Blog | Personal Finance

3 Ways to Invest in the Economy

The government wants people to invest in the economy to create jobs, housing, energy and the environment

I’ll be up front with you, taxes aren’t fair to the average taxpayer. But who is the average taxpayer? The average taxpayer has a job, a family, and a mortgage or rent. The average taxpayer has little to no financial education. The average taxpayer gets his advice from the mainstream media and H & R Block. The average taxpayer’s only available tax benefit is form personal exemptions and itemized deductions, such as property taxes, and charitable contributions. And, of course a 401(k) or IRA in the U.S. or RRSP in Canada to postpone a portion of their tax burden until retirement.

Instead of being an average taxpayer, become an above average taxpayer or super taxpayer. Start by doing what the government wants you to do by contributing more to the economy.

Here are 3 ways to invest in the economy and not be average:

Real Estate

Real estate is a tax-favored investment. In all countries, the government will pay you to invest in real estate. Here is how it works.

You decide you want to purchase investment real estate in Country X. You find a property that costs $1 million and has net operating income of $80,000. Rather than paying cash with your own money, you borrow as much as you can from the bank. In this case, let’s say you put in 20% of your own money as a down payment and the bank lends you 80% of the cost of the property. The bank lends you money at 4% interest on an interest-only loan. Your net cash flow from the property is $48,000 ($80,000 less 4% x $800,000). The government is willing to pay you for making this investment.

On a $1 million property, your depreciation deduction should be about $100,000/year for the first several years. As a result, while the cash flow and true net profit is $48,000, for tax purposes you have a loss of $52,000 ($48,000 less $100,000 depreciation). Not only do you not have to pay tax on your $48,000 of cash flow (tax-free income), you can offset other income, such as business or investment income, with the $52,000 loss, so long as you are a professional investor. In the 40% tax bracket, a $52,000 loss is worth $20,800 in fewer taxes on your business and investment income ($52,000 x 40%). The government is paying you over $20,000 to make the investment in real estate.

Oil & Gas

In the U.S., when you invest directly into an oil and gas-drilling project, you get to write off a large amount of your investment in the very first year. Let’s suppose you invest $200,000 into an oil and gas-drilling project instead of into the real estate project. The first year, you will be able to deduct up to 80% of your original investment, or $160,000, against your other business, wage or investment income. In a 40% tax bracket, this is equivalent to the government paying you $64,000 ($160,000 x 40%) for making the investment. In effect, the government has agreed to be your partner in the drilling project, contributing 32% of the funds for the project.

The remaining 20% can be deducted over the next several years, so in total, you will receive a deduction of $200,000 with a potential tax benefit of $80,000. On top of this, the U.S. government does not tax all of your income from the project. Only 85% of the income from the project is taxed, due to the 15% deduction you get for depletion. On every $1,000 of income you earn from the project, only $850 is taxed.

Agriculture

Most countries provide significant tax breaks to those who engage in agriculture businesses. Developing countries especially have strong tax incentives for agribusiness. Puerto Rico, for example, provides a 100% exemption from property taxes, equipment taxes, municipal taxes and stamp taxes in addition to a 50% tax credit for investment in agricultural businesses. Ethiopia exempts agricultural businesses from income taxes entirely for up to 9 years.

It’s not just developing countries that offer incentives. The U.S. and most other countries allow a 100% deduction for the costs of running a farm. Where most businesses have to add costs of production to inventory, so they don’t get to deduct the cost until they sell the inventory, the opposite is true in agriculture. The cost of seeds, feed and other operating expenses of a farm or ranch that go into the production of the food and livestock is deductible in the year it is purchased. So even if you don’t sell your hay or your cattle for several years, you still get to deduct the cost of producing the hay and cattle in the year you spend the money. This is an investment by the government in your farm.

To learn more about how to build massive wealth by permanently lowering your taxes, get my book, Tax-Free Wealth.