Beoming a "Passive Investor"

I have read a number of the Rich Dad Poor Dad books are. I would like to set up an LLC for real estate investing, and take advantage of the right side of the Cashflow Quadrant by becoming an “Investor.” In the book Tax-Free Wealth, they mention achieving these tax advantages by becoming a “passive investor,” and how this can be done by starting small and purchasing real estate property. What does this actually mean, and how do I do it? How do I explain this to my tax advisor to make this happen? I know the obvious answer is to get a tax advisor that understands… but so far I haven’t found them.


IIRC, as a passive investor you can still write off depreciation up to certain limits. You will need to either read the IRS regulations or consult a tax advisor to determine exactly how these limits affect you.

EDIT: OOPS, sorry. I was replying to your other post regarding depreciation.

I believe you’re talking about how depreciation relates to investing in real estate. BTW, setting up an LLC is super easy. All you have to do is fill out your state’s forms (probably found on the Secretary of State’s website) and pay the filing fee. Make sure you get an EIN which is essentially the business’s Social Security number. The important part of the LLC is to get a good Operating Agreement drafted. This is not required by the state to file for the LLC, but if you get bank financing they will want a copy of your Operating Agreement.

So for these tax advantages you’re speaking of, it’s probably depreciation you’re asking about. Residential property is depreciated over the course of 27.5 years while commercial property is depreciated over 39 years. Different major rehab/repair items will be depreciated over a period of time which your CPA can help you determine. For investing in real estate, you will be dealing with the cost basis of the property to determine how much profit you have from the sale of a property. Along the way as you invest of course you’ll have income and expenses each year. Depreciation is an expense taken along the way to help reduce your net income for the year and thereby reducing your tax liability for that year. Depreciation is not required to be taken, but if you don’t the gov’t will do a recapture at the time of the sale which basically means you should have been taking depreciation all along the way.

You should invest to make money. If you make money, you will pay taxes. You can do your best legally to minimize your tax burden. Depreciation reduces that along the way, but don’t invest in real estate just for depreciation. Find a CPA who understands investing in RE. We use Mark Wagner (mcwagner here on REI club). He can help you wherever you’re located.

Becoming an investor isn’t easy or for everyone. If it was as easy as the book authors make it sound, more people would be doing it. There is work involved. There are headaches. There are not so glamorous parts to it too.

Your taxes need to be dealt with whether you are a passive investor or an active, hands on investor. The real issue here is do you have a trusting partnership to turn your cash over in his/her care to invest on a shared profit basis?

If you were to become a passive investor, this would be the requirement…to find one who is hands on and will do the real estate deals, hopefully for profit, and then share in revenue using your money and your partners efforts/talents/etc.

Lastly, my preference is NOT to us an LLC but rather a trust. Although taxes need to be dealt with no matter how you do your transactions, I’ve personally read ‘private letter rulings’ by the IRS which state that a trust has no requirements for a special tax return for that trust…whereas a corporation does, in fact require its own tax return.

With the complicated tax codes and knowing if you gave 20 accountants your taxes to do and would get back 20 different results, why in the world would anyone want one additional exposure to the IRS?!!!

So read some private letter rulings on the topic…a trust could be a great consideration for investing in real estate to protect you and shield you from liability while at the same time, not expose you to an additional tax return.

Hope this helps.


I can’t figure out where all these newbies get the idea they need to form LLC’s in order to start investing in real estate.

LLC’s are a WASTE of money and time, until you’ve got at least a $250K in assets to protect.

And if it’s for ‘asset protection,’ that’s what insurance is for.

I’m willing to be convinced that LLC’s are valuable for beginning investors, but so far nobody has been able to convince me.

Spot on Javipa. I think you are far better off setting up a Roth IRA for tax incentives vs an LLC if you are investing in Real Estate for the tax advantages.