December 1979
Vol 2 No 3
For those with fiscal years based upon the calendar year, this is the final opportunity for implementing year-end tax-flow tactics. Taking a page out of the current Fortune Seminars Course workbook, here’s how WE look at things:
* Income is good! (Ordinary unearned income is good, Ordinary personal service income is better, Long term capital gain income is better yet, Tax-exempt income is best of all.)
* We should AVOID taxable events! – but – LOSING MONEY is not good!
* Depreciation is mostly good. (However someday someone will pay recapture.)
* Deductible expenditures are bad! (Expense is still EXPENSE regardless of tax!) Non-deductible expenditures are worse! Remember, a tax deductible item, or a tax credit is merely the equivalent of a discount in the final analysis.
* If you can’t deduct it, depreciate it! If you can’t depreciate it, add it to your basis. The sooner you can recover your basis through depreciation, the better.
NON-TAXABLE APPRECIATION WHICH CAN BE CAPTURED THROUGH FINANCING IS BEST OF ALL.
We’d like to thank Mr. Charles Ray Considine, CPA of San Diego, Ca. for these insights. December is a little late of fine-tuning taxes. The optimum time for devising tax-strategy is PRIOR to the start of your tax year, and prior to planning any transaction involving your assets or income. Here are some thoughts to help you now though:
Property tax bills are often payable over a wide time span. If you need cash for paying Federal Income Taxes and don’t need additional business deductions, plan on NOT PAYING your property taxes. In Florida application may be made to defer tax on a homestead which exceeds 5% of household income (3% for senior citizens). Forms are available through the county tax collector’s office and must be filed by Jan. 31st.
Many States allow for nonpayment of property taxes, giving owners several years to pay them, during which time interest ACCRUES. In today’s money market, those interest rates seem mild when one considers that there is no cash-flow drain. By saving cash at this time, you are using the tax collector as a lender. A lovely idea!
Bill Greene’s “Pay no income taxes, ever again, legally!” tape ($12.95, P.O. Box 408, Mill Valley, Ca. 94941) has a neat idea. Borrow the money to pay property taxes. Bankers like tax payers who secure the loans with their property. This way you can avail yourself of the various discounts available for early payment, while you get your taxes paid in 1979 to allow you to claim the deductions if you need them.
Of course, you could also borrow your Federal Income Taxes. Put the money in a Money Market Fund (CommonWealth Letters, June 1979) at today’s high yields and pay your taxes with their check. Your funds continue to earn money until the check clears and you can take a 1979 deduction if it is used to pay 1979 property taxes. The interest is subsidized to the extent of your tax bracket, as an additional deduction.
Try to even out your taxes between 1979 and 1980. In general a level tax load from year to year is more advantageous in the absence of any special situation. It is often easier to shift INCOME from one year to the next versus EXPENSE. All of our lease payments fall due on the FIRST of each month. If we need more income, we can approach our tenants with an incentive for early payment by December 31st. Otherwise the rent is received in the next year automatically.
When we have accepted an offer to purchase one of our investment properties, we reserve unto ourselves the election as to the date of closing, stipulating in the contract that it will be no-later-than the first week in January, but as-soon-as we can evaluate the tax impact. Thus, we exert total control over year of receipt.
Doing your tax planning early reaps a host of benefits. When you KNOW you will be selling an asset in January, you will not be liable for the tax on your gain until 15 months later. If you use the sale proceeds to purchase leveraged replacement property, you will have a full year’s depreciation to offset your taxable gain.
Let’s suppose you sell a $100,000 property in January and realize $50,000 fully taxable long term capital gain. You are in the 25% bracket, so you might pay as much as $5,000 in taxes ($50M times 40% LTCG equals $20M times 25% bracket). In January you buy replacement houses worth $500,000 using your $100,000 for a down payment. Assuming a conservative 5% per year straight line depreciation of $400M in improvements, this will yield $20M in depreciation completely sheltering the gain from the sale.
Of course, a tax-free EXCHANGE would also be beneficial in minimizing taxes. Anytime you have a serious buyer for your property, you can enter into an exchange agreement under Section 1031 of the IRC whereby you get that buyer to purchase other property which you would like to own, and then exchange it to you for your property.
It pays to get professional advice when doing a tax-free exchange because of the technical details involved, however it is a time-tested device for avoiding taxes. Licensed Brokers may join the Florida Real Estate Exchangers for $60.00 per year. Investors who are not licensed are eligible to join the Academy of Real Estate once they have successfully completed the “Trade Secrets of Exchanging” course offered by Warren G. Harding, (46 N. Washington Square, Sarasota, Florida 33577). Both of these professional exchange groups meet several times per year to market exchange properties.
Some expenses can be shifted from one year to the next. Using borrowed funds, (available from institutions in the form of home improvement loans) deferred routine maintenance can be performed and paid for in 1979 or 1980. Necessary office supplies, equipment, postage, credit card accumulations, etc. can be expensed flexibly.
Now is the time to do some trimming in your security and commodity accounts. If you have lost money, make it a taxable event by selling now to get short-term tax treatment of the losses. Gains could be taxed at lower rates in 1980, so it might pay to hold off realizing them until then. There’s no substitute for sound tax advice when planning strategy. Either YOU must acquire the necessary skills or hire them to optimize your tax planning.
Projecting your next year’s taxable income is a wise course! We have made it a practice to estimate total income and expenses a year in advance based upon the schedule of activities we plan. Using as accurate information as we can get, we look at our projected tax liability. WE ACTIVELY ACQUIRE NECESSARY TAX SHELTER AS OUR FIRST ORDER OF BUSINESS EACH YEAR! This way, we attempt to maintain “bracket-control” over our taxes in a systematic manner.
As a final thought on taxes, THEY DON’T TAX LEISURE YET! Consider taking a TIME-DIVIDENT tax-free. Since they only tax the producers, why not employ the tax strategy of earning enough t live comfortably, then cutting off all taxable income once you have achieved your tax bracket objective. Take some time to smell the roses! Once you tire of the indolent life, pursue the muse, become a student, take a tax course, go to tax-deductible seminars in distant lands. Or – start buying shelter in the form of single family houses which will provide for next year’s income. Buyers are not taxed on gains made at time of purchase. Only Sellers are taxed!
Industrious Buyers accrue tax shelter so fast, they rarely pay taxes at all! That’s the ultimate tax shelter – un-taxable, finance-able growth from SFH investments.
WE’VE BEEN GETTING SOME FEEDBACK ON SINGLE FAMILY HOUSES FROM AROUND THE COUNTRY.
California’s San Francisco Bay area seems to be continuing to enjoy a SELLER’s market. Overall prices are rising at about 28% with average prices that are approaching $100M. Sacramento continues strong, but we have had reports of a slowdown in some of the smaller interior towns as a result of money costs.
The Mid-West from Iowa to Indiana and including Michigan is averaging about 12% growth in resale houses which average in the mid-forties. There is a mixed market with Buyers predominating in the higher ranges. Appreciation is a little higher in Virginia and North Carolina’s Piedmont region. The average $47M 1978 house is now priced at $53M for a 13% increase. News from the Northeast, the South, Rocky Mountain, Plains, and Southwest is noteworthy for its absence. We’ll have to rely on the National Association of Realtors for those averages, which peg the figure at about 18.5% appreciation.
Those who joined in our survey (see October 1979 CommonWealth Letter) reported an average 223% increase in their holdings of single family houses over the same point in time last year. More and more people are joining the Silver Trust with others who own or control over 30 single family houses.
Reports of prohibitive interest rates and FHA/VA discount points to the mortgage are filtering in from all areas. Let’s put this into proper perspective. THE GOOD NEWS IS THAT THERE IS BAD NEWS! Only when the market is unsaturated with easy-money buyers is there true opportunity for the specialist who buys with his or her “head” and not with money! If we ever had a motto, it is “Use Your Head”, Not Your Capital”.
National media home sales reporting is seriously flawed! Because housing “STARTS” are one of our economic indicators, NEW HOUSING CONSTRUCTION and sales data are the basis for almost all reporting. By and large, our market for investment SFH is the RESALE HOUSING MARKET! For that reason, our market opportunities revolve more around demographic statics than any other data.
It boils down to market demand versus cost and availability of long term mortgage financing. News events which can be translated into movement of large numbers of people into or out of any particular region are more significant to us than daily quotes on Gold, Stocks, Bonds, or the Commodities markets. We buy our houses from people who are moving out, or who have lost their jobs, or who can afford better homes. We rent out houses to those who are entering the job market, or who are moving into a more favorable climate, or who seek a better opportunity in the economic environment, or who are forming new families.
Efforts by the Federal Reserve to control the economy through the use of artificially controlled interest rates are effective in the area of DISCRETIONARY PURCHASES of the wage earners. These purchases include consumer items, new cars, and new houses, but THEY DON’T AFFECT THE DEMAND FOR BASIC SHELTER which our houses represent. As long as people form families they will seek homes of their own which they will sacrifice lifestyle in order to either buy or rent, driving up the price regardless of the money market.
What this all means is that, those who employ Options, Lease Options, Contracts, Private Sector financing, Exchanges, and creative financial structures will thrive anytime the conventional money lenders start to restrict their loans!
Oddly enough, even when home sales in the resale market slow, the houses continue to appreciate in value. Houses are more like diamonds than gold. They do not experience wild swings up and down, but rather enjoy a consistent high rate of appreciation in good times and bad in comparison to almost every other investment alternative. UNLIKE DIAMONDS, HOUSES PRICES RESIST ALMOST EVERY ATTEMPT AT MANIPULATION!
When all else fails, the last act of politicians, desperate to hold on to their perquisites of power, is to invoke RENT CONTROLS in hopes of duping the public with a short range solution which has historically lead to inner-city disaster. On November 6, 1979 the BALTIMORE RENT CONTROL CHARTER AMENDMENT was passed. We’ve received word that it is already being contested in court and no wonder. It represents a new low in demagoguery. Sad that it could happen in a city steeped in history as a refuge of people fleeing tyranny – seeking the land of the free.
Overall Article 6A of this document is ominous in its provisions, invoking dim recollections of the law in Hitler’s Germany which also was aimed at depriving apartment owners of their property rights. In Baltimore, George Orwell’s 1984 seems to be arriving just a mite early. Big Brother appears to be alive and thriving.
ALL RENTAL HOUSING IS INCLUDED including spare rooms rented to students! Some “owner-occupied”, transient housing, and, of course, government owned or subsidized housing are exempted. By March 1, 1980 all regulated rental units must be REGISTERED with the Tenant-Landlord Commission (shades of the French Revolution). Rents will be rolled back to their November 1, 1978 levels and then allowed to rise 4 – 7 percent. Tenants will be allowed to request additional increases be denied.
Free Enterprise will not be tolerated even when both Tenant and Landlord want to reach terms outside the controls established. There is liability for triple damages for infractions. In the event the owner of 4 or more units wants to remove them from the rental market, the COMMISSION will rule on whether he can receive a fair return on his investment by forcing him to keep them rented (unless of course the government wants the property, in which case it can force a sale.)
We have said it over and over again. Avoid buying investments where organized labor or liberals are entrenched in local politics. We have had examples of their handiwork in all the historic Eastern cities: New York, Boston, Philadelphia, and now Baltimore. Gresham’s Law of People always applies: Bad politics drives out producers!
A quick look at the June 1979 CommonWealth Letter’s rent control strategies is reassuring. Almost all the techniques outlined therein would seem to suffice even in Baltimore’s hostile environment. If a successful tactical maneuver can be devised, there will be a runaway opportunity to buy property from distraught owners who don’t know how to combat this totalitarian scheme. We’ll keep watching this one.
In the Potpourri Department, the CommonWealth Trust has been completed. It is composed of 500 investors in SFH across the country who are dedicated to maintaining our free enterprise system of investment in SFH. We will maintain this number by replacing those who are no longer active with those who seek to join us. Be sure to keep us informed of your activities if you wish to either join this group or to keep your status as Trustee.
Owners of Florida houses with VA mortgages are eligible for financial help in the event their properties were damaged by heavy rains. Contact the VA, Loan Service & Claims, P.O. Box 505, Jacksonville, Fl. 32201 (904) 791-2714.
Ever want to know the address of a particular County Seat across the country? We ran across a neat desktop model recording directory for $8.95 which shows each State, each County, and the address of the County Seat. Write Ann Hansen, P.O. Box 1404, Porterville, Ca. 93258. Add $1.00 for postage and handling. Works good!
We’re looking for an answer to the insurance dilemma. We need to find some way to get a centralized underwriter who recognizes the value of having ONLY SFH to insure. With an estimated 5,000 SFH owned by our readers, this should make us a preferred risk group with extraordinary premium structures. Any of you Insurers who can figure out how to make this work, should drop us a Bill of Particulars.
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