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Peter Locke

President Biden’s 2022 Budget Request will change the way you plan

The three takeaways in this article: What you can expect regarding the Increase Capital Gains Rate How Estate Planning & Gifting will change next year How to use Tax Credits for parents and children While I was out to lunch with Sue, a small business owner in the Event Planning space, she asked me about Biden’s proposed tax increases and if she should be doing anything about it. Given that Sue is nearing retirement and her business is very profitable it was important to discuss how the proposed budget would impact her and the business.   Sue was hoping to work for 3-5 more years and then sell her business when she reaches 65 for Medicare purposes. While this is very much still an option, Sue and I decided to review her situation in more detail so she could make the most educated decision moving forward. Since selling a business and retiring is a massive decision in itself, if the new proposed tax law changes would help make her decision easier then it was my job to let her know.  The Capital Gains Rate is expected to increase from 20% to 39.6% on income in excess of $1 million Proposal: Increase the top capital gains rate (raising the capital gains tax is an alternative to raising the estate tax exemption) currently at 20% to 39.6% before application of the 3.8% net investment income tax for income in excess of $1 million (possibly retroactively – Yes, this can be done due to Article I, Section 9 of the United States Constitution) Ex: In 1993, the top ordinary income tax rate was increased on both ordinary income as well as the estate and gift tax retroactively to the beginning of the year (even though it was enacted in August).  What can Sue do: It may be worthwhile to accelerate the sale of her company in order to capture gains at today’s current top capital gain tax rate. Additionally, those that have appreciated land, real estate, stocks, collectibles, etc should look to do the same.  Ex: Sue (60) owns a company that she is looking to sell in the next 3-5 years as she is nearing retirement. Her income is typically $300,000 and the value of her business is $3 million. If she sells her business this year she will pay 20% instead of 39.6% (plus the 3.8% medicare surtax) on any income above $1 million. So, $460,000 (20% x $2.3 mill) vs. $910,800 (39.6% x $2.3 mill). The difference being $450,800 which if you invested at a 6% rate of return over the next 30 years (Sue at age 90) would be $2.58 million dollars.  Sue’s Options: Keep the business until she is ready to sell, sell the business now, or sell the business and consult the acquiring company for a set number of years for a lower sale price.  Our Guidance: Sell the business and consult the new company. This will enable her to bridge the gap between now and Medicare when paying for health insurance out of pocket is extremely expensive, capitalize on a low capital gain tax rate, and provide her the peace of mind that her clients will be taken care of while she collects an income.  Estate Planning & Gifting Death itself would become a capital gains realization event (1 million exemption) Gifting is now a realization event (so if you’re looking to gift an appreciated asset soon it may be worthwhile to accelerate that into this year)  Ex: If you gift an asset that has a basis of $100k and it is now worth $1mill then $900k would be taxed immediately. Previously, the recipient of the gift would not realize a taxable event until the asset is sold.  Tax Credits for Parents and their children are increasing Child and Dependent Care Tax Credit refundable credit up to 50% of up to $8,000 in expenses for one child/disabled dependent ($16k for more than one child/disabled dependent) with a phaseout and an exclusion of up to $10,500 in employer assistance/contributions for dependent care.  *Child Tax Credit extends the ARP child tax credit through 2025, including a maximum of $3,600 for children under 6 and $3,000 for children 6 through 17. Half of a taxpayer’s total allowable credit would be received as monthly advance payments and half would be paid when households file their taxes; any discrepancies would be reconciled on tax returns. Notably, by proposing that only half of the credit be paid out monthly, the resulting maximum monthly payments would be $150/$125 per child for 2022 through 2025, with the rest received at tax time, compared to maximum monthly payments of $300/$250 under the current ARP child tax credit in 2021. Full refundability, regardless of earned income, would become permanent. *Source – Biden Proposed Child Tax Credit Here are some additional facts and what you should know: The QBI (Qualified Business Income) deduction is here to stay – QBI Deduction – IRS 1031 exchanges, if you’re a married couple then Biden is proposing a 1 million per year cap on 1031 exchange exemption (500k for single filers) – 1031 Exchange – IRS Proposed 3.8% surtax to S-Corps distributions There have been talks about getting rid of  “Zeroed Out Grats” and rolling GRATs  What should you be doing now?  Think about your goals and objectives for your life, employment, gifting plans in order to prioritize the next steps If your income is less than 1 million then proposed tax increases don’t affect you Plan now and prepare while you have time. Planning on selling a business, piece of land, or real estate in December is not feasible. Sit down with your tax professional and CERTIFIED FINANCIAL PLANNER™ to plan the next steps

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Kevin Taylor

Real Estate Investment Due Diligence: Preliminary Assessment

When embarking on a real estate investment journey, one of the first critical steps is the preliminary assessment. This phase sets the foundation for your entire investment strategy and helps you determine whether a property aligns with your goals. In this article, we’ll explore the essential components of the preliminary assessment, including property identification and defining your investment objectives and strategy. Property Identification   1. Location and Geography The adage in real estate, “Location, location, location,” couldn’t be more accurate. The location of a property plays a pivotal role in its potential for success as an investment. Here are key considerations when identifying a property’s location: Neighborhood Analysis: Research the neighborhood’s safety, amenities, schools, and overall quality of life. Is it a desirable area for potential tenants or buyers? Proximity to Services: Evaluate the property’s proximity to essential services such as hospitals, grocery stores, public transportation, and highways. Accessibility can significantly affect property value. Market Trends: Study the historical and current trends in the local real estate market. Is the area experiencing growth, stability, or decline? Are property values appreciating or depreciating? Economic Factors: Consider the economic health of the region. Is there job growth, a diverse job market, or an influx of businesses? Economic stability often translates to higher demand for real estate. Future Development: Investigate any planned or ongoing infrastructure projects, zoning changes, or commercial developments in the area. These factors can impact property values and rental potential. 2. Property Type Real estate encompasses various property types, each with its unique set of characteristics and investment opportunities. Common property types include: Residential: This includes single-family homes, multifamily units (duplexes, apartment buildings), and condominiums. Residential properties often cater to renters or homeowners. Commercial: Commercial real estate includes office buildings, retail spaces, industrial warehouses, and hotels. It offers income potential through leasing to businesses. Industrial: Industrial properties are typically warehouses, manufacturing facilities, or distribution centers. They can provide stable rental income from industrial tenants. Mixed-Use: These properties combine two or more types, such as retail spaces on the ground floor with residential units above. They offer versatility but may require a deeper understanding of multiple markets. Vacant Land: Vacant land can be developed for various purposes, from residential housing to commercial or agricultural use. It offers the potential for significant capital appreciation. Investment Goals and Strategy   1. Identify Investment Objectives Your investment objectives serve as the compass that guides your real estate journey. Common investment objectives include: Rental Income: Generating consistent cash flow through rental properties, which can provide a steady stream of passive income. Capital Appreciation: Focusing on properties in areas expected to experience significant appreciation in value over time, with the intent to sell for a profit later. Portfolio Diversification: Adding real estate to diversify your investment portfolio and reduce risk. Tax Benefits: Utilizing tax advantages available to real estate investors, such as depreciation deductions and 1031 exchanges. Long-Term vs. Short-Term: Determining whether you’re looking for a long-term investment strategy (buy and hold) or a short-term approach (fix and flip) 2. Determine Investment Strategy Once you’ve identified your objectives, it’s crucial to align them with a specific investment strategy: Buy and Hold: Acquiring properties with the intention of holding onto them for an extended period, generating rental income, and potentially benefiting from long-term appreciation. Fix and Flip: Purchasing properties that require renovations or improvements, with the goal of selling them at a higher price after the enhancements are made. Wholesale: Acting as an intermediary between sellers and buyers, typically without taking ownership of the property, and earning a profit through the transaction. Development: Investing in undeveloped land or properties with development potential, where you can build and sell or lease the completed structures. DSTs: A pooled, small-scale, investment vehicle that provides directed exposure to the underlying investment and very limited liquidity. REITs or Funds: Investing in Real Estate Investment Trusts (REITs) or real estate funds, offering diversification and professional management. The preliminary assessment stage of real estate investment lays the groundwork for success. By carefully considering property location, type, investment objectives, and strategy, you set the stage for informed decision-making. This phase is just the beginning of your journey toward achieving your real estate investment goals. Stay tuned for our next articles, where we’ll delve deeper into the various aspects of real estate due diligence to ensure your investments are well-informed and profitable.

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Kevin Taylor

How to Survive a Bear Attack? (Pt. 2)

Don’t Discard your Strategy During a Recession We own stocks for a very deliberate reason. These equities are inflation resistant, generate cash, and the good companies grow at a rate faster than the economy they are a part of. They change prices wildly in a recession as people try to determine the long-term value of those features, but at the end of a recession, it is the only asset class that will be worth more after the economic slowdown. Stock prices might be down, but that doesn’t mean you need to change the way you invest. Remember you own these assets for a reason. This thought process applies to both long-term and short-term investors, and retirees. Long-Term Investors Long Term investors have the most to gain from a recession. It is very likely younger investors have been buying stocks at historically high prices. Any investor that began building their portfolio after 2001 has only had three windows where the broad market was trading below its historical average. That’s right, with the exception of three small windows in the last 20 years investors have been “overpaying” for their exposure to the market. Long-term investors might see the next window opening before their eyes right now.  If you’re regularly adding funds to a long-term account, such as a 401(k) or IRA, don’t stop during a recession. That’s huge! If you place most of your money in stocks, don’t “chase performance” and sell out of them. They may be falling in price while bonds are rising in price. Don’t chase bonds, don’t chase life insurance schemes, and don’t try to buy and sell rapidly. Don’t change what you are buying for the long term, in favor of what you see in the short term. Take advantage of the discount in prices – and keep saving.  Short-Term Investors and Retirees Although you may be uncomfortable during a bear market, don’t be tempted to sell your stocks or stock mutual funds at a loss across the board. Make two things a priority, lower your risk, and focus on cash flow. This is a time to focus on quality investments, and pair down the speculative portions of the portfolio – this isn’t the market for moonshots. Begin by accepting that speculative bets might be lost forever and start looking for investments that will survive economic contraction.  If you need income right away, it would be best to have money set aside in cash and bonds before the downturn. That way, you can withdraw from your cash while you wait for stock prices to recover. Then look for investments that can safely replace the cash you need on an annual basis – bonds, real estate, and dividend stalwarts are the keys here. If you can create a cash balance, then you can keep your more speculative investments grinding through the economic slowdown. Ideally, if you are retired, you and your CFP® know what your annual need for cash is, and what investments and institutions are working to replace that cash as fast as it is used. Investing Before and During a Recession It’s easy to go wrong during a recession if you forget or don’t understand how certain investments perform during a downturn. Or how they are related to each other. The stock market is a forward-looking vehicle. Stocks represent your right to a company’s future cash flows. So when warning signs of a recession “hit” these are the most skittish assets and will react the most violently. This doesn’t necessarily mean these companies won’t survive the recession or even become better as a result. What it means is that the amount that other people are willing to pay for a company’s future earnings is lower. When the recession becomes a thing of the past, people will begin to overpay for earnings again, and this is where you want to be in a position to sell shares to those people.  Stock prices often fall months before a recession begins, which also means that they often bounce back up before the recession is declared over. You can miss an entire downturn if you only follow the news. That is why it is vital to know the signs of a recession and recovery, and how assets perform during those periods.  These are our general expectations of asset behavior during a recession: Stocks: Prices for stocks tend to fall before the downturn begins, often selling off even at the scent of a recession. Stocks are the most volatile and skittish, during a recession. But they also have the most to gain. Good companies buy back their own stock during a recession, smart investors buy more shares at lower prices, and recessions make good companies leaner, and more financially fit for the next business cycle.  Real Estate: After stocks, Real Estate is the second most appetizing asset in a recession. And for some, it might be the most appropriate risk. Real Estate investors get the luxury of not having the mark-to-market value of their portfolio put in front of their face. During a recession, they make known their real estate is “down” but they are rarely bombarded with the daily and hourly reminders of the real estate market. This does two things, it reinforces patience for the investor and shifts their focus to the income the property produces. Both of these are things we noted above that stock investors need to learn in a recession.  Bonds: Prices for bonds tend to rise during a recession which means their yield declines. Good bonds (that is to say Bond from good companies) will often be over pursued their security – leading to an opportunity to sell overpriced bonds to scared or unprepared investors. Historically, The Federal Reserve (the Fed) stimulates the economy by lowering interest rates and purchasing Treasury bonds. But for the coming recession, this may not be the expectation as the Fed is in the first innings of raising its rates. This might be the macroeconomic element that causes this

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