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A Monthly Newsletter Source of Financial Sources • Five Strategies that Reduce Capital
Gains Taxes of Highly Appreciated Real Estate • Apartment Rents are About to Explode
and Should take the Consumer Price Index with them • Go Shopping at Home This Christmas, Instead of the Mall • Create a Special Event to Distribute Your Family
Treasures • Concierge-Style Living Versus Cleaning Your
Own Gutters Clearly, leaving a longtime home is a big decision ---------------------------------------------------------------------------------------------------------------------------- Five Strategies that Reduce
Capital Gains Taxes of Highly Appreciated Real Estate If the recent proposal to keep the current tax cuts is granted soon by Congress, investors will see the Federal capital gains tax rate stay at fifteen percent on January 1, 2011. If Congress does not pass the tax cuts, rates will move to 20%. In addition, investors are responsible for other less familiar but equally significant taxes on appreciated property, which include:
More so than ever, capital gain taxes on the sale price of appreciated investment real estate should be carefully managed. What follows are five strategies for managing these various taxes: Strategy #1: The classic
1031 Exchange Strategy #2: The lesser-known 1031-721 Exchange
Many REITs utilize Section 721 as a way to acquire property from investors interesting in selling, but who wish to defer capital gains taxes and find a replacement property as part of a 1031 Exchange. Rather than exchanging property for property or for a Tenants in Common property interest, Internal Revenue Code Section 721 allows an investor to contribute property directly to a REIT's operating partnership in exchange for operating partnership units (or ownership). This type of transaction is commonly referred to as a 1031-721 Exchange or UPREIT transaction. The benefits of this particular strategy include:
Strategy #3: The little known Allocation of Sales Price Strategy #4: Tax-Advantaged Investments Qualified programs allow investors to write off a significant amount of their investments against income or gains for that same tax year. For example, an investor with $500,000 in capital gains may decide to invest this amount into a qualified program, and deduct 80% to 90% of that investment, or $400,000 to $450,000, against all income and gains for that year. This strategy can make a significant impact on lowering an otherwise high amount of taxable gains. It’s important to note that most oil drilling programs do not properly support this strategy as their investment objectives vary. Interested parties should make sure that they contact a credentialed and experienced advisor for assistance. Strategy #5: Irrevocable Trust Strategies
Rich Arzaga, CFP® CCIM, is the Founder and President of Cornerstone Wealth Management, Inc., San Ramon, California, a life planning company. He is also an award-winning instructor in the U.C. Berkeley Personal Financial Planning program. Rich can be reached at rich@cornerstonewmi.com. 888-290-9900 Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033 Apartment Rents
are About to Explode and Should take the Consumer Price Index
with them A powerful combination of demographics and a very tough economy is forcing an increase in demand for rental apartments. One indirect upshot is the almost certain serious and sustained upward pressure on investors and advisors whose performance is measured by the CPI because of the odd way it is constructed. First, multi-family rents, which had taken a header in the general bubble collapse, have turned around sharply. Apartment vacancies reached a record high of 7.4 percent in 2009. They were falling this year as job losses stabilized. As a direct result, new construction plummeted. As the end of 2010 approaches, apartment-owning Real Estate Investment Trusts (REITs) are posting 5% annualized rent increases in latter 2010. The industry is now only about 160 occupancy basis points from the historical national vacancy norm. All indications are that three drivers are in place for dramatically increased demand for rental apartments over the next five years or more. The first driver is a happy trend. In the 60s and 70s there was a huge boom in multi-family construction as Baby-Boomers started forming their own households and needed places to put them. Now their children are doing the same. Echo Boomers will be creating 1.5 million new households a year for the next three to five years. Most do not yet have either the down payment or the credit rating to buy a house, so they will have to rent. The second demand driver is much sadder, but still inexorable. There will be one million foreclosures this year. That could go to two million next year. All those displaced families who can't move in with someone else will go into the rental pool. Again, most will not have either the down payment or the credit to buy a house. They, too, will have to rent. Third, as the economy gradually turns, some lost households will again be looking for apartments. We lost about a half million households in the last two years as people had to move in with relatives or otherwise double up. With any sustained job growth most of those people will want to move out and rent as they get their feet back under them. At the same time, there won’t be sufficient increased supply to meet that demand for years. We are only building 100,000 new multi-family units per year. On average for decades, we historically built 400,000. In the last real recovery with many banks actively lending to many borrowers then thought to be qualified, 700,000 units were completed in one year. Now we are hardly replacing what's becoming obsolete. As CB Richard Ellis (the noted brokerage for properties and leases) notes: “Assuming that new rental completions will total about 150,000 units next year and that conversions of previously owned homes into rentals continue at the current near-record pace, the rental vacancy rate is still bound to decline further. Improving occupancy should push rents higher in the coming months; the question is just how strong this growth will be.” The US home ownership rate started declining in 2005. Since then 80% of growth in total housing demand has been from renters. In the last 12 months alone, 800,000 households were added to the ranks of renters. According to CB Richard Ellis, U.S. apartment occupancy is now: “within striking distance of the historical norm……. Effective rents in a number of large markets including Boston, Chicago, Miami, New York, San Francisco, and Washington DC, are already reporting 3-5% growth on an annualized basis.” Month rates in Boston, which dropped 2% in the last quarter of 2009, are already projected to climb 2.8 % in the fourth quarter of 2010. Parking and rent reductions had been supporting the Boston market but anecdotally that's about over so the effective rental increase is much higher. In Manhattan, concessions are also disappearing and landlords are increasingly unwilling to reimburse the tenant for the cost of brokers. That alone is an effective 16% first year revenue increase from new tenants before adding a 5 to 10% increase in stated rents. Combine the Echo Boomers and the foreclosure-dispossessed and we need space for some 2.5 million households next year, most of then rentals. Eighty percent of new households have been renters for the last two years. Eighty percent of 2.5 million is 2.0 million in new demand. But while the factors affecting demand have already turned briskly upward, the factors affecting supply are a lot stickier. We are presently only building 100,000 units per year. On average we’ve historically built 400,000 or 500,000 new units a year before the crash. Sometime developers will start to build, but new construction financing is still very hard to come by, and a great number of the developers who used to build now have serious financial troubles that would not make them qualified borrowers. There are new rules at HUD that require a very hard look at a borrower’s balance sheet, with particular reference to any construction projects that are or might go under water. Investment bankers at Herbert J. Sims note: “Multifamily mortgage insurance applications now must contain detailed schedules for what HUD terms the “key decision makers” and “key equity sources” that identify all real estate holdings, outstanding mortgage debt, net operating income, debt service, net cash flow and percentage ownership. Lenders must analyze this information to determine whether a principal has “underwater” real estate assets or mortgages coming due within a five-year window that may negatively impact their financial capacities relative to the HUD-insured project.“ There will be non-HUD insured financing available for very strong developers but a lot of the smaller banks that formerly made loans to smaller developers are in about the same troubled shape as many of the smaller developers. It will take time for developers and lenders to recover, and it usually takes years to acquire site control, plan, permit and then finance and build a new property. Eventually more people will start making money on re-use of the foreclosed single-family properties (some people are doing this on a small scale) but the legal process of foreclosing and re-selling is tough and it is hard for one person to manage more than a handful of single family property rentals. Most of the foreclosed single-family homes will stay owner-occupied, even at lower prices, but the Echo Boomers and the recently foreclosed will mostly not qualify to buy them for some years. Recognizing this supply and demand situation, apartment REIT prices are already up over 60% in the 12 months ending this November. “FFO” is REIT speak for earnings before depreciation. It is not hard to forecast double-digit FFO growth for a while, and that is one way to play that trend. Apartment REITs throw off a 3% dividend today, but the dividends on the good ones could fairly easily double by 2013. The interesting (though to some threatening) byproduct of apartment rental increases is an inevitable major increase in the Consumer Price Index. “Housing” (the combination of real third party rents and the “costs of shelter” for homeowners) accounts for 41% of the CPI. When the Department of Labor is computing the CPI, the main categories of goods and services include: Food and beverages
— 14.795% There are a few small items in that 41.9%, student dorm rents, hotel bills, home insurance, but about 90% is real housing cost. Obviously the main driver of the CPI is housing, which the Labor Department defined as “rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture”. Why bedroom furniture and not your dishes, couch or stove? No answer. Maybe they eat cold cereal. But the real question is “Since most of the households in the U.S. are in owner-occupied dwellings, the recent decline in home prices of almost 40% from the all-time highs might make you think that the CPI would have come down over the last few years, but due to the way it is calculated, that did not happen. Starting with the index for January 1999, the Bureau of Labor Statistics returned to the method that was used for the “rental equivalence index” when it was first introduced in 1987, that is, mechanically re-weighting the renter sample to represent owner-occupied units. (Once upon a time, before 1987 the cost of buying or fixing up a house did enter into the CPI calculation but no longer. Now just the Bureau’s estimate of the cost to rent not including utilities which are a separate line item. Buying and fix-up is considered “investment” but not “consumption.”) This is important. Over the last 50 years, growth in the primary residence estimate has accounted for 60% of year-to year overall inflation, and over 70% of variation in what they call “core inflation.” So a forecast of national apartment rents may well be a good proxy for 40% of the CPI. That would argue, despite recent comments from some sources, and to the extent that those comments are based on the larger CPI measures, deflation is not likely to hit us– rather, with about 40% of the index under serious upward pressure the reverse is true and inflation is a likely scenario. The Federal budget has benefited from the fact that we have just been though two years without Social Security having to pay its recipients increased checks to reflect CPI adjustments. For the second year in a row, the nearly 54 million retirees and other Americans who receive Social Security benefits will not get any cost-of-living increase in 2011 in their monthly checks. The absence of any growth in Social Security checks for consecutive years is unprecedented in the 3 1/2 decades that payments have been automatically adjusted according to the nation’s inflation rate. This is despite the fact that single-family home owners have faced increased real estate taxes, and in many cases, higher mortgage interest rates for floating rate loans that have ballooned. We are, I would argue, about to see that end. Unless Congress changes the Social Security CPI formula, every recipient will begin to see increased payment checks of around 3% or higher. Federal (and many State and Municipal) pension benefits are also indexed to the CPI and they mostly have even less spare cash. States and counties are not contributing enough to their pension obligations and they don’t want to raise taxes. That will have political implications for budget balancers. Those financial planners and others who measure their own investment performance against the CPI will have to meet tougher bogeys. Those bonds, annuities and other investments indexed to the CPI will start to perform better. Those that are not, will perform worse. Good for REIT investors, maybe not so good for a lot of the rest of us. Michael Dowd is a Principal at Equity Research Collaborative, Weston Massachusetts, a firm specialized in commercial real estate property acquisition research and finance. He can be reached at DowdBoston@aol.com Year End Management of Your Portfolio Requires Attention to Small Details – And the Tax Benefits are Worth the Effort The end of the year is approaching and we are close to that part of the year most mutual fund investors detest: capital gain distribution season. An investor must include in his or her taxes a mutual fund capital gain distribution unless the shares are owned in a tax-qualified account such as an IRA or a 401k. Certain sectors, like gold and emerging markets, have enjoyed tremendous returns. Many of these mutual funds may have sizable capital gain distributions coming up before year end. It would be wise to contact your fund companies or investment advisor about potential distributions. It is also prudent to review your portfolio for any rebalancing you may need to do. If you do rebalance your portfolio, be careful to wait until after the fund you are buying has had its distribution. If you buy a fund right before the distribution occurs, you will be hit with a taxable event even though you didn't own the fund during the time it earned enough to produce the distribution. Also you can avoid a distribution by selling all or part of a fund you own prior to the distribution. Selling a fund in this situation will likely produce a realized gain for you, but you may be able to negate this gain if you have an unrealized loss in another holding. It is possible to be proactive with both yearend capital gains and realized gains, but it does take a good bit of detective work and math. Don't be afraid of it since you can reap tax benefits from your efforts. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000.
Minneapolis, Minnesota. Registered investment adviser and subsidiary company
Montgomery Investment Management, specialize in the management of no-load
mutual fund portfolios for individuals and retirement plans designed to
protect capital by reducing risk. 952-835-9000 – pfs@usinternet.com Go Shopping at Home This Christmas,
Instead of the Mall Clutter is not junk. Clutter is your gently-used stuff that no longer adds value to your present life – you do not love or use it now, but someone else may! If you match items with specific people you think will really appreciate them (just what you do when you shop at the mall), everyone benefits by the gift. If you can’t think of anyone, donate the item. In this economy, people really need what many of us can afford to give away. Go shopping only when getting something uniquely special for someone or for small children. Speaking of kids, visit BabyPlays.com. Modeled after Netflixs, you can gift a subscription to parents who can then rent age appropriate toys, and return them as the child grows. No waste of money, no stuffing closets with old toys, no throwing away plastic, which takes 100-500 years to decompose. Get a gift you don't like? Many hold onto these unwanted gifts fearing that “getting rid of it” they will insult the gift giver. If you don't love (or use) it, or importantly, you really don’t like the person who gave it to you, it's clutter. Give it away or donate immediately after Christmas so it doesn't take up valuable space in your home or annoy you when you see it. If a person asks about the gift, say something like, “I really appreciate the thought you put into the Rooster Tureen. It's lovely, yet I won’t use it and my cabinets are already full. I gave it to a friend who loved it, and thought it perfect for her kitchen.” Inform with respect, not defensiveness. Unused gift cards can cut your holiday costs and worry because they allow recipients to buy what they want. No disappointments. You can buy gift cards with up to 30% discounts or turn unwanted cards into cash by visiting these websites: http://www.plasticjungle.com and http://www.giftcardrescue.com. While looking for cards in your home, it’s likely you’ll find more discover gifts or donations in your clutter. If you are like most of us, you know you do not need or want everything you own and you’re belongings are piled high and deep in the recesses of your residence, garage or storage units. Instead of wasting your valuable time, money and energy at the mall, de-clutter your home for your holiday gifts. You’ll be amazed at what you may find: the perfect present and your peace of mind, just in time for Christmas. For ten more tips on how to efficiently distribute your treasures, visit Laura’s blog www.ClutterClarityatHome.com. Laura Moore, M.Ed., principal of ClutterClarity at Home, Concord, MA shows overwhelmed people how to enjoy de-cluttering and organizing their homes. As a professional organizer, coach, and author of Paper Clarity at a Glance, Laura offers tele-classes, phone coaching and in-home services. To learn more, visit www.ClutterClarity.com. Create a Special Event to Distribute
Your Family Treasures Traditionally we distribute our assets through a will and trust that protect people and property after we die. Some attorneys encourage an addendum for the will that specifically says what possessions are to end up in whose hands, but that doesn’t happen all the time. Yet numerous possessions that hold very real monetary or emotional value are neither mentioned in wills nor protected from haphazard distribution. Many things get in the way of distributing your treasures. A family member may think your treasure is clutter, and place it into the distribution channels of consignment, charity or trash, lost forever. You may think you know what holds value for someone, but you didn’t know the interests of your intended recipient had changed. Casual conversation and innocent forgetfulness cause additional confusion and upset. Divorce and downsizing naturally stimulate distribution, yet many move their treasures to storage units, fully planning to get to them … soon. For numerous emotional reasons, overwhelmed parents resist their children’s efforts to help. Time-strapped boomers of the sandwich generation live in terror of dismantling their parent’s homes. Too often, their parents have never decided what to do with their family treasures, or cannot decide, and knowingly or unknowingly, leave the responsibility to their tired loved ones. Families need an orderly alternative to distribute family treasures. Instead of behind closed doors with expensive attorneys after your death, it’s possible to enjoy transferring your property when using a carefully managed, inclusive distribution process while alive. Here’s how:
There are lots of subtleties to the process, but the process is straightforward. Here are some tips to help make things go smoothly. Add pictures and short descriptions for each item in your inventory. Ask recipients to work alone, prioritize the family treasures they want, and return their priority list to you within thirty days. You then review the priorities, weighing your wishes, the recipients, and balancing the financial and emotional value of each item. Make a good faith effort to be fair and true to your relationship with each recipient. Take your time – perhaps up to nine months, but make it important enough to steadily persevere until done. Your final distribution list not only helps you, it provides invaluable direction for others. The next step is to essentially throw a Family Treasure Party when most recipients can attend. With other’s witnessing, give each recipient at least one of their top three priorities with the story behind each treasure – the history, meaning to you, memories, and why you gave the treasure to a particular person. Share monetary values of treasures privately after the party so people can adjust their insurance policies. Adjust yours as well. This orderly process builds continuity - a bridge between your family past and future. The building blocks are the family treasures; the mortar is the story accompanying each treasure. If you record the event, everyone can enjoy the experience and stories again, even if an item goes missing. Instead of dread or burden, you turn the distribution of your family treasures into a fun celebration with people you love. In a vital, joyful way, it eases the letting go of possessions and life itself. Many people worry that this much inclusivity will make things more difficult, not less. There may be bumps along the way, but everyone will appreciate your asking them what they want, and giving them tools to decide. You are essentially gathering information to make good decisions – decisions without regret. The final decision remains yours, yet without input, your treasures risk losing value because they are unwanted. Don’t wait till you die to give away what you love. Instead of distributing property in the tradition of wills and legalities, start a new tradition for your family. Perhaps the greatest gift to your loved ones is not the treasure they receive from you, but how well you took care of things while alive. For ten more tips on how to efficiently distribute your treasures, visit Laura’s blog www.ClutterClarityatHome.com. Laura Moore, M.Ed., principal of ClutterClarity at Home, Concord, MA shows overwhelmed people how to enjoy de-cluttering and organizing their homes. As a professional organizer, coach, and author of Paper Clarity at a Glance, Laura offers tele-classes, phone coaching and in-home services. To learn more, visit www.ClutterClarity.com. Concierge-Style Living Versus
Cleaning Your Own Gutters Clearly, leaving a longtime home is a big decision. Concierge-style living in a Continuing Care Retirement Community (CCRC) for those 55-years-old and up is something that many people are unfamiliar with, and so they choose to stay in their own homes. This despite the fact that a CCRC offers a more unencumbered lifestyle allowing freedom to pursue passions with more time and comfort. A CCRC is a neighborhood within a neighborhood. All the services you would need are self-contained, and assisted living services, rehabilitation servicesm and short-term skilled nursing services are available should you need them. Concierge-style living in a CCRC means simply that many of your home maintenance, cleaning and food preparation tasks are taken care of for you if you choose. You can also expect that transportation for errands, sidewalk clearing, and the elimination of all suite maintenance, real estate taxes, electrical, water, sewer, plumbing and appliance replacement costs will be eliminated. The ease and comfort of your suite and companionship of nearby neighbors is the plus that most residents cite over and over again when evaluating their CCRC. Gutters have faded into the distant past. It’s true. Many people put off moving to the convenience and comfort of a concierge-style CCRC. “I’m not ready yet,” and “I’ll miss my own home” are only two of the reasons offered. That beautiful home in the woods may not be the perfect choice for your life now. Here are some of the classic resistance thoughts and some ideas that might allow you to consider a move to a new CCRC neighborhood.
Clearly, leaving a longtime
home is a big decision. Focus on the where, and then the how, and make
the decision to opt for comfort, convenience and caring friends that you
will find in a CCRC. Oh yes, don’t forget the Concierge Services available
to you when you need them. You will not regret your decision to
move. Kevin Comick is Executive Director for
Seashore Point, Provincetown, MA, a full service, continuing care residential
community, the only such community on the Outer Cape and the only one
located in the nation’s oldest continuous art colony. Seashore
Point is one of five Deaconess Abundant Life Communities. Deaconess
is a not-for-profit organization operating in Concord, Massachusetts
for over 120 years. Comick
can be reached at kcomick@seashorepoint.org or
508-487-0771. |
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