Every Radio and TV consumer reporter will tell you that “Rent to Own” is never a good idea.
That’s true when it comes to furniture and electronics, but not necessarily true for everything else. Real Estate is the best example where you might want to “rent to own” but with a twist…you need to rent from yourself.
For years, real estate has been a core component of everyone’s net worth. At DDS Financial, we aspire to help all of our clients reach a “40/40/20” threshold when it comes to their finances. We believe that:
- 40% of your net worth should come from your practice value
- 40% from your real estate
- only 20% from cash and investments.
This allows you to create growth in areas you can control, while outsourcing risk to areas where it is best suited (i.e. the stock market.)
Real Estate is our favorite topic when it comes to net worth because when done properly, it is paid for with pennies on the dollar. I am not talking about the “get rich quick” real estate infomercials you see on TV, I am referring to the methodology used by all of the Fortune 500 combined. When you get to the basics and the core denominator of wealth, real estate is the only area with guaranteed longevity. With the ups and downs of every market, real estate will always be there, even long after you are gone.
Here is how it works.
Most Dentists set up a separate LLC with the sole purpose of owning real estate, but the real estate it owns needs to be the building you have your practice in.
Once this is established, the practice pays rent to the LLC that owns the building (the same LLC happens to be owned by you). When the transaction occurs, the rent payments are 100% tax deductible to the practice, and the revenue to the LLC who owns the building is taxed at a lesser rate than you would be for ordinary income…but it gets better.
Since you own the building, you get to write off any depreciation and expense tied to the building, which is in essence, is the total purchase price. Therefore, if properly done…
You buy the building virtually tax-free.
Is this a loophole? No, it is just the rules. Think of it this way: McDonalds and Waffle House are known for their fast food, but that’s not their “business”. They are actually real estate companies who own the corner of every interstate exit in America, and they are paying for it with money at a discounted tax rate. They are in essence buying the land with limited to no tax.
So… what should you do?
If you are renting your space and don’t own the building via your own LLC, it is more than likely that your rent payments are enough to fund 80+% of your mortgage even without the tax advantages. As with anything in tax there are a lot of moving parts, but simply put… you need to “rent to own”, from yourself!
Call our team of experts at 866-917-2808 to discuss your financial plan and learn what options might work best for your practice!