INVESTMENT INSIGHTS

Capital Gains and Losses

rgaadvisors — Thu, 30 Jul 2009 12:48:09 +0000

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

A “paper loss” — a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets.

If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. There is a worksheet in last year’s Instructions to Schedule D to figure a capital loss carryover to this year. This is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

Our Investment Philosophy

rgaadvisors — Thu, 05 Feb 2009 14:33:22 +0000

In a world (and market) replete with uncertainty, there are a few investment themes we can count on. Portfolio performance is more of an art than it is a science. In many respects, optimal portfolio construction is a constant balancing act between risk and reward while creating a mathematical problem that aims to prove 1 + 1 = 3.

We assert that there are three factors that determine long-term portfolio performance:

1. The long-term asset allocation between stocks, bonds, and commodities

2. The funds and/or vehicles selected to represent various stock, bond, or commodity types

3. The total cost incurred to manage the portfolio

When an investor has the right asset mix, holds the right funds representing those asset classes, and keeps their total investment cost relatively low, they have a much higher probability of achieving long term capital appreciation. While fairly basic, the above assertions could provide hardship to the average investor. For example, the points above could erroneously be understood to mean that;

1. There is one ideal portfolio construction for all investors

2. The average investor has the ability and skill to isolate representative assets, and,

3. The average investor can appropriately factor in the cost of commissions and taxes while actively managing their portfolio

The good news is that, with professional coaching, a solid understanding and acceptance of risk tolerance, and patience, investors can effectively achieve solid returns and build time-tested portfolios. RGA Investment Advisors provides portfolio construction and investment management services. Please contact us today to Get Started.

Portfolio Allocation: Slices of the Pie – Part II

rgaadvisors — Tue, 03 Feb 2009 13:11:36 +0000

So what is the proper allocation for you to achieve the risk adjusted return that you desire? Well, the first that you should probably determine is how much risk are you willing to take? Shaping an asset allocation is going to be largely impacted by your personality — will you be able to sleep at night knowing that your money is being subject to significant market fluctuations? Do you need immediate liquidity? These are important questions to ask yourself before you begin designing your own allocation (or buying pre-packaged products [to be discussed in the next segment]).

For those individuals who aim to preserve their capital (and this is their #1 priority) I would generally recommend that a portfolio be be structured to maintain in excess of 80% of their value in cash and cash equivalents (money markets, treasuries and commercial paper). High liquidity is a major benefit of this portfolio allocation — many individuals favoring this portfolio style have a need for capital within the next 12 months. Please note, while this structure may have less market risk, it does open you up to the risk of losing money over time because the appreciation of assets may not keep pace with inflation.

For individuals desiring current income, we can expect a similar (majority) component of the portfolio to be composed investment-grade, fixed income obligations of large, profitable corporations, real estate (usually REITs), treasury notes, and, to a lesser extent, shares of blue chip companies with long histories of continuous dividend payments. Usually, the investor who prefers this type of allocation is one who is income-oriented — usually nearing retirement or structuring some way to preserving the principle (with some upside potential) of a significant cash inflow (inheritance, etc.).

For most of us, we can find a certain level of comfort in a “Balanced Portfolio.” Most people find a sense of emotional comfort in knowing that this portfolio is structured as to balance long-term growth and appreciation of assets and current income. An ideal mix of assets would include those that generate cash as well as those that appreciate over time. Well balanced portfolios mitigate the risk of medium-term investment-grade fixed income obligations, shares of common stocks in leading corporations (some but not all that pay dividends), and real estate holdings via REITs. Generally, a balanced portfolio is always vested (meaning very little is held in cash or cash equivalents unless the investor (either you or a portfolio manager) has determined that there are no compelling opportunities.

Portfolio Allocation: Overview – Part I

rgaadvisors — Tue, 03 Feb 2009 13:10:51 +0000

This will be the first of numerous segments discussing portfolio allocation, and recommendations in an volatile environment. Please feel free to email us with questions/comments.

What is Asset Allocation?
At the base of any portfolio allocation is the premise that the best-performing asset varies from year to year and is not easily predictable. At the same time, poorly performing investments could be the result of multiple factors including, but not limited to, market conditions, earnings, rumors, and/or changes in board/management. The thinking goes, by having a mixture of asset classes, sectors, and geographies, an investor is best prepared to achieve the best risk adjusted return* by hedging against individual risk drivers while diversifying to capture holistic opportunities.

The laymen’s thinking almost makes more sense — an allocation is the equivalent of a pie (the sum total of different slices). Each slice is the equivalent of an asset class, sector, or geography. As these classes (slices) increase/decrease (grow/shrink) the pie (allocation) must be rebalanced. An investor would effectively sell winners (bigger slices) and buy losers (smaller slices) to get the allocation (pie) back into symmetrical shape. After rebalancing, the allocation (pie) is larger than it was initially — the investor made money by diversifying.

A Note on Risk Adjusted Return*
We live in a risk-reward world, that is the more risk you take the more benefit you might be able to derive from that risk (at the same time, higher risk increases the extent to which you can lose). Entrepreneurs take a phenomenal risk in building businesses. Beyond the financial and time investment, an entrepreneur foregoes the opportunity to build a career and achieve stable income. While they might succeed and profit tremendously from a successful business venture, they may decide to exit the business, losing any investment made while owing significant debt. The term “Risk Adjusted Return,” aims to find that happy level of risk by which a rational and risk averse investor is willing to subject their money to in order to achieve an acceptable return.

Tax Credit to Aid First-Time Homebuyers

rgaadvisors — Mon, 02 Feb 2009 20:18:05 +0000

Congress recently approved a tax credit for first-time homebuyers that can be worth up to $7,500. The credit, however, acts more like a no-interest loan because it must be repaid to the government over 15 years. First-time homebuyers can begin planning in 2009 to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

Available for a limited time only, the credit:

Applies to home purchases after April 8, 2008, and before July 1, 2009.
Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit.

Q. Which home purchases qualify for the first-time homebuyer credit?

A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.

Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Q. How much is the credit?

A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Q. Are there income limits?

A. Yes. The credit is reduced or eliminated for higher-income taxpayers.

The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Q. Who cannot take the credit?

A. If any of the following describe you, you cannot take the credit, even if you buy a main home:

Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
You stop using your home as your main home.
You sell your home before the end of the year.
You are a nonresident alien.
You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
Your home financing comes from tax-exempt mortgage revenue bonds.
You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

Q. How and when is the credit repaid?

A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.

Four Mistakes Women Make When Managing Money

rgaadvisors — Mon, 02 Feb 2009 20:17:08 +0000

Most of the time, you manage your money successfully, handling your day-to-day finances and saving and investing for the future. But nobody’s perfect. Even if you’ve made some of the following money mistakes, there’s plenty you can do to get your finances back on track.

Mistake #1: Ignoring your credit rating

One of the most common mistakes women make is not establishing a solid credit history. Having a good credit history will give you more–and often better–financial options. Lenders will review your credit history when deciding whether to extend you credit. If your credit history is good, you may be offered credit at more advantageous terms, potentially saving you hundreds or even thousands of dollars in interest. And here’s some extra incentive: prospective employers or landlords may check your credit history before offering you a job or renting you a home. Here are some ways you can help keep your credit history healthy:

* Regularly check your credit history. You’re entitled to a free credit report once a year from each of the three major credit reporting bureaus. To request your report, call 877-322-8228 or visit www.annualcreditreport.com

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* Don’t cosign loans or sign joint credit applications without understanding the consequences. You will be legally obligated to repay the debt, and any late payments may hurt your credit rating.
* If you struggle with debt, don’t wait to take action. Call your creditors. They may be better able to work with you before you get too far behind. Ignoring the situation will make things worse.

Mistake #2: Saving for your child’s education–but not your own retirement

As a parent, you may feel it’s your obligation to pay for all or part of your child’s college education, and you may put off saving for retirement until you’ve done so. While it’s natural to want to put your child’s needs first, you don’t want to sacrifice your own financial security. Your children have many options for financing college, and many years to pay for it. On the other hand, you can’t borrow money for retirement, and with a limited number of years to save, it’s hard to make up for lost time. Make saving for retirement your priority, and save for college when your budget allows.

Mistake #3: Underestimating the need for life insurance

Like many women, you may not have enough life insurance. If you’re staying home to raise your family or if you have a part-time job outside the home, you may think that you don’t need it, based on your income. But you’re contributing a lot to your family’s finances, even if you’re not the primary breadwinner. The services you provide for your family are invaluable. If you were to die, would your family members be able to afford college or continue to save for retirement? Would they have enough to cover ordinary living expenses? Life insurance can help protect your family’s finances even after you’re gone.

Mistake #4: Not planning for a long retirement

The good news is that retirement is likely to last 20 to 30 years, but that’s also the bad news–if you’re not prepared. Outliving your retirement income is one of the biggest risks you face. According to recent statistics, a woman who reaches age 65 can expect to live until at least age 85 (with many women living longer). (Source: National Center for Health Statistics, Volume 56, Number 16.) Yet because women typically spend less time in the workforce and may earn less than their male counterparts, their retirement savings and benefits are often shortchanged.

So what can you do to make sure you’ll have enough income to last throughout retirement? Here are some suggestions:

* Set a realistic retirement savings goal, save as much as you can, and keep track of your progress.
* If you’re married, plan for retirement with your spouse. It’s especially important to account for your joint life expectancies and ensure that you have a steady stream of lifetime income.
* Find out how much you can expect to receive from Social Security, and what you can do to maximize your benefits.
* Consider buying long-term care insurance to help protect your retirement savings from the high cost of long-term care. And because women are often the primary caregivers for a loved one, consider coverage for family members as well.

The ABCs of 1031 Like-Kind Exchanges

rgaadvisors — Mon, 02 Feb 2009 20:15:30 +0000

A like-kind exchange, sometimes called a 1031 exchange after the section of the Internal Revenue Code that governs these transactions, is the exchange of one business or investment property for another. Provided the property you receive is of a “like kind” to the property you transfer, and all other requirements are met, no gain or loss is recognized on the income deferred as a result of the exchange. This has made like-kind exchanges a popular technique for investors looking to defer the payment of taxes on capital gains. When it comes to like-kind exchanges, though, even the most straightforward transaction is complicated.

Simultaneous swaps

If there is a “basic” like-kind exchange, it takes the form of a simultaneous exchange. You transfer business or investment property to another party in return for similar property. For example, let’s say you own a piece of land that has a basis of $200,000 (your cost) and a fair market value of $400,000. If you were to sell the property, you would recognize $200,000 in gain. Instead of selling the land, however, you exchange it for a rental property owned by another individual. If all the conditions of IRC Section 1031 are met, you do not recognize any gain as a result of the exchange (recognition of any gain is deferred until you sell the rental property). If you receive cash in addition to the rental property, gain is recognized to the extent of the cash received.

Deferred exchanges

With a deferred exchange, you give up your original property before receiving the replacement property. During the time that you’re looking for a replacement property, you can’t touch the proceeds from your original property (taking control of cash or proceeds before the entire like-kind exchange is complete can disqualify the transaction). For this reason, deferred like-kind exchanges generally involve executing a written exchange agreement with a qualified intermediary or other exchange facilitator, such as a bank, trust company, or attorney, that you pay to handle the transaction. The intermediary, who may assist you in locating a replacement property, is responsible for keeping the proceeds from your original property separate in an escrow account until the exchange is complete.

In a deferred exchange, you have 45 days from the date that you relinquish your original property to identify, in writing, potential replacement properties. You must then receive the replacement property and close the exchange within 180 days from the date you relinquish your original property, or by the due date of your tax return (including extensions) for the tax year in which you relinquished your original property, whichever is earlier.

Tenancy-in-common (TIC) exchanges

With a TIC exchange, you exchange real property, and as replacement property, you receive a partial ownership interest (you’re a co-owner, specifically a tenant-in-common) in commercial real estate. For example, you might exchange a piece of land with a fair market value of $400,000 for a 10% TIC ownership interest in a $4 million commercial property. TIC interest offerings include partial ownership interests in manufacturing facilities, office buildings, and malls.

These exchanges are extremely complicated. In fact, for a TIC interest to even qualify as potential replacement property in a like-kind exchange, there are extensive conditions that must be met. Most TIC interests are sold as securities, and are not available to the general public. TIC interests are generally available only to individuals who qualify as “accredited” investors (basically, those with a net worth greater than $1 million, or income of at least $200,000–$300,000 for a married couple–for the prior two years). TIC offerings are non-conventional investments, and while they might provide ownership opportunity in a larger property than you might otherwise be able to afford, they are not suitable for all investors. In addition to the significant fees and lack of liquidity generally associated with TIC exchanges, you’ll typically have little or no day-to-day control over the TIC property.

Final thoughts

It can’t be overemphasized: like-kind exchanges are complicated, and there’s simply no way to cover all the rules here. So, before you even consider a like-kind exchange, you should familiarize yourself with the details, including all tax aspects of an exchange. Note as well that special rules apply to exchanges between related parties.

A like-kind exchange can be a powerful strategy for investors and business owners, so it’s worth understanding. But, if you’re interested, make sure that you contact a qualified professional who can help you navigate the intricate rules that apply.