Happy New Year!

The Exeter Learning Institute team would like to wish you and your family a very Happy, Healthy, Safe and Prosperous New Year. Happy New Year everyone.

Dear President Obama: I Think You Have A Problem.

This is a great letter drafted by my good friend Alan Nevin with MarketPointe Realty, and I thought I would share it with you.  You can read the original letter posted on the Wealth & Legacy Series blog on The Center for Wealth & Legacy Studies.  Alan Nevin is one of the co-founders of The Center. 

Dear President Obama: I Think You Have A Problem! 

In about a year from now, you will have to start running for your second term. No doubt it would wound your ego to no end to be a one-term president and yet it would be very difficult for you to be elected to a second term if the economy continues to be in a moribund state.

I really don’t want the word “sickonomy” to be the byword of your administration.

Now, we have all read in the business section that our gross national product is rising; that productivity is just plain great; that the stock market is solid; oil prices are stable; our interest rates remain low; Walmart and McDonald’s are bursting with economic vitality; and that our leading lending institutions are healthy once more.

Unfortunately, all of these wonderful things happening to our economy are without the benefit of new jobs.

And frankly, Mr. President, without new jobs, you don’t have a shot at a second term.

It appears to me that your gnomes in the West Wing are spending all their time working on the auto industry, a category that at best is a minor player in the national economy, especially when you consider that at least a quarter of the sales are of vehicles made somewhere besides the United States, or substantially containing parts made outside the country.

Automobile manufacturing employment in the United States in 2008 totaled 877,000 jobs.

Now let’s talk about America’s really important industry: housing construction. Now there’s an industry that deserves your full and immediate attention and is barely a footnote in your economic stimulus agenda.

In a year in which construction is healthy, homebuilding employment is almost 10 million, more than 10 times that in the automobile manufacturing industry; and, in that 10 million I am not counting the multitude of jobs in industries that directly relate to construction or manufacturing the materials that go into the construction of a home.

Before the housing industry fell apart, there were more than 9000,000 firms in the construction-related businesses.

New housing constitutes more than 80 percent of construction employment in this nation and that industry is really hurting right now, and that’s a shame, because it it the one industry that can put you back in the White House in 2012.

Let me share a few facts with you:

First, the residential construction industry has twice the economic multiplier of virtually any other industry in America (according to the economic model developed by the U.S. Department of Commerce).

There’s a good reason for that, or I should say, four good reasons:

First, it is a highly leveraged industry, which means that a relatively small amount of equity will cause a whole house to be built. So a small investment generates large amounts of material purchases and new jobs.

Second, virtually all materials used making a home are created within the 50 states.

Third, it is a labor-intensive industry. Typically, 50 percent of the cost of a new home is the labor component and all that labor is local. A new home is a genuinely a “made in the U.S. A.” product.

And fourth, the purchase of a new home sets off an amazing round of purchase activity that is home-related. A multitude of jobs are created in the escrow, title, finance, landscaping and home improvement industries.

In addition, typically, every time someone buys a new home, there are four resale homes sold. And those sales, as well, create another multitude of jobs in the industries noted above.

The home remodeling business, when things are good, is far larger than the automobile manufacturing business.

Housing construction has plummeted from almost 2 million units in 2005 to fewer than 500,000 unties in 2009. Imagine that, Mr. President. America’s most potent economic job generator is down 75 percent and your administration is doing virtually nothing to change the situation.

And I won’t even bother to mention the impact of the home construction industry on the construction of and demand for retail, office and industrial space.

The big question is: “What can you do to generate a massive increase in new home construction?” I am going to tell you in my next article right here in The Daily Transcript.

Dear President Obama: I Think You Have A Problem!

I just read a fantastic letter addressed to President Obama.  It's entitled "Dear President Obama:  I Think You Have A Problem" by my friend, economist and demographer, Alan Nevin with Marketpointe Realty.  I highly recommned a quick read of the letter.

The Demise of the Private Annuity Trust or PAT

Private Annuity Trusts, or PATs for short, were sometimes used (prior to 2007) to defer capital gain taxes upon the sale of highly appreciated real estate or personal property.  The Private Annuity Trust allowed taxpayers to transfer property, whether it be real property or personal property, into a Private Annuity Trust by conveying or transferring it to the Trustee of the Private Annuity Trust.  The conveyance or transfer of the property had to be completed prior to the sale of the asset. 

Sale of Real or Personal Property

The Trustee of the Private Annuity Trust would then sell the real or personal property to the end buyer and deposit the sale proceeds into the PAT.  The taxpayer was the Beneficiary of the Trust, which was part of the reason for the demise of the PAT that will be discussed shortly. 

Capital Gain Deferred Into Future

Capital gains from the sale of the real or personal property were deferred into the future since the Beneficiary (Taxpayer) did not receive any of the funds from the sale of the asset.  The Beneficiary would only recognize a portion of his or her capital gain as they received principal payments from the Private Annuity Trusts. 

IRS Rules Against PAT

The IRS ruled against the Private Annuity Trust on October 17, 2006.  The IRS ruled that “Private Annuity Trusts or PATs have been relied upon inappropriately in a number of transactions that are designed to avoid U.S. income tax,” according to an IRS press release.

In Buckmaster vs. CM TC Memo 1997-236, there were four (4) elements used to determine whether or not a trust of any type was actually a "sham trust".  These four (4) elements were the Taxpayer’s relationship to the property or asset in question; the independence of the Trustee; whether or not an economic interest was transferred to other beneficiaries of the trust; and restrictions placed on the taxpayer by the trust.

Private Annuity Trusts can not meet this test, and therefore can no longer be used to defer the payment of a taxpayer's capital gain taxes after October 17, 2006.  Transactions which have been properly structured under the old rules prior to October 18, 2006 will be permitted to stand, but the Internal Revenue Service will not recognize future transactions structured as Private Annuity Trusts for income tax deferral purposes.

However, Private Annuity Trusts can still provide some important estate planning benefits when used appropriately, so consult with your estate planning professional for further details. 

Is It Better To Sell My Relinquished Property in 2009 Or Postpone Until 2010

Taxpayers have only four more business days to get transactions structured and closed until 2010 hits us right between the eyes.  First of all, yikes, where did 2009 go?  Second of all, thank God we are moving into 2010, which promises to be a much better year than 2009.

Closing By Year-End

Now to the question of when to close on the sale of your relinquished property.  It has always boggled my mind during the 24 years that I have been in the 1031 Exchange industry that so many taxpayers want to close on their relinquished property before year-end when they are structuring a 1031 Tax Deferred Exchange. 

Why put so much pressure on yourselves?  Its a tax-deferred exchange, so its tax deferred and it shouldn't matter when you close on the sale of your property assuming that all other relevant factors are equal.  However, let's discuss some of the basic reasons why, and then get to the question. 

The Buyer

Certainly, the buyer may wish to close by December 31st in order to obtain any number of benefits, including tax benefits, of owning the property before year-end.  The tax benefits can often be tremendous, or losing tax benefits that may expire at year-end may be very expensive.  So, the buyer may have motives for doing so. 

There may be other reasons as well, such as deploying investment capital by year-end, shoring up the balance sheet ("window dressing") for year-end financial statements, etc. 

The Seller

Generally, the seller completing the 1031 Tax Exchange shouldn't care, but some of the same reasons my apply.  They may want to get the property off their balance sheets by year-end, may want to reduce the amount of outstanding debt before December 31st, etc., just to name a few of the more obvious reasons. 

When to Sell/Close

One or both parties may wish to close on the property for some of the reasons stated above, or other reasons, in which case, it certainly does make sense to sell and close on the property before December 31st. 

However, barring other benefits, detriments, or issues not mentioned here, there is no real benefit from a 1031 Exchange perspective to closing in 2009 or 2010, unless you are concerned that your 1031 Tax Exchange may fail (i.e. you are not able to acquire replacement property). 

A failed or incomplete 1031 Exchange is generally taxable in the year of sale or the year in which the taxpayer has the right to receive their 1031 Exchange proceeds from the Qualified Intermediary.  This is the one main issue that taxpayers should consider when selling relinquished property in order to answer the question when should they close because it may affect their income tax situation. 

As yourself the following questions:

• Will closing in 2009 versus 2010, or vice versa, potentially place myself in a higher income tax bracket because of the 1031 Tax Deferred Exchange?
• Will closing in 2009 trigger my 45 day and 180 day deadlines before I am ready to?
• Would closing in 2010 buy me more time to look for and identify suitable replacement properties to be acquired through my 1031 Exchange? 
• Will closing earlier or later help or hurt my borrowing position? 
• Will closing in 2009 hold up the filing of my income tax return if I have not completed the acquisition of my replacement property?

There are probably many more question like this that should be addressed, so you should always consult with your legal and tax advisors before proceeding with your 1031 Tax Deferred Exchange.