Page 139 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

In overly simplified terms, internal rate of return (IRR) measures the
other returns and other leverage that a well-controlled investment can

provide.

1. Income column: Passive income. Most people understand that gross
rents are part of the income column. Yet IRR also measures other

forms of income. Passive income is subject to lower tax rates than
earned income. In the U.S., passive income is not subject to Social
Security or self-employment taxes. In other words, these taxes do not
show up as expenses in the expense column, which is technically a

gain in income.
2. Expense column: Depreciation. In the U.S., the tax department gives
some investors an additional income that actually looks like an
expense. This income is known as depreciation. Another term for

depreciation is “phantom income.” The reason it is phantom income
is because it’s income that shows up somewhere else. For example,
let’s say my tax bill is $1,000. The IRS may allow me to depreciate
my investment by $200, allowing me to pay only $800 in taxes. This

additional $200 is phantom income, or money I did not have to pay. It
is $200 that remains in my pocket instead of going to the government.
Depreciation is allowed for such things as refrigerators, ceiling fans,
carpet, furniture, and other items that decline in value with age. A tax

accountant can explain this to you if you own a business or real
estate. There is no such thing as depreciation for paper asset
investors.
3. Liability column: Amortization. Another form of income to the

investor is known as amortization, which is a fancy word for paying
off debt on a scheduled basis. When you have good debt, debt that
someone else such as a renter pays for you, amortization becomes
income to you. In other words, as a tenant pays down my debt, that

payment is technically income to me, income that is paid to reduce
my debt as my cash stays in my pocket, ready for the next great
investment opportunity to come my way. Additionally, while my
tenant is paying down my debt, I still receive all the tax benefits

associated with my investment.