House Rich, Cash Poor? How Strategic Debt Can Fuel Your Financial Future

Dubai, Sheikh Zayed Road

 The concept of being 'house rich, cash poor' refers to a situation where a significant portion of an individual's wealth is tied up in their home equity, leaving them with limited liquid assets for other expenses. This can be a precarious position, particularly if unexpected costs arise or if there's a sudden need for cash. However, strategic debt can be a tool for leveraging this equity in a way that fuels financial growth and stability.

 By carefully considering options such as home equity loans or lines of credit, homeowners can convert part of their home equity into cash that can be used for investments, business ventures, or consolidating higher-interest debts. This approach can potentially lead to a more balanced financial portfolio, with assets diversified beyond real estate. 

It's important to note, though, that this strategy requires careful planning and consideration of the risks involved, including the potential for increased debt burden and the need to ensure that any new investments yield a return that exceeds the cost of borrowing. With the right approach, strategic debt can be a powerful tool for enhancing one's financial future, but it should be undertaken with a clear understanding of both the opportunities and the potential pitfalls.

 Based on this concept, I am attempting to assess the subject with Robert Kiyosaki's thoughts. In today’s market, where home prices are soaring, acquiring a house poses a considerable hurdle for many. However, for Robert Kiyosaki, the acclaimed author of “Rich Dad Poor Dad,” this task is effortlessly manageable.

 In a conversation with Sharan Hegde, a prominent figure in personal finance on YouTube, Kiyosaki disclosed an astonishing detail regarding his collection of real estate investments. His approach and success in the property market stand as a testament to his investment acumen and strategies that have been widely discussed in his bestselling book.

“I possess a portfolio of 15,000 properties,” declares Robert Kiyosaki, indicating that purchasing a house is perfectly acceptable. However, he distinguishes his method by utilizing debt as a means to finance these acquisitions and strategically managing his finances to minimize tax obligations.

The concept of buying a house using debt and potentially paying no taxes is often associated with strategies employed by real estate investors. Here’s a summary of the key points related to this topic:

 Real Estate Investment: Investors may use borrowed money, or debt, to finance the purchase of properties. This leverage allows them to acquire more assets than they could with their funds alone.

Mortgage Interest Deduction: The interest on loans used to purchase properties can often be deducted from taxable income, which can reduce the amount of taxes owed1.

Tax Lien Certificates: In some cases, investors may buy properties with delinquent taxes through tax lien certificates. This involves paying off the outstanding property tax bill, which may eventually lead to acquiring the property if the original owner fails to repay the debt.

Tax Deed Sales: Unlike tax lien certificate sales, tax deed sales involve purchasing the property itself, not just the tax liability. The buyer inherits the rights to ownership of the property, and a portion of the sale is used to repay the tax debt.

Buying with Back Taxes: It is possible to buy a house even if you owe back taxes to the IRS. However, this can complicate the process of obtaining a mortgage from traditional lenders.

It’s important to note that while these strategies can be legal and financially savvy, they require thorough understanding and careful planning. Tax laws can be complex, and it’s advisable to consult with a financial advisor or tax professional to navigate these investment strategies effectively. Additionally, the ethical and social implications of such investments should be considered, as they can affect communities and individuals in various ways

Real estate investors often take advantage of debt financing to expand their property portfolios. By doing so, they’re able to purchase more properties than if they were limited to their capital. 

The strategy includes several tax advantages: 

Mortgage Interest: The interest paid on mortgages for property purchases can often be deducted from the investor’s taxable income, leading to a reduction in tax liability.

Operational Expenses: Investors can deduct operating expenses related to their properties, including property taxes, insurance, and maintenance costs, further decreasing their taxable income.

Depreciation: This accounting method allows property owners to account for the decrease in value of their property over time due to usage and aging. Depreciation is recognized as a non-cash expense that effectively lowers taxable income. 

Through the use of debt leverage and these tax deductions, real estate investors can significantly boost their investment returns while concurrently reducing the amount of taxes they owe. It’s a strategic approach to maximizing financial growth and efficiency within the realm of property investment.

 Concept of assets versus liabilities as explained by Robert Kiyosaki:

 Robert Kiyosaki draws a clear distinction between income-generating properties and personal residences. He emphasizes that not all properties qualify as assets.

 Kiyosaki bluntly states, “Your dwelling is not an asset.”

 He simplifies the distinction with a straightforward criterion: An asset is something that deposits money into your pocket. Conversely, if it’s extracting money from your pocket, it’s a liability. 

Under this definition, a primary residence doesn’t count as an asset. The typical homeowner, who buys a house to live in, incurs regular expenses such as mortgage payments, property taxes, insurance, and upkeep costs. These outflows represent financial liabilities.

Corporate Tax In The Free Zones - New Guidelines 2024

 Some new guidelines were released in May 2024 regarding corporate tax in Free Zones. Here's a quick rundown:

·       The Federal Tax Authority (FTA) issued a guide on how Corporate Tax applies to businesses operating in Free Zones [UAE corporate tax guide for freezones]. This guide clarifies the process for Qualifying Free Zone Persons (QFZPs) to benefit from the 0% corporate tax rate on their Qualifying Income.

·       The guide also details what constitutes Qualifying Activities, Excluded Activities, and the compliance requirements for QFZPs [UAE corporate tax guide for freezones].

Some important points to remember:

·       The 0% tax rate applies to Qualifying Income earned by QFZPs.

·       Not all Free Zone businesses automatically qualify as QFZPs. There are specific requirements to meet.

·       The guide offers details on what happens if a QFZP operates outside the Free Zone in a Permanent Establishment (PE). In that case, the income from the PE would be taxed at the standard 9% corporate tax rate.

If you're looking for the official guide, you can find it on the UAE government's tax authority website: [UAE corporate tax guide for freezones].

Not all Free Zone businesses automatically qualify as QFZPs.

Here's a breakdown of what a Free Zone business needs to do to qualify as a Qualifying Free Zone Person (QFZP) and enjoy the 0% corporate tax rate on its Qualifying Income:

Maximize Your Tax Benefits with the latest updates on qualifying income and activities for the 0% corporate tax rate in UAE Free Zones.

The Ministry of Finance has released crucial information for companies operating in these zones. Here's a breakdown:

• Qualifying Income:
• Transactions with other Free Zone entities.
• Income derived from conducting approved activities (both domestically and internationally).
• Excluded Activities (No 0% Tax Rate):
• Transactions with individual consumers.
• Banking, insurance, financing, and specific leasing activities.
• Owning/using intellectual property assets or UAE real estate.

Important Note: Generating income from excluded activities or non-qualifying sources can disqualify your company from the 0% tax benefit, with some exceptions based on "de minimis requirements."

Stay Compliant, Stay Competitive:

By understanding these guidelines, you can ensure your Free Zone business continues to enjoy the benefits of the 0% corporate tax rate.

Substance Requirements:

• Adequate economic activity: The company's core income-generating activities must be physically located within the Free Zone. This translates to having an adequate number of qualified employees, appropriate assets, and incurring operational expenditure within the Free Zone, commensurate with the level of its activities. Outsourcing is allowed, but only with proper supervision within the Free Zone.
• Demonstrate economic substance: This means the company should be a genuine business operation and not just a shell company set up to avoid taxes.

Income Requirements:

• Qualifying Income: The company's income must come from activities listed as "Qualifying Activities" by the UAE authorities. These are generally activities that contribute to the development of the UAE economy, such as manufacturing, technology, and logistics. Excluded Activities, like banking and insurance, typically don't qualify for the 0% tax rate.

Compliance Requirements:

• Maintain proper records: The company must maintain detailed records of its income, expenses, employees, and assets to demonstrate compliance with QFZP criteria.
• Transfer Pricing: Companies with related party transactions (e.g., with subsidiaries or parent companies) need to comply with transfer pricing rules to ensure arm's length pricing is followed.
• Tax filings: Even with a 0% tax rate, QFZPs are still required to file tax returns with the FTA.

Additional factors to consider:

• New businesses: A new company in its setup phase may still need to generate income, but as long as it meets the other requirements and intends to conduct Qualifying Activities within the Free Zone, it can still qualify as a QFZP.
• Operating outside the Free Zone: If a QFZP establishes a Permanent Establishment (PE) outside the Free Zone, the income generated through that PE will be subject to the standard 9% corporate tax rate.

By meeting these requirements, a Free Zone business can leverage the benefits of being a QFZP, including the significant advantage of a 0% corporate tax rate on its Qualifying Income. It's important to consult with a tax advisor to ensure your specific business activities and structure align with the QFZP criteria. 

How to pledge real estate assets for the short term in Saudi Arabia: The procedures

 Pledging real estate in Saudi Arabia for short-term financing involves following specific procedures outlined in the Commercial Pledge Law (CPL). Here's a general overview:

1. Understand the CPL:

The CPL governs the creation and enforcement of pledges over various assets, including real estate. Familiarize yourself with the law's key provisions, particularly those related to real estate pledges.

2. Secure Legal Counsel:

Navigating the CPL and ensuring a secure pledge requires legal expertise. Consult a lawyer specializing in Saudi Arabian commercial law. They can guide you through the process, draft the pledge agreement, and address any legal concerns.

3. The Pledge Agreement:

The pledge agreement is a crucial document outlining the terms of the pledge. Your lawyer will ensure it includes essential details like:

• Description of the pledged property: A clear description of the real estate asset, including its location, size, and any unique identifiers.
• Secured Debt: Specify the amount of the loan or debt being secured by the pledge.
• Duration: Clearly state the pledge term, ensuring it doesn't exceed six months in your case.
• Default Provisions: Outline the consequences if you fail to repay the debt within the agreed timeframe.
• Valuation: The agreement may require a professional valuation of the property to determine its worth.

4. Registration:

For the pledge to be enforceable against third parties, it must be registered with the relevant real estate registry office. Your lawyer will handle this process.

5. Short-Term Considerations:

While the CPL allows pledges for various durations, some lenders might hesitate for short-term (6-month) real estate pledges due to the registration process involved. Discuss this aspect with your lawyer and potential lenders.

Additional Tips:

• Maintain Open Communication: Ensure clear communication with the lender regarding the loan terms, repayment schedule, and potential early settlement options.
• Consider Alternatives: Depending on your situation, exploring alternative short-term financing options like invoice financing or lines of credit might be faster and less complex.

Remember, this is a general overview, and the specific process might vary depending on your circumstances 

5 Important Common Questions the U.A.E Resident Needs to Know the Answers

 1)Question: I have a residency visa in the UAE, but I am still waiting for my Emirates ID card. I would like to know if I can travel out of the country without an identity card.

U.A.E Residents

Answer: You can travel out of the UAE without the Emirates ID card as long as your residency visa has been issued. UAE immigration will be able to see your visa status electronically.

It is advisable to bring a copy of your Emirates ID card application form with you in case immigration asks for proof that you have applied for the ID. You can also show them the online application status if available.

2)Paternity leave in U.AE is it possible to add this leave to my annual leave?

Answer: Yes, you may be able to add your paternity leave to your annual leave in the UAE. Cabinet Decision No. 1/2022 allows combining parental leave with annual leave

Paternity leave in the UAE is for 5 working days for both private and public sectors. This leave applies to fathers employed by both private and public sectors and can be taken any time within the first 6 months of the child's birth.

Here are some things to keep in mind:

• Approval needed: While regulations allow it, you will still need to get approval from your employer to combine your paternity leave with your annual leave.
• Notice period: Make sure to notify your employer well in advance about your intention to use both your paternity leave and annual leave together.
• Documentation: You will need to provide proof of your child's birth to avail of paternity leave.

3) I have an offshore bank account – will I have to close this account when I move to the U.A.E

Answer? No, you generally do not have to close your offshore bank account when moving to the UAE. The UAE does not restrict residents from having offshore bank accounts.

However, it's important to be aware of UAE regulations regarding reporting foreign income. You may be required to disclose your offshore accounts and any income earned on them to the UAE authorities.

4) Is it possible to sponsor my mother-in-law and father in law in U.A.E?

5) Is it possible to take a Resident visa from GCC countries for a U.A.E  resident without canceling a U.A.E visa?

Yes, it is possible to sponsor your mother-in-law and father-in-law for residency in the UAE, under the Parent Residence Visa program. There have been some recent changes to the eligibility criteria, so here's what you need to know:

• Minimum Salary: You will need to meet a minimum monthly salary threshold to be eligible. This amount is higher than what's required for sponsoring a spouse or child.
• Financial Support: You no longer need to be the sole financial support for your parents-in-law, as was previously required. However, you will still need to demonstrate sufficient income to cover their living expenses.
• Sponsored Together: You cannot sponsor just one parent-in-law. The application needs to be for both of them.

 No, it is generally not possible to hold a resident visa from another GCC country while being a resident of the UAE. UAE residency visas are typically tied to employment or sponsorship within the UAE.

If you are considering working in another GCC country, you would likely need to apply for a work visa in that country. This would likely cancel your UAE residency visa.

Here's why:

·       Tied to Sponsorship: UAE residency visas are linked to your employer or sponsor in the UAE. Having a residency visa in another GCC country would indicate sponsorship or employment outside the UAE, which would conflict with your UAE visa.

·       Specific Country Requirements: Each GCC country has its own immigration regulations. To obtain residency in another GCC country, you would need to meet their specific requirements, which would likely involve canceling your UAE visa.

The U.A.E has introduced a new 10-year "Blue Residency Visa."

 This visa is specifically for individuals who have made exceptional contributions and efforts in the field of protecting the environment.

The United Arab Emirates (UAE) has unveiled
d a new long-term residency program, the ‘Blue Residency’, aimed at environmental advocates. This 10-year visa is designed for those who have made significant strides in environmental protection.

The areas of focus for this visa include enhancing air quality and advancing green technology. Sheikh Mohammed bin Rashid, the Vice-President and Prime Minister of the UAE, stated during a Cabinet meeting on Wednesday that the sustainability of their economy is now intertwined with environmental sustainability.

The introduction of the Blue Residency is one of several initiatives launched by the country in recognition of 2024 as the year of sustainability. This sustainability drive was extended into 2024 following a year dominated by green themes, during which the country encouraged residents to participate in sustainable practices.

Traditionally, the UAE issues residency visas with a two-year validity. However, in 2019, they introduced the 10-year ‘Golden Visas’ for investors, entrepreneurs, scientists, exceptional students and graduates, and humanitarian pioneers, among others. Following this, a five-year ‘Green Visa’ was announced for skilled professionals, freelancers, investors, and entrepreneurs.