Category: Personal Finance

Property Tax Roundup

Posted on by Evan in Taxes

I was reading the WSJ this morning and came across THIS POST which references a report issued by the National League of Cities which shows property tax revenues declining for the first time in this recession.  It’s kind of interesting if you think about it.  Typically property taxes are based on the value of the real property.  So despite the fact that property values have been declining nationwide since 2007 this is the first year that tax revenues are declining.  There is obviously significant lag time in the process of accessing real estate values.

This prompted me to go to wikipedia and read about Oregon’s landmark property tax legislation that was passed in the 1990’s.  Among other things measures 5, 47, and 50 limited property tax growth by 3% per year.  Therefore, if a person owns a home and it doubles in value their property tax bill can only rise by 3% per year (unless they made significant property improvements.  This explains why homes with the same market value can have drastically different property taxes.  If one home has been lived in continuously by the same person for 20 years then beginning in the 1990’s their property taxes could only rise by 3% despite the fact that on average their home’s value likely increased by 4-5% per year.

However, if an identical home across the street was bought and sold multiple times over the same 20 year period their tax bill would have adjusted to the market because when the property changes ownership the 3% limitation doesn’t apply.

Costs of college have risen faster than inflation

Posted on by Evan in Investing

The Economist posted THIS today which compares the growth in the cost of college since 1978 to housing prices, wage growth, and consumer prices.  The bottom line? The cost of college has risen much quicker than wage growth.  If you’d like to help your kids with tuition expenses then you’re going to need to start early to take advantage of compound interest.  Contact a financial planner today to learn more about your options.

For the Contrarian in you…

Posted on by Evan in Investing

I happen to be a fan of Contrarian Investment Strategies after reading David Dreman’s book on the topic.  If you also like the idea of picking up out-of-favor stocks and holding them for the long-term until the prospects improve then you may like this article in the WSJ that was published over the weekend.  It names home builders, for profit educators, and staffing companies as good contrarian picks.  It also predicts that later on this fall may be a better time to buy.  Take it for what it’s worth…

Simple Financial Advice for the Masses courtesy of Cuban

Posted on by Evan in Personal Finance

I’m not a Mark Cuban fan for the simple reason that I am a born and bred Blazer fan.  However, I came across a recent money-related post he put on his blog and I thought I would share it.  Simple is good.

I’m going to simplify what I consider to be the best investment advice I have ever been given and share it with you.  Here you go:

1. If you have any credit card or other type of consumer debt on which you pay 5pct or more interest, pay it off.  Compound interest is your enemy.  The chances of you earning more on your money than you are paying in consumer interest rates are slim. Pay it off.

2.  Cash is King. Now that Madoff is in jail, no investment can offer returns with zero risk. If you don’t fully understand the risks of an investment you are contemplating, it’s ok to do nothing. In times of massive uncertainty like we are facing today, doing nothing is a valid and IMHO preferable investment strategy. Just put your money in the bank.

3. Cash Creates Transactional Returns.   What does this mean ? It means that you should analyze what you spend money on over the course of a year. You will get a better return on your money by being a smart shopper and taking advantage of  cash, quantity or other types of discounts than you will in the stock market.  Saving 15pct on the $1k dollars worth of items you know you will absolutely spend money on is a better return on your money than making 15pct in a year on a $1k investment  because you don’t pay taxes on it.

If you have under 100k dollars in liquid assets,  your net worth will be higher in one year if you follow this advice  than if you follow ANY other investment advice any broker or banker will give you this year.

Credit Card Rates Rise as Mortgage Rates linger at all-time lows

Posted on by Evan in Credit

I thought it was interesting that as mortgage rates linger at all-time lows credit card interest rates have been steadily rising and are now at 9-year highs.  This article in the WSJ this morning explains why.  Here are a couple of the highlights:

*”New credit-card rules that took effect Sunday limit banks’ ability to charge penalty fees. They come on top of rule changes earlier this year restricting issuers’ ability to adjust rates on the fly. Issuers responded by pushing card rates to their highest level in nine years.”

*”In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier…”

*”More increases are looming as card issuers respond to the new penalty-fee limits…”

Family Budget Planning Tool

Posted on by Evan in Saving-Spending

Talk with any financial planner and I think they’ll agree that a households ability to build wealth starts and ends with cash-flow.  If they are able to spend less money than they earn then they will be able to set aside cash for savings and investment.  That money will then benefit from compound interest which even Albert Einstein called “the most powerful force in the universe.”  Conversely, a household that spends the same or more than they earn will be forced into a cycle of debt to acquire housing, cars, college tuition, etc.  That household will not build long-term wealth.  Do you know if you’re getting ahead or falling behind?

Despite its critical importance to the financial planning process very few households operate on a budget and/ or track their spending.  I can appreciate why.  The process is tedious and overwhelming.  I wanted to share THIS SPREADSHEET that I found on google docs for those people who want to take a pro-active step in evaluating their cash-flow.  I would recommend sitting down with your bank and credit card statements at least monthly to record your spending so that you can see for yourself how you’re doing.

What I like about this spreadsheet is that the spending categories are plentiful and customizable so you feel like you are getting an accurate depiction of your spending history.  If you have any other ideas for tracking cash-flow please leave them in the comments section below.

Geithner says federal tax rates are to rise in 2011

Posted on by Evan in Taxes

This article in the WSJ last Friday indicates that President Obama and lawmakers are likely to allow income tax rates on the highest earners to increase in 2011.  Currently, Bush-era tax cuts are set to expire at the end of the year.  Assuming lawmakers don’t intervene this means that households will pay higher income taxes.  Here is a chart with the changes:

However, Treasury Secretary Tim Geithner indicated in the article that President Obama and demo’s would like to see the tax cuts for income earners less than $250,000 (married filing jointly) extended.  My guess is they’ll get their way and high income earners will end up paying significantly higher tax rates.  If that happens then there will be more focus and planning on how to reduce taxable income.  This will create a renewed focus on planning opportunities to shelter income.

One way this is possible is through qualified retirement plans where income can be deferred into retirement savings account and grow tax deferred.  Charities will also benefit as more Americans look for ways to reduce taxes.  The mortgage interest deduction will become more valuable making the “Effective Percentage Rate” even lower.  If you are a household that is likely to be impacted by these tax increases it would be wise to schedule an appointment with your tax professional and/ or financial planner now so that you begin planning.

New financial bill lacks fiduciary standard

Posted on by Evan in Personal Finance

Brent Hunsberger’s column in this weekend’s Sunday Oregonian touched on the fact that the new financial overhaul bill fails in implementing the fiduciary standard of care for money managers.  It also talks about the CFP(R) designation for which I just completed my exam (Brent and I were classmates at University of Portland).  Here are a couple excerpts:

  • “The problem is that the finance industry has blurred the lines between those whose main duty is to watch out for their client’s best interest and those who make more money selling you products for a profit.”
  • “Traditional broker-dealers instead abide by a “suitability standard.” They have to make sure the product they sell is appropriate for a client’s investment needs and timeline. It’s the same bar that insurance sales agents must keep when selling equity indexed annuities, which are invested in securities.”
  • “The standard is much different for registered investment advisers and certified financial planners. They’ve pledged, through licensing or certification, to put their clients’ economic interests before their own.”
  • “Days before Obama signed the historic bill, I joined about 1,900 people across the nation in taking the certified financial planner certification exam.  It was brutal.  For nearly a year, 11 of us — all very capable students — studied together through the University of Portland for the test, learning basics about the tax code, estate law, retirement plans and time value of money. I even took six weeks off work to gear up for it.  But Saturday, after 10 hours and 285 questions, we emerged drained, with little feeling for whether we’d passed. We won’t know until Labor Day. (Historically, the pass rate is 56 percent.)”

Talking with your kids about money

Posted on by Evan in Personal Finance

My daughter is only 8 weeks old but my wife sent me THIS ARTICLE over the week to read from the NY Times.  It is an article about talking with your kids about money and I think it is a great resource.  As you know I am a big advocate for educating kids about money because unfortunately our public school system currently fails in this regard.

The article also references the Money Savvy Generation website which is focused on educating elementary school-aged kids about positive money habits.  Great stuff!  Good work Susan Beacham!

Taxation of rental vacation homes

Posted on by Evan in Taxes

Being in the real estate finance business for over 8 years now I have come across many a conversation about the tax and investment benefits of owning rental real estate.  I’ve found that many people (including many real estate and mortgage professionals) overstate the tax benefits of owning investment real estate.  There is a lot of detail in the tax code designed to prevent owners of investment real estate from using losses on their property to offset earned income (from their “regular” full-time work).  One area that I find particularly detailed (i.e. annoying) is the tax treatment of property held for investment AND recreational use.  These rules are designed to apply to vacation homes where the owners occupy the property for a portion of the year and rent it out to vacationers for a portion of the year.

Before I go into detail it’s important that I mention that I am not a tax professional.  If you are reading this blog post and are wondering how these rules apply to your situation you are encouraged to visit the IRS’s website and consult with a tax professional.

So how are vacation homes taxed?  As is the answer to many tax questions- IT DEPENDS.

The first question to ask is whether or not the home is rented out for 14 or fewer days during the year?  If it is then the income DOES NOT have to be recognized and the only expenses that would be deductible are property taxes and qualifying mortgage interest on schedule A of the taxpayer’s return.  The best example of the potential benefit of this rule is for property owned on Augusta National Golf Course.  Every year property owners are able to rent their homes out during Master’s Week for thousand’s of dollars.  Assuming they only rent the property out during that week they do not need to claim that income on their tax returns.  However, they are not able to deduct the cleaning and maintenance expenses either.

If a vacation home is rented out for 15 or more days during the year then the next question is whether the property is used by the owner for the greater of 14 days or 10% of the rental days.  If the personal use is less than the greater of 14 days or 10% of rental days then the property will be considered a rental home and ALL of the income and associated expenses will flow through schedule E on the owner’s tax return.  If the personal use of the rental property exceeds that threshold then the property is considered to be “mixed-use” and the associated expenses must be pro-rated based on the number of personal use and rental days.

For example, let’s say a person owns a home down at the coast.  During the year the home is rented out to vacation-goers for 180 days.  The property owner may use the home for up to 18 days (10% of the rental days) and still classify the home as a rental property.  They would report all income and expenses on a schedule E.  However, if they used the property for 20 days during the year then the home is considered to be mixed-use and 10% of the expenses would be considered personal (20/200 days in use) and 90% of the expenses (180/200) could flow through schedule E of the tax return.  All of the income would also be claimed.

This is a fairly complex rule but the tax code wasn’t designed for ease of use.  Feel free to leave any questions below in the comment section.