Making Money and Building Wealth

Many people see these 2 terms and think they mean the same.

But, ponder a while, do they really?

Since I have had the experience working and living elsewhere before coming to USA, I believe making money and building wealth are 2 very different things in USA.

I worked and lived in Hong Kong for 10 years before coming to live in USA. The top tax rate is Hong Kong is 15%, and every tax payer enjoy a rather high standard deduction. I knew people who were single and make about US$100,000, still only pay about 12% income tax after the deductions.

It still amaze me how much taxes people in US pay. But, oh well, that is another subject for another day, or month, or life time.

Given we live here, how does one build wealth if one must pay so much taxes?

Well, one of the tool is, of course, real estate.

Just last week I have a buyer under contract buying a foreclosed duplex.

This young man is so mature. He saved money, had a goal, and barely in his mid 20's, he is buying a 5 yr old duplex with more than 20% down.

With the current low interest rate, he can buy the duplex, live in one side, rent out the other, and the rent he will receive will cover over 80% of his mortgage payment.

Oh, this young buyer has further plan than this, he is getting a 15 yr loan, hoping that in 5-7 years, he will have more than 1/2 of the duplex paid, and then he will hopefully get married and buy a single family home.

At that point, he could keep the duplex for rent, or sell it, depending on the market.

Why Real Estate investment help build wealth? Well, for one, the IRS allow depreciation for the building you rent out. That depreciation is an expense, that can off set the rental income, therefore offset the taxes on the rental income.

The depreciation rule is rather complicated, but, no free lunch right? If one wants to save some taxes, one needs to put in a few hours of paperwork, and a few hours of tax code studying.

My husband and I own 10 units of rentals. In most years, those rentals report a lost on paper, after depreciation.

Simply, currently the IRS allow buildings to depreciate at a rate of 27.5 years. If you have a $120,000 duplex, and if the land that the duplex is on is worth $20,000, owner can depreciate the building, not the land.

So the building without land is worth $100,000, which allow owner to write off $3636.36 income per year.

Now, the tax code is a whole lot more complicated than that, but for now, this is enough to get someone to start to ponder about RE investments.