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Bailout for speculation
Thanks to a handout from this spend crazy congress, dozens of serial money-losers will stake claims in a cash scramble that could cost us more than $50 billion. Thanks to months of lobbying by the homebuilders, the measure also gave companies the right to apply losses incurred in 2008 and 2009 to income earned in any five years through 2007. Previously, losses could be counted against profits over just two previous years. The change was good news for companies like Lennar, a Miami-based homebuilder that has been gushing red ink since its misguided bets on house prices went bad three years ago. All told, Lennar has lost $3.4 billion over the past three years, wiping out profits running back to 2003. But the company now is free to use $1.5 billion of losses over the past two years to offset previous income. It expects to get a $320 million tax refund check this year. Those funds will allow Lennar “to continue to capitalize on distressed land-buying opportunities, which will improve our operating results in 2010 and beyond,” Miller said. As CNN says, it is curious at a time of bulging national budget deficits that taxpayers should be funding Lennar’s land speculation efforts — particularly given the company’s poor record in that area. After gorging on land during the boom, the company lost $1.8 billion on land sales in 2007 and 2008. Regardless of what purpose the refunds might serve, Lennar won’t be the last homebuilder to claim one. Toll Brothers (TOL) said last month it expects to get a $162 million income tax refund when it files its 2009 taxes, thanks to losses the past two years it can now offset against 2007 income. A Wall Street analyst last month upgraded KB Home (KBH) shares, citing a large expected refund there. As has so often been the case during the last two bailout-soaked years, those funds will come out of taxpayers’ pockets.
So much for “job creation”
Labor Department data showed that US employers unexpectedly cut 85,000 jobs in December, even though analysts polled by Reuters had expected nonfarm payrolls to be unchanged last month and the unemployment rate to edge up to 10.1 percent. For the whole of 2009, the economy shed 4.2 million jobs, the department said. Still the job market continued to show broad improvements last month, with a number of sectors showing gains. Professional and business services added 50,000 positions, while education and health services increased payrolls by 35,000. Temporary help employment rose by 47,000. Manufacturing payrolls fell 27,000 after dropping 35,000 in November. The construction sector lost 53,000 jobs, while the service-providing sector shed only 4,000 workers. The average workweek was unchanged at 33.2 hours, while average hourly earnings increased by $18.80 from $18.77 in November. Unemployment remains the Achilles heel of the economic recovery that started in the third quarter of 2009 following the worst recession in 70 years. Creating jobs is critical to sustaining the economic recovery when government stimulus fades. It’s also critical to Democratic ambitions. Obama’s popularity has steadily fallen, knocking his approval ratings down to around 50 percent, and this could dim the election prospects for his Democratic Party in the November congressional elections. Obama is scheduled to make a statement on the economy at 2:40 p.m. EST.
DSNews.com – Unemployment Plagues 25% of Distressed Homeowners
An analysis by MortgageKeeper Referral Services of 400,000 homeowners in 2009 shows that nearly one in four needed access to employment services to help them keep their homes. The New York-based MortgageKeeper has found that of the 19 service categories its database offers, struggling homeowners most requested employment assistance. Based on this information, the company sees strong ties between job loss and foreclosure. “The results are not surprising, but they point to foreclosure as a symptom of much larger problems in our economy,” said Rochelle Nawrocki Gorey, president of MortgageKeeper Referral Services. “In almost all cases, something is forcing a family to miss their mortgage payments. If these underlying issues go unaddressed, loan modifications and other aids are only temporary fixes.” MortgageKeeper says its database is accessed more than 1,000 times every day, helping more than 30,000 families every month. Its resources include more than 4,000 nonprofit and government agencies in 75 metro areas in all 50 states-covering 90 percent of high foreclosure markets, the company said. “Our web-based applications-including our newest, MKDirect-dive to the root cause of missed mortgage payments,” said Gorey. “Offering a struggling homeowner help to find a job, feed their family, and pay their utility bills-this helps them steady their financial ship. And with their finances in order, homeowners will be much more likely to stay current on their mortgage.”
Holiday sales up
Total holiday-season sales grew 1.8% with a late surge before Christmas, according to an index of 33 retailers by the International Council of Shopping Centers. According to a Thomson Reuters index of 30 retailers, sales grew even more, with sales for the five weeks ended in early January rising 2.9% compared with the prior year, the best monthly showing since April 2008. Retail economists now predict solid growth for 2010. The International Council of Shopping Centers projects annual sales will increase 3% to 3.5%, the biggest jump since 2006. “It’s a story of the turning of the corner for the retail industry,” said Michael Niemira, the group’s chief economist. The improvement was seen broadly. From department stores to teen retailers to discount mass merchants, three-fourths of major store chains reporting December sales exceeded low analysts’ expectations. The 2009 Christmas totals remained far below those of just two years ago and only presented a partial portrait because they didn’t include retail behemoth Wal-Mart Stores Inc., which stopped disclosing monthly figures last year. The relatively strong performance signaled that most store chains protected profit margins by restricting inventories to match demand, avoiding the desperation clearance sales that ate into fourth-quarter earnings in 2008. Nordstrom Inc. posted a 7.4% rise in same-store sales and said annual earnings should exceed its prior estimate of $1.83 to $1.88 a share. The less-is-more strategy is expected to continue well into this year as merchants cautiously move forward in light of continuing high unemployment and a recent spike in energy prices that is reducing consumers’ disposable income.
Recovery Worries over Fed Plan to Stop Buying Mortgages
The Federal Reserve’s pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course. Rates on 30-year fixed-rate mortgage have risen by a quarter of a percentage point in the past month to around 5.2%, according to HSH Associates, near their highest levels since September as the bond market has pushed up long-term interest rates amid signs of an improving economy. The recent rise in mortgage rates could be a prelude to even bigger increases in coming months as the Fed steps away from support for the market. That prospect has some in the markets counting on the Fed to change course and keep buying past March, which many officials are reluctant to do. When such a big investor stops buying, “that could lead to material increases in [interest] rates across the board,” said Ronald Temple, portfolio manager at Lazard Asset Management. He sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said. The Fed now holds $909 billion of mortgage-backed securities. In the past year it has purchased 73% of the mortgages that government-backed Fannie Mae, Freddie Mac and Ginnie Mae have turned into securities. Purchases by the Treasury pushed total government purchases above $1 trillion. The Fed says it plans to top off its purchases at $1.25 trillion by the end of March, but must decide in the months ahead whether the economy is strong enough to stick with that plan.
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Try to Top These Tax Benefits!
There are many reasons to invest in real estate but undoubtedly, one of the most important is the undeniable tax benefits. From depreciation to deductions, just try to find another source of income able to top these tax benefits!
1. Passive Loss Deductions. High income individuals will be delighted by the ability to offset gains in other areas by taking passive loss deductions from real estate. All expenses associated with real estate investments qualify including management fees, taxes, insurance, repairs, homeowner association dues, legal and accounting fees and even small office expenses. Just be sure to keep receipts and set up a tracking method.
2. Depreciation. Few things are more tax friendly than real estate; while the property appreciates in value due to inflation, improvements and/or market forces, it simultaneously depreciates in value according to Uncle Sam. The average depreciation schedule for most single family residential homes is 27.5 years which means you deduct a percentage of the price of the building (not land) in addition to expenses or other fees each and every year.
3. Interest Deduction. If you are using other people’s money – including banks, hard money lenders or even personal loans – the interest is typically deductible. Since interest payments tend to be highest in the early stages of ownership, interest deductions are especially useful when building a real estate portfolio.
5. Income Tax Treatment. When you work for a living personal income taxes and FICA represent a significant tax burden. FICA alone equal 15 percent of wages for self employed individuals (employers match employee contributions for a total of 15% combined), however, rents collected from real estate are never subject to self employment taxes making them a favorable way to generate tax free profits for retirees and others.
6. 1031 Exchanges. There are very few investments that allow you to trade them in and purchase another without any tax consequences but real estate is one of the exceptions to the rule. Investors must follow specific criteria to qualify but it’s entirely possible to roll profits from one property into another without generating any tax bills whatsoever – be sure to understand the requirements well into advance in order to avoid unpleasant surprises later.
7. Totally Tax Free. Personal residential property can generate up to $250,000 of profit completely tax free! Many people have been able to fund a significant retirement benefit from buying their primary residence at the right price then downsizing later in life and pocketing the profits (tax free!). To qualify, you must live in the property for two out of five years immediately prior to selling. Imagine the additional income someone could generate simply by buying low and selling high every five years – with zero tax burden.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2009.
All Rights Reserved.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
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