The point is, what they’ve done with this strategy is to utilize what appeared to be a negative, not being able to use depreciation, and turn it into a positive by planning to use it as an offset to capital gains taxes and generating a quarter million dollars of after-tax income in their palms. After that, they will then consider what to do when his wife retires from work to have children. This means that her 401K, which they no longer contribute to by the way, will have money in it that is just sitting there. She will now be able to roll that over into what’s known as a solo 401K, which they themselves will administer. They will take that money and put it in the Roth side, pay the taxes, unless they have extra depreciation to avoid those taxes, who knows at that time, and they will begin buying discounted notes. Those notes will accumulate and keep paying off in providing tax-free income inside that Roth envelope until they’re fifty-nine and a half. When they start this, they’ll only be in their early to mid-thirty’s. They’ll have twenty to twenty-five years to build this up. Let’s recap. Let’s don’t even talk about what they may or may not have in real estate income when they retire at sixty-five, sixty-seven, whenever. Let’s talk about their EIUL income. That’s already a done deal. David Schaeffer has since done the numbers and they’re going to make over $200,000 a year, tax-free, beginning at age sixty-seven. Thank you, Dave. That’s tax-free, $200,000. We don’t know what our lives are going to be like economically forty years from now, but we do know that over $200,000 a year tax-free is going to be a whole lot better than not having it. When they look at their notes, they will have had roughly another twenty-five years of building up those payments because it’s Roth, by definition, that income at fifty-nine and a half will again be tax-free. That income, if they screw up like hogan’s goat, if the economy really goes south, like two or three times, they’ll be able to have $150,000 to $300,000 a year tax-free. By between sixty-nine and a half and sixty-seven, they will have created somewhere between $350,000 and half a million dollars a year and tax-free, by IRS definition tax-free, cash flow in retirement. Now, let’s go back to the real estate. Let’s say by the time they’re fifty, they’ve acquired all the real estate they’re ever going to acquire and they’re now going to concentrate in getting it all free and clear. If … I’m going to be very conservative, they’re probably going to own at least a couple of million, and you know I’m being conservative. That’s twenty-five years from now, maybe twenty years. By the time they’re done with that, their income from that $2 million is going to be in excess of 12 to 15 thousand a month. At that point, we don’t know how much of that cash flow will be tax-sheltered. Even if none of it is tax-sheltered, highly unlikely, it’s 12 to 15 thousand or more a month in income in addition to everything else they’ll be getting, and they have a $2 million free and clear asset by which they can borrow a million bucks in a matter of a couple of phone calls anytime they want, paid for by their tenants, still allowing for cash flow to boot. This isn’t bad. If you’re twenty-something, play this again. It’ll work for you. Thanks for joining me today. This is Jeff Brown, the Bawld Guy. I’ll see you next time.

2 thoughts on “Case Study — Video

  1. Mike T

    The more I listen to you the more my company holding my 401 k hostage in high admin fee mutual funds with a three day settlement seems criminal.

    I listened 3 times!

  2. BawldGuy Post author

    I hear ya, Mike. The first thing you can do, if you haven’t already, is to stop contributing. You’re rowing in a very crowded boat. More and more people are coming to your way of thinkin’, Mike.


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