InSight

Market InSights:

Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

More related articles:

Articles
Kevin Taylor

Managing the 1031 Exchange Rules for Vacation Homes, Conversions and Mixed Use Properties

It is quite common for clients to call a 1031 exchange company with questions regarding exchanges of their former or future principal residences or vacation homes. After all, if you can have a rental property with some side benefits, it would be the best of two worlds, right? Well, we will discuss the requirements you should be aware of as you evaluate the replacements. So these are the questions imbedded in the 1031 Exchange requirements that must be answered:  Under what circumstances can these dwellings be used as part of a 1031 exchange? Do they satisfy the requirement that both the relinquished and replacement properties must be held for investment or for use in a business or trade? Does some personal use trump the investment use of the property? This article is intended to answer these commonly asked questions: Under what circumstances can a second home or vacation home constitute relinquished or replacement property for the purposes of a 1031 exchange? Can a principal residence be converted into an investment property eligible for 1031 tax deferral upon sale? Can a property that has been held for investment be converted to a principal residence and what are the rules when it is sold? Can a mixed-use property be sold with a personal residence exemption and 1031 exchange deferral? Rules for Including a Vacation Home in a 1031 Exchange Historically, determining whether a home that was both rented out and used by its owner could be eligible for a 1031 tax deferral was difficult to ascertain.  There was some case law but that was a bit inconsistent.  The IRS attempted to provide some definitive guidance regarding some of these questions in the form of Revenue Procedure 2008-16.  As the IRS aptly put it: “The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under §1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.” This revenue procedure made clear that for a relinquished vacation property to qualify for a 1031 exchange, the property has to be owned by the taxpayer and held as an investment for at least 24 months immediately prior to the exchange.  Additionally, within each of the two 12-month periods prior to the sale, the property must have been rented at fair market value to a person for at least 14 days or more, and the taxpayer cannot have used the property personally for the greater of 14 days or 10% of the number of days in the 12-month period that it had been rented. The requirements for a property to qualify as a 1031 replacement property are very similar.  The property has to be owned by the taxpayer for at least 24 months immediately after the exchange.  Also, within each of the two 12-month periods after the exchange, the property must have been rented at fair market value to a person for at least 14 days or more and the taxpayer cannot have used the property personally for the greater of 14 days or 10% of the number of days in the 12-month period that it had been rented. The taxpayer is allowed to use the relinquished or replacement property for additional days if the use is for property maintenance or repair. These days and the project and maintenance completed should be documented thoroughly. Rules for Converting a Personal Residence for a 1031 Exchange In many cases, conversion of a personal residence to a property held as an investment or for use in a business or trade “exchange eligible property,” as defined above, may still allow a taxpayer to receive a full exemption of gain pursuant to the rules of Internal Revenue Code (IRC). The comprehensive set of tax laws was created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress and is sometimes also referred to as the Internal Revenue Title. The code is organized according to the topic and covers all relevant rules pertaining to income, gift, estate, sales, payroll, and excise taxes. Internal Revenue Code Section 121 upon sale of the property.  That Code section provides for an exclusion of gain of up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly upon the sale of a principal residence.  There is a requirement that during the five-year period immediately preceding the sale, the taxpayer must have used the property as a principal residence for a cumulative period of at least two years. Even if the property has had principal residence use followed by exchange eligible use, the taxpayer does not necessarily have to do an exchange on the investment/business use of the property if the total gain can be sheltered by the §121 allowed exclusions.  So even if during the immediate two years preceding the sale, the property was used as exchange eligible property, the taxpayer may still benefit from the personal residence exclusion.  In the event, the gain exceeds the maximums allowed for per IRC Section 121 primary residence, the taxpayer may still be able to shelter the balance via a 1031 exchange, thus combining the benefits of these two code sections. Under Revenue Procedure 2008-16 the conversion of the principal residence to an exchange eligible investment property does not disqualify a family member as the tenant.  However, the revenue procedure requires that this should be done at a fair market rental and it must constitute the family member’s personal residence and not the family member’s vacation home.  There are additional rules for the rental of the property by a family member who co-owns the property with the taxpayer. Should a taxpayer wish to convert the personal residence to exchange eligible property, the

Read More »
Articles
Kevin Taylor

Tax Mitigation Playbook: What Is Depreciation and Why Is It Important to a 1031 Exchange?

Depreciation is a major part of the appeal of real estate ownership. Taking the “wear and tear” of a property as a loss against the rental gains makes a huge impact on the personal tax strategy. But the effect of Depreiscation is an essential concept for understanding the true benefits of a 1031 exchange and where the taxes ultimately catch up, to the investor. This is Key: Depreciation is the percentage of the cost of an investment property that is written off every year, recognizing the effects of wear and tear. Before you sell, or even list a property, you should know what the amount you have deprecated is, and what you can expect as part of the depreciation “recapture.” When a property is sold, capital gains taxes are calculated based on the property’s net-adjusted basis, which reflects the property’s original purchase price, plus capital improvements minus depreciation. If a property sells for more than its depreciated value, you may have to recapture the depreciation. That means the amount of depreciation will be included in your taxable income from the sale of the property. Since the size of the depreciation recaptured increases with time, you may be motivated to engage in a 1031 exchange to avoid the large increase in taxable income that depreciation recapture would cause later on. Depreciation recapture will be a factor to account for when calculating the value of any 1031 exchange transaction—it is only a matter of to what degree.

Read More »
risk management boulder colorado financial planners
Articles
Kevin Taylor

Mastering Risk Management: Cyber-Security – A Comprehensive Guide

In today’s digital world, cyber-security is a critical aspect of risk management. Protecting yourself online is essential to safeguard your personal information, finances, and digital assets. In this blog post, we will provide a comprehensive guide to mastering risk management in cyber-security. We will explore best practices for protecting yourself online, managing passwords, avoiding scams, and creating a robust cyber-security ecosystem. Protecting Yourself Online: Use Strong and Unique Passwords: Create strong, complex passwords for all your online accounts. Avoid reusing passwords across different platforms, and consider using a password manager to securely store and manage your passwords. Enable Two-Factor Authentication (2FA): Enable 2FA wherever possible, as it adds an extra layer of security to your online accounts. This typically involves using a secondary authentication method, such as a text message code or a biometric scan. Keep Software Up to Date: Regularly update your operating system, web browsers, and applications to ensure you have the latest security patches and bug fixes. Outdated software can leave vulnerabilities that hackers can exploit. Avoiding Scams and Phishing Attacks: Be Skeptical of Unsolicited Emails: Exercise caution when receiving emails from unknown senders or emails that seem suspicious. Avoid clicking on links or downloading attachments from untrusted sources. Verify Website Security: Before entering sensitive information on a website, ensure it has a secure connection. Look for “https” and a padlock symbol in the browser’s address bar. Educate Yourself on Phishing Techniques: Stay informed about common phishing techniques used by scammers to trick individuals into revealing their personal information. Be wary of unexpected requests for sensitive data or urgent action. Creating a Strong Cybersecurity Ecosystem: Install Antivirus and Firewall Protection: Utilize reliable antivirus software and keep it up to date. Additionally, enable a firewall to create a barrier between your computer and potential threats. Regularly Back Up Your Data: Back up your important files and data regularly to an external hard drive, cloud storage, or a combination of both. In the event of a cyber-attack or data loss, having secure backups ensures you can recover your information. Educate Yourself and Practice Cybersecurity Hygiene: Stay informed about the latest cyber threats and best practices for online security. Practice good cyber hygiene, such as avoiding unsecured Wi-Fi networks, being cautious with public computers, and limiting the information you share on social media. Secure Your Home Network: Set Up a Strong Password for Your Wi-Fi: Change the default password for your home Wi-Fi router to a unique and robust password. This helps prevent unauthorized access to your network. Use Network Encryption: Enable WPA2 or WPA3 encryption on your Wi-Fi router to encrypt the data transmitted over your network. This adds an extra layer of protection against potential eavesdropping. Keep Router Firmware Updated: Regularly check for firmware updates for your router and apply them promptly. These updates often include security patches that address vulnerabilities. Mastering risk management in cyber-security is crucial for protecting yourself online. By following these best practices, you can minimize the risk of falling victim to scams, protect your sensitive information, and create a strong cyber-security ecosystem. Remember to stay informed about the latest threats, regularly update your software, and practice good cyber hygiene. Taking proactive measures to enhance your cyber-security posture will significantly reduce the potential risks associated with the digital landscape.  

Read More »

Pin It on Pinterest