A Real Estate Investor Says the Tax Code Rewards Whoever Moves the Most Money
Justin Brennan says one 20-unit building sends money through more than 60 industries, and that ripple is what the tax break is buying.
Right About Now - Legendary Business Advice · Building Wealth With Other People’s Money: Justin Brennan on Multifamily Real EstateJustin Brennan, an investor who buys and manages apartment buildings, says the complaint he hears from people earning $50,000 a year up to millions is taxes. He summed up what they tell him this way: "Oh my gosh, I'm making all this money, but holy cow, now I gotta pay all these taxes."
His answer starts with buildings that hold many rental units in one place, called multifamily apartments, and an income tax break called bonus depreciation. That break lets an owner deduct a large share of the cost of the building and improvements in the year the property is put into service, rather than spreading it over decades. Brennan called multifamily apartments "the biggest and best way to" use it, and said "you can literally wipe out your taxes for the rest of your life." That last claim is his, and it does not hold for most wage earners, whose salary income faces limits on how much property losses can offset.
Then he offered his explanation for why that break exists. Capitalism, in his definition, is the movement of money, so the tax rules reward whoever moves the most money. In his telling, that is why, as Brennan put it, "business owners and investors get the most amount of tax breaks," while salaried employees, people who collect a regular paycheck from an employer, do not because they do not move enough money.
Brennan believes that when money moves it creates jobs, opportunity, and risk taking, and that growth eventually produces more tax revenue, which is why the government offers the break up front to encourage more movement. That chain from a deal to jobs to tax revenue is his theory, and Brennan offers no data to test it. His summary of the rule was: "If you move more money, you get more tax breaks. It's that simple."
His example was a single deal. When one 20-unit apartment building changes hands, he said, "there's over 60 different industries, not people, industries, that make money from one single transaction of an apartment building." That is why, he believes, the government gives tax breaks to the person who starts it.
"It's not 'cause they love us," he said with a laugh.
Questions people ask
What exactly is bonus depreciation?
Bonus depreciation lets a property owner deduct a large share of the cost of a building and certain improvements in the year the property is put into service, rather than spreading the deduction over decades. Congress has expanded and then scaled back the percentage in recent years, so the size of the benefit depends on the year and the property.
Can an apartment really wipe out someone's taxes for life?
No. Real estate losses can offset certain kinds of income, and professional investors can use them more broadly than most salaried workers. But wage income faces limits, the rules are complex, and Congress changes the percentages, so an ordinary paycheck is rarely wiped to zero for life.
Why would the government give up tax money to get tax money?
Brennan's point is about economic plumbing. A sale triggers appraisals, loans, title insurance, inspections, repairs, leasing, and management, and each vendor hires, buys, and pays taxes of its own. The government taxes that downstream activity even when it gives the first mover a break.