How to make TAX FREE MONEY in Real Estate

Here’s how to basically earn tax free money in real estate. Since it’s a subject so many people get confused on, I’ll do my best to break it down as simply as I can from beginning to end. Enjoy! Feel free to add me on Snapchat / Instagram: GPStephan

Here’s the situation using some simple numbers. You buy a property for $100,000. You spend $20,000 fixing it up. The home is now worth $170,000. This means that you’ve just gained $50,000 of EQUITY in the home…your $120,000 price + $50,000 gained = $170,000 value. What is equity? Just think of it like an unrealized gain, like if you hold a stock and it goes from $100 to $150…that extra $50 is an unrealized profit until you sell it…what is unrealized? That means you haven’t sold yet and are still holding on to the asset.

Since you now have an UNREALIZED gain in real estate and the home is worth MORE than you bought it for, you’re able to borrow against that gain. So in this case of $50,000…you’re able to get a LOAN against your $50,000 profit, using that equity as collateral. Now the way taxes work is that you’re only taxed when you SELL the property…just the same as stocks or cryptocurrency, you’re taxed at the time of selling and then those are REALIZED profits. So if you had a $50,000 GAIN when you sold the property, you’d then have to pay taxes on that income…but if you get a LOAN, even if you wind up with money back in your pocket, the IRS treats that as just a shift in assets. Because you just received a loan, you never “realized” your profits by selling.

Because there was only a shift in assets and debts and not a change in the REALIZED net worth when you sell, the IRS does not consider the pulled-out cash income. When you receive cash out in a refinance, the IRS recognizes that you have to pay it back, and so you really haven't “made”  any income.

The thing is, since this is a loan, you still have to pay it back over the term of your loan. And this frees up the money you would have tied up in a property, and opens it up to be reinvested at a higher rate or into something else. The purpose of doing this should be to buy more investments that produce a HIGHER return than what you’re paying out in interest..and the refinanced property should generate the income to support the new mortgage. If this doesn’t happen, it begins getting risky…you shouldn’t over leverage yourself to a point where you owe more than you can handle, BUT, if used correctly, you can leverage yourself a lot of extra money to invest with.

This is what’s known as a cash-out refinance and how you can use your equity in a property for tax free money. This method of real estate investing is also known as the BRRRR method of real estate investing. Buy. Rehab. Rent. Refinance. Repeat.

It’s a way of “cashing out” without actually cashing out…then using those proceeds to continue investing in more properties. Each property generates equity, each time you use that equity to buy another, which continues the process. I like this method because it’s a long term approach that grows a lot over time. But like I said, I’ll get into this in another video in more detail. Thanks for watching!

For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness@gmail.com

Suggested reading:

The Millionaire Real Estate Agent

Your money or your life

The Millionaire Real Estate Investor

How to Win Friends and Influence People

Think and grow rich

Awaken the giant within

The Book on Rental Property Investing

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