Rich reviews Robert Kiyosaki on Yahoo!

So Yahoo! has added 8 columnists to their finance pages. I prefer Yahoo! Finance for stock quotes and their main finance page is pretty good for news with some very informative articles. I’m also very impressed with the level of talent they’ve gotten as columnists and think most of them will be worth reading. The 8, with links to their bio pages, are David Bach author of The Automatic Millionaire, psychologist and author Ken Dychtwald, Ph.D., Suze Orman, author Daniel Pink, author Laura Rowley, professor Jeremy Siegel, Ben Stein, Charles Wheelan and last but not least Robert Kiyosaki.

I saved Mr. Kiyosaki for last because he is the subject of this post. I’m sure you know Robert from his best-selling book “Rich Dad, Poor Dad” or any one of his many other titles. He is one of these people you either agree with completely or you think he’s a total fake. I consider myself somewhere in the middle leaning heavily toward fake.

I think you can find good aspects to any one and any thing and so if Robert Kiyosaki motivates you to do more and think about money differently then fine but I also think he does more harm than good. I’m certainly not alone in this and if you want to read a scathing but accurate assessment of Robert’s advice I highly suggest this extensive post by John T. Reed.

Since Robert is an “expert” that Yahoo! believes in enough to give a forum, I thought why not offer a critique, an alternative to his bad advice but also to point out the truth in what he says (when there is any). So I begin with his first official post.

You don’t have to look far to find the first bit of exaggeration and hype. The title of the post “Work Hard, Earn Less?” is already leading you down a dangerous path. Mr. Kiyosaki is a big advocate of “passive income” through real estate investing. I am too but I’m honest about the amount of work it takes and the risks involved.

Robert Kiyosaki portrays hard work as a sucker’s game, implying that the rich actually do nothing (or nothing too difficult) while collecting money faster than they can count it. That’s simply not true. In this excerpt from my forthcoming book I show how Robert himself has even proven my point and contradicted himself.

"The problem with 'Rich Dad, Poor Dad' is while Robert says one thing his examples actually say the other. Mr. Kiyosaki tells a story about how he got started investing in real estate which does much more to prove my point, that hard work is the path to success and wealth, than his point that the rich let their money work for them. The account according to Mr. Kiyosaki is that after college and after serving in the marine corps, he worked at Xerox apparently selling copy machines in Hawaii. In order to grow his own business he says he became a "better employee." "I wanted out of the trap of being an employee so badly," he writes "that I worked harder, not less." My point exactly. Working for the corporation wasn’t the end it was a means to the end.”

In his Yahoo! article Robert is definitely right about the tax system in the United States, it certainly does emphasize investing over working. Investments, especially under the Bush administration, are taxed far less than income but is that enough reason to quit your job and become a full time investor? Robert derides 401k plans but fails to mention other tax advantaged savings plans available to workers, IRAs and Roth IRAs. None of these plans allow you to avoid taxes entirely but the advantages simply can’t be ignored.

This paragraph from Robert’s article has to be the most inaccurate of the entire post.

"For example, my passive income from real estate can be the lowest taxed income of all. On one of our commercial properties, my wife and I receive approximately $30,000 a month in income – almost tax-free. When we sell the property, we can legally take the capital gains without paying capital gains tax, which in our state would be 20 percent. Try doing that with stocks, bonds, mutual funds, or real estate investment trusts (REITS). In fact, mutual funds can be a tax trap if you do not understand the rules."

First of all passive income is a complicated matter with many IRS rules and it does the reader a severe disservice to suggest that passive income "can be the lowest taxed income of all." Passive income is taxed as regular income, no more and certainly no less. Can you off-set the income with losses? Sure but there’s nothing special about that simply because it’s passive income from real estate.

Here’s a problem I’ve run into with passive income that I’ve never heard Robert address at all. Because I’m gainfully employed and receive a W2, the IRS considers that job my primary career, I’m not therefore a "real estate professional" as defined by the IRS. Since I’m not a real estate professional I’m subject to some limitations on passive income. I can not write off any passive losses from my rental property because I make too much in my primary career. Instead I must carry over this loss, year after year, and only when I sell the property can I deduct those accumulated losses from the capital gains I owe. Sorry Robert no tax advantage there.

The only way Robert can "legally take the capital gains without paying capital gains tax" is by doing what’s called a 1031 exchange. This is a complicated (but not difficult) transaction that requires you to take the gain from the sale of one property and use it to buy a similar property of greater value. A useful tool to be sure but that doesn’t sound like he’s legally "taking" the capital gains to me.

Robert says: "try doing that with stocks, bonds, mutual funds, or real estate investment trusts" and I say he can’t do it with real estate either.

As for his comment on mutual funds being a tax trap, I’ve heard this argument before and this article (subscription required) supports that premise.

Robert’s biggest flaw is that everything is presented as an either/or situation. Either you work for someone else and are permanently limited by some external force (taxes) or you work for yourself and are treated better then those poor working stiffs. Either you get a paycheck that’s small or you have passive income that’s large. Well it just isn’t that easy.

So far I think Robert Kiyosaki’s contribution to Yahoo! is 0 for 1, not providing any useful information at all and quite possibly offering dangerous advice. I can’t wait for the next installment.