– 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. Let's listen. – 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. Liability. 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? – Yeah. – 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. – 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. It's depreciation. And this is where it gets tricky. See. 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. (foreign language) 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. (laughs) Thank you guys so much for
joining us on this episode. I spit. (laughs) The most important lesson of all. Whoa. (laughs).