Rebecca Walser is one of the few Top 100 US Advisors who is also a tax attorney, so she has a completely different perspective on personal finance. She is also a best-selling author and wealth management firm founder and is a regular on Fox Business who has also been featured in Wall Street Journal, Bloomberg, ABC, NBC, and Yahoo Finance.
Rebecca Walser Real Estate Background:
- Wealth Strategist, CFP, Tax Attorney, 2X Top 100 U.S. Advisor by Investopedia
- Best selling Author of the book “Wealth Unbroken”
- Podcast Host – Crashes and Taxes
- Frequently on national media such as Fox News, Business, Yahoo and more
- Based in Tampa, FL
- Say hi to her at: walser wealth
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Best Ever Tweet:
“I’m not just a tax lawyer, I’m a financial person who wants to do tax and finance together.” – Rebecca Walser
Joe Fairless: Best ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever. We don’t get into any fluffy stuff. With us today, Rebecca Walser. How are you doing, Rebecca?
Rebecca Walser: I’m good, Joe, thanks for having me.
Joe Fairless: Well, I’m glad to hear that, and it is my pleasure. A little bit about Rebecca. She’s a wealth strategist, a certified financial planner, a tax attorney and Investopedia has named her in the top 100 US advisors, not once, but twice. She’s also the author of Wealth Unbroken and podcast host of Crashes and Taxes. Based in sunny Tampa, Florida.
Today, first off, I hope you’re having the best ever weekend; because today it’s Sunday, we have a special segment called Skillset Sunday. And Rebecca is going to talk to us about the three ways that real estate is a tax-favored investment. And are those three ways to stay? And if not, what do we do about it?
So I’m very much looking forward to this conversation. Rebecca, I guess to kick things off, would you mind just telling the Best Ever listeners a little bit more about your background, and then let’s roll right into the taxes?
Rebecca Walser: Yes, absolutely. That would be my pleasure. Again, thanks for having me, Joe. So I basically have been in finance my entire life. I learned about money at four years of age. I had a personal experience with my family, my parents weren’t that great with money. They came from a lot of money, both of them. And when you get two people together that come from a lot of money, they don’t really know what they’re doing with money. They don’t understand the value of money, how it’s earned, how to keep it… So they were unfortunately in a little bit of a financial disaster. And they had four kids right in a row, and it just really framed me — our power would be cut off all the time and weird things like that. And I just said, “Hey, whatever this thing about money is, paying bills, it’s not going to be me. I’m going to do it the right way.”
So I was pretty much obsessed with finance since the very beginning. I knew I would always be in the financial world. Graduated with my undergrad in finance with exactly the right credit hours. I did not waste one class, laser-focused. Got my first job with Price Waterhouse before the merger with Coopers & Lybrand my senior year of college. Worked for them internationally in the global financial world of consulting for five plus years. Then I moved to IBM, AT&T. Then I went into real estate finance. So I ran the gamut of finance, I’d say, all around multiple sectors. Then I decided, “Hey, I keep bumping up against this thing called taxation. You make a lot of money or you’re trying to help big corporations make a lot of money and there’s a lot of stuff you got to do a tax on.”
So I said, “You know, I think I need to quit my job and become a tax lawyer.” So I did that. It’s just that I was able to financially quit, go back to school. I went to University of Florida for my law degree and then I went and got my extra advanced law degree from NYU out of New York City in tax, which is the best tax program in the country. I then practiced tax law exclusively for a few years and decided, “This isn’t going to work. I’m not just a tax lawyer, I’m actually a financial person that wants to do tax and finance together, not just one solely independent of the other.” And I opened my own practice going on seven years now. So that’s kind of my background.
Joe Fairless: And just by having that job in college shows the initiative. And you mentioned, you didn’t waste any credit hours, which I never really thought of. I definitely wasted some credit hours, but maybe I got more well rounded. Who knows?
Rebecca Walser: Probably you did, Joe.
Joe Fairless: Having that job as a senior in college – that speaks volumes about the tenacity and the focus, in my opinion. So let’s talk about the three ways that real estate is currently tax-favored, and then we’d love to hear your thoughts on if that’s going to stay with us.
Rebecca Walser: Yeah. If you don’t mind, Joe, what I want to do is flip the script for one second, and before we go into how real estate is so tax-advantaged, I wanted to tell your listeners, why are we talking about that changing possibly? Why I talk about it if it’s going to be the case forever? And that’s why we’re going to talk about it, because we actually do see now that it’s threatened and that it is potentially going to change, and we need to prepare for that. There’s nothing to be scared of. It’s always the unknown that we’re afraid of. Once you know and you have potentially active strategies that can help you deal with what is coming, then you’ll be okay, right?
So what I feel like is most real estate investors don’t really understand the tax code around real estate and why it’s so favored. And I definitely want to go into that, but I first want to tell your listeners why are we even talking about this if it’s not going to change? It’s going to change in my lifetime. And I definitely believe in your lifetime as well, Joe, and certainly a lot of your listeners’ lifetimes. Because when these changes are happening now very fast. They’re coming very, very fast now. And why is that happening?
So you’re probably very familiar with, and I’m sure that your listeners are, the terminology “kicking the can down the road.” Okay—
Joe Fairless: 1031.
Rebecca Walser: So we’ve kicked this can down the road, and I’m specifically talking now about the broader world of America. And specifically, when we’re talking about the “kicking the can down the road”, we have known really since 1965 that we were going to have a huge problem between 2020 and 2030. And we’ve known this for a very, very long time. Like I said, since 1965, when Medicare got signed into law. And we’ve done nothing about it. And the politicians have kept saying, “Oh, I’ll deal with it later. I’ll deal with it later.” That’s the “kicking the can down the road.”
So why is everything changing? Well, what is it that we’ve known? We’ve had 75 million Americans born in a boom between 1946 and 1964. We call those people the baby boomers. So we have 75 million people — some of them have passed away, but we have a lot of baby boomers that are still in our workforce to this day. And we know that between 2020 and 2030, those people are going to reach what we call FRA or Full Retirement Age. So as these people retire, what’s going to happen is you’ve got about 70 million people still that are working in the workforce, give or take. It probably might be closer to 68, but let’s call it 70 million people. So we’ve got 70 million people that are in the system that are at their top earning years, that are paying payroll taxes. Payroll taxes is the sole government source of funds that funds Social Security and Medicare. These people over this next decade are rightfully going to retire and extract themselves from paying those payroll taxes. So we’re minus 70 million people (approximately 68) from paying those taxes; and then those people are rightfully going to go on to Social Security and Medicare themselves. So if we round it up to 70, that’s a swing of 140 million people in the wrong direction from what we can afford to pay as American citizens and what we pay in. So we have known that this is going to be a huge problem—
Joe Fairless: Real quick, just curious… So that’s assuming that there’s not new people entering the workforce doing that?
Rebecca Walser: Excellent question. So your listeners are probably thinking, “Yeah, but there’s people to replace them,” right? And yes, there is. But let’s look at that for just a quick second. We have all the millennials, or we call them Gen Y right? All the millennials are already all working, because they’re all in their basically 30s at this point, or almost 30s; you’ve got some people that are in their late 20s. But then you’ve got Gen Z or the Zoomers, or whatever you want to call them; I call them the last generation, because they’re Gen Z. And Gen Z, we have already part of that generation already working. They’re in their young 20s, but they’re already working. And what we’re seeing with Gen Z is a new phenomenon. And this is the problem in a nutshell.
First of all, you’re replacing people that have been in the workforce for 30 plus years working at the top of their pay scale, presumably, most of them, and then you’ve got Gen Z that are young 20s, maybe with a degree, not with a degree, and they’re obviously not going to make the same amount of money. But then what we’re finding is a new phenomenon is what we call the gig economy. So people like you, you’ve got real estate investors that say, “I don’t need a W-2 job, I can go out and follow Joe’s advice and do all these things and make this real estate cash flow and have a freedom number. And I don’t need to work as a W-2.” You’ve got social media influencers, like YouTubers and Instagrammers. You’ve got gig economy like Uber driver, Uber Eats. Like, you’ve got all these people that are basically ICs (Independent Contractors), 1099, and they’re not paying the payroll taxes, which is why California did AB5. AB5 basically says, “Everybody is a W-2 employee for somebody else. You can no longer be an independent contractor”, so that they can try to recapture some of those state income taxes that they’re missing out on.
So you will probably likely see a countrywide AB5 in this coming decade because of this shift. In the history of time, this is the largest demographic shift ever recorded. It’s a worldwide phenomenon, because World War II really is what made the baby boomers come so fast. And that was a worldwide war. So this is happening everywhere. This is not just happening in America. I would say Germany, it’s happened probably 10 years ahead of time. They’re probably 10 years before us. Japan is also the same. But this is otherwise a worldwide phenomenon that every country is going to go through.
Joe Fairless: That’s fascinating.
Rebecca Walser: Yeah, it’s huge. So to just kind of cap off why that’s important… The CBO (Congressional Budget Office) in 2008, did a research project on “What is the impact to the federal government of the mass retirement of the baby boomers?” And specifically, “What is the impact of Social Security, Medicare and Medicaid?” And they concluded that report in 2008; this has been on record for 12 years, nobody talks about it. They concluded that study by saying two things will happen. It’s not a mathematical question. It’s not an estimate or a projection, it’s a mathematical certainty. And that is number one, they said benefits will be cut. So you’re going to start to see Social Security benefits being means-tested. It’s already done right now in the form of taxation. They calculate your certain type of income and then they tax you based on that income. Provisional income is what it’s called. So the bottom line is, they said that benefits will be cut.
Based on the other taxable income that you have, your Social Security benefit will go down. Now, that’s not for everybody. I don’t want to scare your listeners and they think, “Oh my gosh, I’m supposed to get $24,000 a year and I’m only making $5,000.” I’m not talking to the people that are not making substantial money, but what I am saying is if you’re getting a taxable distribution from an IRA account or you’re getting taxable real estate income that’s substantial, anything above $20,000 a year, you can start to see that you will potentially be affected, your Social Security benefit could be cut. So the first thing is we can’t afford to pay the benefit that we’ve promised everybody, so benefits will be means-tested.
The second thing and the more important thing that they said is taxes will have to more than double. And they gave us projections. They said that 2008, the lowest tax bracket was 10%. They said the 10% bracket is projected to go to 25%, the then middle-class tax bracket of 25% was projected to go to 63%, and the top tax bracket was projected to go to 88%.
Joe Fairless: Well, that would be a game-changer.
Rebecca Walser: Yes, huge game-changer. What you’re looking at, Joe, really is European tax levels. People have to understand, we’ve had Social Security since 1935. We’ve had Medicare since 1965. Yet the baby boomers, this generation that’s retiring between 2020 and 2030, this generation is our first full generation that is moving onto these social programs in mass. This has never happened for America before. So because of that, we’ve had sort of a pay-as-you-go system between these two systems that’s been very cash-rich, which is why you hear of this $3 trillion fund, this surplus fund of social security that we’ve been able to gather or at least collect, but the government has already spent it. There is no dollars in the trust fund, just so you know.
So we’ve been able to be very cash-rich, but we always knew that once a full generation retired and went on to these programs, that we would have to have some sort of European style tax system. And we’ve been living under Ronald Reagan’s ’86 tax reforms where our top rate has been under 37% for the last 30 plus years, since ‘87. So you can see that people have sort of gotten used to thinking that low taxes is normal. Low taxes is not normal when you have massive social welfare systems.
Joe Fairless: That makes sense. The question I have – you said that these were mathematical, I think you said, certainties. I don’t want to misquote you, but there’s no question about these two things happening is what you mentioned. But wouldn’t raising taxes to say 88% be just one of the possible directions? It’s not certain that it would happen? …because you could just say, “Well, we’re going to have the provisional income, as you mentioned, just be even steeper, or maybe we’ll just not do as much Social Security”, something like that or maybe there’s some other solution, other than increasing taxes to the certainty of 88% between 2020 and 2030.
Rebecca Walser: Well, obviously, they gave us projections, and I would think that the government would try to fake the tax rates as long as they possibly can, because these tax rates are really disastrous and they have all kinds of implications economically, as you know. But I think what their point was, Joe, is that even after we cut benefits, so even after we means-test, we still are not going to be able to pay out anywhere near what we promised to pay. So, therefore, taxes now must go up after you have cut benefits.
And the other problem that we have – and this is [unintelligible [00:16:17] we don’t have time. But the other problem we have is that when Ronald Reagan cut tax rates from [unintelligible [00:16:20].01], active and passive in 1986 down to 28% top rate – when he did that, we didn’t stop spending money as a country just because we collected that much less in taxation. What we ended up doing as we’d come off the gold standard we started really leveraging debt. When Ronald Reagan was inaugurated, we didn’t even have a trillion dollars of debt. It took us October of his first term to even get to a trillion dollars of debt. But once he cut the taxes in the second term, we still kept spending like we were collecting higher taxes, but we weren’t. We were just debt financing it.
So what you have now is a perfect storm really in America that basically has lived off of 30 years plus of low taxation, high debt spending, now we have almost $30 trillion of debt. The Coronavirus is certainly going to put us at $30 trillion. And that $30 trillion, which is almost what I call an unsustainable no-go debt amount for gross domestic product and taxation, when you combine that with the retirement of the baby boomers and the tax need or that the revenue that we’re going to have, we can’t debt-finance it. So the only alternative to raising the taxes that you’re kind of thinking of is let’s just finance it with debt, but we already have $30 million of debt and that is almost unsustainable at that current level. So we are starting to get back into a corner where the only thing that we can do is really extremely raise taxes.
Joe Fairless: So let’s talk about the three ways that real estate is currently tax-favored.
Rebecca Walser: Absolutely. So it’s not a tax shelter, but it’s really close. So a real estate investor, as you know very well, Joe, that the whole MO of real estate investing with taxation is you buy your properties and you’re able to shield your cash flow, and therefore you’re able to shield and not pay taxes through depreciation. So we buy property, and we depreciate it down completely and we’re able to shelter or shield some of that rental income from taxation because of the depreciation.
Once we depreciate it down fully to a zero-cost basis, now we do a 1031 exchange into a new property and we get to start this process all over. So basically, we can go on a successive pattern of buying a property, depreciating it down, buying a property, depreciating it down, and 1031-exchanging all of the gains all along that therefore we are not paying capital gains taxes on anything, or even regular taxes on anything, because we’ve shielded depreciation as much as possible through depreciation and we don’t pay the tax on the 1031.
So there’s the first two advantages – real estate allows you to use a non-cash deduction called depreciation, to shield income from taxation. That’s unique. We don’t get that on anything else except for an intangible asset that we can amortize. So that’s very unique to real estate. That’s number one. That’s the number one positive tax advantage.
Number two, we have the 1031 exchange, where you can literally sell an asset and defer the gain into a very similar asset without paying a tax. You can’t do that with a stock. That’s number two.
And then number three, and final, is the 1014, or what we call the “Step-up at Death.” So let’s say that you’ve built a portfolio of $5 million. It’s all depreciated fully to zero, so now you’re fully paying tax on whatever you cannot hide with expenses legally, obviously. I’m not trying to give any tax [unintelligible [00:19:38].22] So we have fully depreciated the $5 million in our portfolio and the person who owns it passes and they leave it to their son, and now the son inherits that $5 million through something called the “1014 Step-up at Death”, meaning he inherits $5 million of an asset with a basis of fair market value $5 million, and he does not have to pay any gain taxes or any income taxes on that inheritance – estate tax, we’re not going to talk about that, it’s separate.
So we’ve got an income tax shelter of income while we’re holding it, gain while we sell it and then death – we can step it up to the next generation and never pay a tax on the income side.
Joe Fairless: That’s going away based on what you were saying before? At least some of that, right?
Rebecca Walser: Yeah. So what I wanted to kind of frame was, I want you all to see that everything is going to be changing in this 10-year period. So by 2030, I expect everything to look very, very different. And what I always love to do in a presidential election year – and this is not political, but whatever party is not an office, that’s the party that has all the vigorous debate and comes out with all their new tax proposals… And I always like to look at the party that’s not in power, their tax proposals, to start to see where we’re going to see these proposals coming. So we know Trump’s tax proposals – because we’re under his plan right now and he’s got all those things… What did the democrats, because they were the party that was going through all the rigorous debate schedule, what did they talk about? So it’s very interesting.
So starting with the 1031, you had Mike Bloomberg, of all people – very odd real estate guy who’s built a real estate empire along with his other assets – proposing the elimination of the 1031, complete elimination of the 1031. And you had Pete Buttigieg, proposed the elimination of capital gains altogether. So basically, every game would be taxed as ordinary income.
You have Joe Biden, who has obviously made it to the actual finale, could easily be the president, you have him saying that he wants to eliminate capital gains for people that make over $400,000. So if you’re making over $400,000 a year, all of your now income that would have otherwise been subject to a long-term capital gain at a tax-favored rate of 15% or 20%, 20% being the highest capital gain we have right now – that’s going to end and it will be taxed as ordinary income. And then you had surprisingly enough, in April of last year, Joe Biden proposed the elimination of the 1014 “Step-Up at Death”.
So what you can see is a future scenario where we’ve already started contemplating the elimination of the 1031, the elimination of the “Step-Up at Death” and taxing people at ordinary income tax rates as opposed to capital gains rates, which will apply to those gains that we get since we will no longer be able to do 1031. And this is not going to happen tomorrow. This is not going to happen overnight. I’m not trying to tell people to go out, [unintelligible [00:22:37] real estate. Real estate is a truly great asset. It’s the best asset to have for inflation hedge protection over the history of America. But I do want people to understand how tax-favored it is and how it will be attacked in these next 10 years.
Joe Fairless: What an insightful—and to me, it’s exciting. None of it is good for me, personally, or my business. But ignorance is not bliss. Yeah. So it’s important to get this information out there. And then everything needs to evolve, or it dies.
Rebecca Walser: Yeah.
Joe Fairless: So if we can’t control what’s happening, then we just got to evolve with it. And that’s why I think it’s exciting, because it’s just getting this information out there and having the conversation is so important. And I appreciate that you are leading the conversation and brought this up.
As we wrap up, how can the Best Ever listeners work with you?
Rebecca Walser: Great question, Joe. I have a pretty public profile. I also wrote a book called Wealth Unbroken. And if you just Google my name, Rebecca Walser, you’ll find me. I’m usually on national media, television once or twice a week. So if people just Google my name, they’ll find my practice, they’ll find my book, they’ll find all my media, they’ll find me. So it’s Walser. My website is http://www.walserwealth.com/.
Joe Fairless: And what do they hire you for?
Rebecca Walser: So what I do is — we’re a money manager, so we manage a ton of money in the market and we’re not anti-market. We’re just not as plain Jane, vanilla market money manager, like if you go to a Merrill, Morgan, Raymond James, Edward Jones; you’re going to just get what I call a triangle advisor. It’s an advisor who exists within the three angles of stocks, bonds, ETFs, mutual funds or REITs. We obviously manage money in that world, but we also leverage a lot of other strategies, specifically creating legal domestic tax shelters, which still exists in America… And also real estate is a huge part of it.
We really do love real estate as inflation protection. We’ve enjoyed these tax-favored policies of real estate, and now it’s just going to become very important for people that are real estate investors to make sure that they are starting to build tax-free asset classes alongside of their real estate portfolio, so that if everything does hit the fan and when it does hit the fan like I’m prognosticating here, they have a backup plan where they have gotten a certain amount of cash to sort of set tax-free, that will be usable for them while these tax rates go to high heaven.
Joe Fairless: Grateful that you were on the show, Rebecca. Thanks for talking about this. Hope you have a best ever weekend and talk to you again soon.
Rebecca Walser: Thanks, Joe.
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