Given the fact that my recent Tesla video got so many views - and a lot of the misunderstanding when it comes to how tax write offs are applied, here is a follow up. Instagram: GPStephan Tesla Referral: Get 1000 Miles Free Supercharging:
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I’d say the biggest complaint in that video was that people felt my title was “Clickbait” for two reasons:
One, I only talked about the first year of ownership on the car - not what happens after that.
Second, what I do is NOT applicable to everyone, which is where I think much of the confusion came from.
First:
When it comes to business write offs, this doesn’t mean that my literal payment is $78.39 per month - quite the opposite. I am still paying $640 per month to own the car, but I SAVE money at the time I file my tax return - which brings down the NET ownership cost at the end of the year.
Yes, second year I continue to pay $640 per month - my monthly payment does NOT change at all.
However - here’s what happens.
I can continue to depreciate the value of the car over the following 4 years. Since I depreciated the car the first year already, I have 4 MORE years left that I can continue to depreciate the value. The current tax basis of the car is $40,000 minus $8200 first year depreciation, which leaves us with $31,800 remaining. We’ll just keep things simple, divide that over the remaining 4 years - and this means I can continue to enjoy an AVERAGE of $7950 per year as a write off over the following 4 years.
During the second year, I’m continuing to pay interest on the loan balance - which is $1165.
I’ve still paid $640 per month on the car…which works out to be $7,680 after the first year.
Then I write off $7,950 in depreciation and $1165 in loan interest, which comes out to be an $8845 write off.
In my tax bracket, that saves me about $3095 in taxes…which is subtracted by by my the total car payment that year…and that brings down my monthly NET out of pocket “cost” to $382 per month for the Tesla.
However, what many people forget is that from my $640 per month payment, only $100 per month is that is interest - the rest pays down my loan, and that’s “equity” I have in the car. So I’m paying an out of pocket expense of $382 after taxes, to get BACK about $520 per month in terms of net asset value.
This calculation continues until the last year of payment, when almost all of that monthly payment is principle, and the car is paid off in full. So after the second year, my “net” to me is essentially nothing. I’m also NOT including the cost of gas savings, since the cost of running this car on electricity is 1/4th the cost of Gas here in California.
Now HERE is are nuanced details when doing this:
First, this is NOT sponsored by Tesla. I wish they would sponsor me, but I love talking about money and finance, and even though it’s a nuanced topic that’s highly specific to the person, I like getting people to think about these things.
Second, When I SELL the car, I WILL have to pay what’s called depreciation recapture - since I depreciated the cars value, if I sell it above the current tax basis, I have to pay taxes on that higher amount as though it’s ordinary earned income.
I also chose to get a LOAN on the car instead of buying it in cash because I knew the interest would be a write off, and I can make MORE than 3.75% if I invest in real estate or in index funds - so this meant the less money I have tied up in the car, the better. I’m not getting a loan because I CAN’T afford it - I’m not getting a loan because it’s just the SMART thing to do financially.
And finally, for everyone talking about added insurance costs - the insurance cost isn’t that bad - insurance companies base their values on the MSRP of the car when new. For a Model S at a $100k sticker price, even if you buy it USED, it’ll be about as expensive to insure as any other $100k car. My model 3 was $40,000 brand new, and cost just as much to insure as my previous $40,000 Mercedes C - Class. And for anyone curious, I’m paying $215 per month for full coverage on the Model 3 and a Lotus Exige S240.
So I hope that clears up any confusion for anyone wondering.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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