You may recall that there were significant declines in the housing values both on the West Coast and in the Northeast in the early 90’s and the gradual recovery of those markets leading up to their current highs today. Historically, the West Coast and Northeast housing markets have been cyclical (with large gains and subsequent declines in housing prices). This is in stark contrast to the more linear and stable historical price gains throughout much of the Midwest and South (where the prices for these regions are almost flat over the same period of time). The only exception to this would be the Florida market which has been more volatile historically than other markets in the South and remains that way to date.
The affordability index which computes how much a median income earner’s wages are required to pay for home ownership in a specific market are most telling. The last time the affordability index was as low for many of the areas along the West Coast and Northeast (specifically So Cal and Northeast, specifically Boston, New York City and Wash DC) housing prices plummeted upwards of 30% in some locales.
Much of the Southern California housing declines beginning in the 1990’s were attributable to the loss of defense and aerospace industry jobs starting in the early 90’s. Similar mass layoffs triggered housing significant declines in the Northeast during roughly the same time frame.
Low affordability alone cannot and does not always explain housing market behavior (think San Francisco Bay/San Diego area markets). Strong job creation and economic growth, coupled with demographic trends (think baby boomers), availability of developable land and finally macro-economic forces (interest rates still as 35 year lows) also factor in considerably in a specific housing market’s behavior.
Yet affordability remains one of the strongest indicators of a housing market’s behavior and overall health historically and moving forward.
For details and lots of numbers, visit the PMI Trends
Monday, October 31, 2005
Friday, October 07, 2005
Canada, Eh? How much can an igloo cost?
Smokey is concerned that many of her readers may have incorrect opinions about America's northern neighbour as it relates to real estate (and lots of other topics as well). In the finest Don Quixote tradition, here is her attempt to bring some real numbers about real estate from the Atlantic to the Pacific on the Canadian side of the border.
Residential real estate prices have continued to climb across Canada with the hottest markets in the West being driven by the energy boom, according to a third-quarter 2005 survey by Royal LePage Real Estate Services Ltd.
"It's incredibly busy," said Elke Babiuk, a real estate agent at MaxWell Canyon Creek of Calgary. "We're supposed to be in the slow period of the year, but it's not happening."
People are attracted to Calgary, she said, where there are job opportunities, house prices are moderate and, as an added bonus, there isn't any sales tax.
The average price of a house in Calgary ranged from $252,411 to $264,389, according to the survey.
"High energy prices are fuelling sizable gains in the mid-western provinces; however, most of these markets have only started to experience significant above-average growth in the past few quarters, and as a result, prices remain relatively affordable," said Phil Soper, president and chief executive officer of Royal LePage Real Estate Services.
But there could continue to be upward pressure in prices. "Builders cannot and will not build to satisfy short-term demands," Mr. Soper said. There could also be a shortage of skilled trades for construction and even materials, he added.
Meanwhile, rising inventory levels have slowed the pace of growth in major metropolitan centres such as Toronto, Montreal and Vancouver, which have seen some of the biggest price increases nationally, according to the survey.
The average price of a two-storey home in Canada increased 6.7 per cent to $324,066 from a year ago. The average price of a bungalow was $265,405, up 7.4 per cent, while the cost of a standard condominium increased 6.8 per cent to an average price of $185,195.
In Toronto, the average price of a two-storey house increased 4.8 per cent to $459,250 while a detached bungalow climbed 6.4 per cent to $364,111 and condo prices registered a 3.6-per-cent gain to $242,664.
Markets east of Manitoba, except New Brunswick, continue to experience slower growth than in the West.
Winnipeg is one of the hottest markets in the country, with double-digit price increases in all three housing types, despite rising inventories.
"We're selling them in days instead of months," said Jim Van Wyk, the owner of Elite Real Estate Inc., an independent real estate agent in Winnipeg.
The market is being helped by a strong economy, population growth and low interest rates, he said. "Winnipeg is also playing catch-up."
The average prices of a two-storey home, a detached bungalow and a condominium in Winnipeg were respectively $179,875, $191,571 and $95,667, according to the survey.
Double-digit house price increases were also recorded for Saint John and Moncton.
For the third consecutive quarter, Victoria showed the largest price increases in Canada with condominium prices increasing 31 per cent to $220,000 as baby boomers look for a place to retire with good weather and scenic views, said Royal LePage Real Estate Services. The price of an average detached bungalow increased 18.4 per cent to $348,000.
The residential real estate expansion has continued for more than five years and "there is little evidence of an economic bubble in any of our major cities," Mr. Soper said.
Strong summer activity
'Robust economic conditions' fuelled strong growth in average housing prices in major markets across Canada, a report by Royal LePage says. The numbers show average prices for two-storey homes in the third quarter of 2005, and the percentage increase over the same period in 2004.
Residential real estate prices have continued to climb across Canada with the hottest markets in the West being driven by the energy boom, according to a third-quarter 2005 survey by Royal LePage Real Estate Services Ltd.
"It's incredibly busy," said Elke Babiuk, a real estate agent at MaxWell Canyon Creek of Calgary. "We're supposed to be in the slow period of the year, but it's not happening."
People are attracted to Calgary, she said, where there are job opportunities, house prices are moderate and, as an added bonus, there isn't any sales tax.
The average price of a house in Calgary ranged from $252,411 to $264,389, according to the survey.
"High energy prices are fuelling sizable gains in the mid-western provinces; however, most of these markets have only started to experience significant above-average growth in the past few quarters, and as a result, prices remain relatively affordable," said Phil Soper, president and chief executive officer of Royal LePage Real Estate Services.
But there could continue to be upward pressure in prices. "Builders cannot and will not build to satisfy short-term demands," Mr. Soper said. There could also be a shortage of skilled trades for construction and even materials, he added.
Meanwhile, rising inventory levels have slowed the pace of growth in major metropolitan centres such as Toronto, Montreal and Vancouver, which have seen some of the biggest price increases nationally, according to the survey.
The average price of a two-storey home in Canada increased 6.7 per cent to $324,066 from a year ago. The average price of a bungalow was $265,405, up 7.4 per cent, while the cost of a standard condominium increased 6.8 per cent to an average price of $185,195.
In Toronto, the average price of a two-storey house increased 4.8 per cent to $459,250 while a detached bungalow climbed 6.4 per cent to $364,111 and condo prices registered a 3.6-per-cent gain to $242,664.
Markets east of Manitoba, except New Brunswick, continue to experience slower growth than in the West.
Winnipeg is one of the hottest markets in the country, with double-digit price increases in all three housing types, despite rising inventories.
"We're selling them in days instead of months," said Jim Van Wyk, the owner of Elite Real Estate Inc., an independent real estate agent in Winnipeg.
The market is being helped by a strong economy, population growth and low interest rates, he said. "Winnipeg is also playing catch-up."
The average prices of a two-storey home, a detached bungalow and a condominium in Winnipeg were respectively $179,875, $191,571 and $95,667, according to the survey.
Double-digit house price increases were also recorded for Saint John and Moncton.
For the third consecutive quarter, Victoria showed the largest price increases in Canada with condominium prices increasing 31 per cent to $220,000 as baby boomers look for a place to retire with good weather and scenic views, said Royal LePage Real Estate Services. The price of an average detached bungalow increased 18.4 per cent to $348,000.
The residential real estate expansion has continued for more than five years and "there is little evidence of an economic bubble in any of our major cities," Mr. Soper said.
Strong summer activity
'Robust economic conditions' fuelled strong growth in average housing prices in major markets across Canada, a report by Royal LePage says. The numbers show average prices for two-storey homes in the third quarter of 2005, and the percentage increase over the same period in 2004.
- HALIFAX: $173,333, up 6.9%
- CHARLOTTETOWN: $141,000, up 3.7%
- MONCTON: $127,000, up 18.7%
- SAINT JOHN, N.B.: $142,900, up 14.9%
- ST. JOHN'S, NFLD.: $142,667, up 7%
- MONTREAL: $203,688, up 5%
- OTTAWA: $271,429, up 4.2%
- TORONTO: $364,111, up 6.4%
- WINNIPEG: $191,571, up 10.9%
- SASKATCHEWAN: $156,083, 8.2%
- CALGARY: $252,411, up 7.9%
- EDMONTON: $194,857, up 9.1%
- VANCOUVER: $499,667, up 8.8%
- VICTORIA: $348,000, up 18.4%
Vive la Difference - real estate in Québec
Completing a real estate transaction in the Province of Québec is generally similar to completing a deal in any other Canadian jurisdiction, except for certain conceptual differences. In practice, this results in the use of some special terminology and a few unique procedures, but mostly the same result is achieved. Québec has responded well to the influence from the rest of North America and its legal system, which is a mix of civil law and common law tradition, can accommodate all the latest structures.
The Civil Code of Québec is the law of general application and governs relations between persons and property. Non-residents are free to purchase real estate in Québec and are subject to the same general restrictions as residents in regard to the purchase of agricultural land and designated cultural properties.
Most real estate transactions involve a review of title, the obtaining of an up-to-date survey and, in some cases, the obtaining of title insurance. Conveyance deeds may be either under private signature or executed before a Québec notary. Québec has a graduated land transfer tax duty, subject to a variety of exemptions, including for related companies.
In Québec, a mortgage is called a hypothec, an easement is called a servitude, a ground lease is called an emphyteusis or emphyteutic lease, real property is called an immovable, a survey is called a certificate of location, an air right is called a right of superficie and a condominium is called a divided co-ownership.
Mortgages are called hypothecs in Québec and must be signed before a Quebec notary if real estate is involved. Québec has a modern central registry system for hypothecs on personal property, leases and conditional sales agreements in which filings and searches can be completed electronically. There is a separate land registry system for title to real estate and hypothecs on real estate. Like other Canadian jurisdictions, Québec has certain fundamental rules which are of "public order" and cannot be waived by the parties. However, in most commercial contexts, the rules of the Civil Code of Québec may be deviated from if desired by the parties.
There is no division of legal ownership and beneficial ownership in Quebec as there is in the common law. It is often the practice in Quebec to register title to real estate in the name of an agency or nominee company and have the nominee enter into an unregistered agency agreement with the beneficial owners. In this way the nominee, even though it is the registered owner, is not vested with any right of beneficial ownership.
Québec law can accommodate all the sophisticated and complex structures being used elsewhere in North America. Indeed, many non-residents own or participate in major development projects in Québec such as shopping centres, office buildings and industrial and multi-residential developments. Québec law can and has accommodated income funds, REITS, trusts, limited partnerships, monetizations and securitizations – all with the usual "joie de vivre" and a few special touches to preserve Québec’s cultural identity.
More information can be found here.
The Civil Code of Québec is the law of general application and governs relations between persons and property. Non-residents are free to purchase real estate in Québec and are subject to the same general restrictions as residents in regard to the purchase of agricultural land and designated cultural properties.
Most real estate transactions involve a review of title, the obtaining of an up-to-date survey and, in some cases, the obtaining of title insurance. Conveyance deeds may be either under private signature or executed before a Québec notary. Québec has a graduated land transfer tax duty, subject to a variety of exemptions, including for related companies.
In Québec, a mortgage is called a hypothec, an easement is called a servitude, a ground lease is called an emphyteusis or emphyteutic lease, real property is called an immovable, a survey is called a certificate of location, an air right is called a right of superficie and a condominium is called a divided co-ownership.
Mortgages are called hypothecs in Québec and must be signed before a Quebec notary if real estate is involved. Québec has a modern central registry system for hypothecs on personal property, leases and conditional sales agreements in which filings and searches can be completed electronically. There is a separate land registry system for title to real estate and hypothecs on real estate. Like other Canadian jurisdictions, Québec has certain fundamental rules which are of "public order" and cannot be waived by the parties. However, in most commercial contexts, the rules of the Civil Code of Québec may be deviated from if desired by the parties.
There is no division of legal ownership and beneficial ownership in Quebec as there is in the common law. It is often the practice in Quebec to register title to real estate in the name of an agency or nominee company and have the nominee enter into an unregistered agency agreement with the beneficial owners. In this way the nominee, even though it is the registered owner, is not vested with any right of beneficial ownership.
Québec law can accommodate all the sophisticated and complex structures being used elsewhere in North America. Indeed, many non-residents own or participate in major development projects in Québec such as shopping centres, office buildings and industrial and multi-residential developments. Québec law can and has accommodated income funds, REITS, trusts, limited partnerships, monetizations and securitizations – all with the usual "joie de vivre" and a few special touches to preserve Québec’s cultural identity.
More information can be found here.
Transfer Taxes in Canada
The transfer of real property is subject to a land transfer tax in most, but not all, provinces in Canada.
Land Transfer Tax
Where these taxes are payable, they are payable by all purchasers (subject to certain limited exemptions), whether the purchaser is a resident or non-resident of Canada. The tax is calculated by applying a graduated tax rate to the total value of the consideration paid for the property.
For instance, in British Columbia, the tax is 1% on the first $200,000 of fair market value and 2% on the balance. For commercial properties in Ontario, a rate of 0.5% is applied to the first $50,000, a rate of 1% to the value of consideration higher than $50,000 but not exceeding $250,000 and a rate of 1.5% to amounts higher than $250,000. Québec has similar land transfer tax rates to Ontario, while Alberta has no land transfer taxes but imposes registration fees to transfers at a rate of just 0.1% of value.
Goods and Services TaxIn Canada, a goods and services tax ("GST") is payable upon a supply of real property, unless otherwise exempted, under the Excise Tax Act. This includes the sale of a property, as well as a lease, license or other similar arrangement. GST is a value-added tax of 7%, except in the provinces of Nova Scotia, New Brunswick and Newfoundland, where the equivalent tax is 15%.
Registration under the Excise Tax Act for GST is mandatory for every person who makes a taxable supply in Canada in the course of a commercial activity except in certain limited circumstances, including where the taxpayer is a non-resident who does not carry on any business in Canada or where the taxpayer’s only commercial activity is making supplies of real property by way of sale, other than in the course of a business.
Generally, it is the "supplier" (the seller) that is obligated to collect GST from the "recipient" (the buyer) of the real property. However, the buyer may be responsible for paying and remitting the GST in situations where the seller is a non-resident person and the buyer is registered for GST purposes.
If a purchaser or tenant is required to pay GST on a property, it may be able to claim input tax credits for the tax paid, which permits the taxpayer to apply for a refund of GST. Input tax credits are only available to purchasers or tenants who are registered for GST purposes and who acquire a property for commercial purposes.
Withholding Tax
A non-resident seller of real property in Canada should be prepared to provide to a purchaser a clearance certificate from Canada Customs and Revenue Agency ("CCRA"). Otherwise, a purchaser may hold back from the closing funds a withholding tax on behalf of CCRA, regardless of whether this has been agreed to in the contract of purchase and sale and regardless of whether the seller owes tax or qualifies for an exemption.
In order to ensure that a non-resident seller pays Canadian tax owing on the disposition of taxable Canadian property (which generally includes all real property), a seller is to report the transaction to, and obtain from, CCRA a clearance certificate for the taxes potentially owing as a result of the sale transaction. If a seller fails to comply, a purchaser may potentially be liable for the tax under s. 116 of the Income Tax Act. Accordingly, a purchaser may holdback from the closing proceeds an amount equal to 25% or 50% of the purchase price.
On a practical level, purchasers generally hold back 50% as it may be difficult for a purchaser to ascertain whether a seller holds real property as capital property or as inventory (being the distinction between the percentage amounts to be withheld).
The purchaser is obligated to remit these amounts to CCRA within 30 days after the end of the month in which the property was acquired. A seller should keep this time frame in mind if it is not able to deliver a clearance certificate until after the closing date.
More details can be found here
Land Transfer Tax
Where these taxes are payable, they are payable by all purchasers (subject to certain limited exemptions), whether the purchaser is a resident or non-resident of Canada. The tax is calculated by applying a graduated tax rate to the total value of the consideration paid for the property.
For instance, in British Columbia, the tax is 1% on the first $200,000 of fair market value and 2% on the balance. For commercial properties in Ontario, a rate of 0.5% is applied to the first $50,000, a rate of 1% to the value of consideration higher than $50,000 but not exceeding $250,000 and a rate of 1.5% to amounts higher than $250,000. Québec has similar land transfer tax rates to Ontario, while Alberta has no land transfer taxes but imposes registration fees to transfers at a rate of just 0.1% of value.
Goods and Services TaxIn Canada, a goods and services tax ("GST") is payable upon a supply of real property, unless otherwise exempted, under the Excise Tax Act. This includes the sale of a property, as well as a lease, license or other similar arrangement. GST is a value-added tax of 7%, except in the provinces of Nova Scotia, New Brunswick and Newfoundland, where the equivalent tax is 15%.
Registration under the Excise Tax Act for GST is mandatory for every person who makes a taxable supply in Canada in the course of a commercial activity except in certain limited circumstances, including where the taxpayer is a non-resident who does not carry on any business in Canada or where the taxpayer’s only commercial activity is making supplies of real property by way of sale, other than in the course of a business.
Generally, it is the "supplier" (the seller) that is obligated to collect GST from the "recipient" (the buyer) of the real property. However, the buyer may be responsible for paying and remitting the GST in situations where the seller is a non-resident person and the buyer is registered for GST purposes.
If a purchaser or tenant is required to pay GST on a property, it may be able to claim input tax credits for the tax paid, which permits the taxpayer to apply for a refund of GST. Input tax credits are only available to purchasers or tenants who are registered for GST purposes and who acquire a property for commercial purposes.
Withholding Tax
A non-resident seller of real property in Canada should be prepared to provide to a purchaser a clearance certificate from Canada Customs and Revenue Agency ("CCRA"). Otherwise, a purchaser may hold back from the closing funds a withholding tax on behalf of CCRA, regardless of whether this has been agreed to in the contract of purchase and sale and regardless of whether the seller owes tax or qualifies for an exemption.
In order to ensure that a non-resident seller pays Canadian tax owing on the disposition of taxable Canadian property (which generally includes all real property), a seller is to report the transaction to, and obtain from, CCRA a clearance certificate for the taxes potentially owing as a result of the sale transaction. If a seller fails to comply, a purchaser may potentially be liable for the tax under s. 116 of the Income Tax Act. Accordingly, a purchaser may holdback from the closing proceeds an amount equal to 25% or 50% of the purchase price.
On a practical level, purchasers generally hold back 50% as it may be difficult for a purchaser to ascertain whether a seller holds real property as capital property or as inventory (being the distinction between the percentage amounts to be withheld).
The purchaser is obligated to remit these amounts to CCRA within 30 days after the end of the month in which the property was acquired. A seller should keep this time frame in mind if it is not able to deliver a clearance certificate until after the closing date.
More details can be found here
Canada. More about the next great (?) investment opportunity
Many of Smokey's friends are looking for good opportunities to invest outside of the US. Recently some parts of Canada are showing up on the radar screen. Rising energy prices are making some of Canada's oil reserves financially recoverable. The "Tar Sands" at Lake Athabaska have been recently been touted as "the answer" to America's independance on foreign oil, although they haven't proven to be so in the past half-century or so.
Forget about the fact that Canada is a sovereign nation (so I guess it qualifies as foreign), there are other energy issues as well.
There are also real estate opportunities in Canada as well. Of course there are issues that a savvy investor should be aware of before jumping in with both feet.
Financing is one of them
Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and ability to enforce simply make the package unattractive to most U.S. lenders.
And, if you do choose to buy and borrow Canadian, don't expect to see the loan options available here. The interest-rate structure could be as different as the locale, and the pricing may not be as favorable as you might expect. Owner financing, or "carrying the paper," is also available.
Many folks "from the states" are drawn to Canadian property during the summer months for a variety of reasons, but the big bargains brought by a favorable exchange rate are not as big as they once were. A U.S. buck can now bring approximately $1.18 in Canadian goods, down significantly from years past.
Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as "open"), each typically amortized over a period of 25 years.
"Open" does not mean the borrower's monthly payments adjust as the monthly market fluctuates; it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules only allow for prepayment once a year. When a loan reaches its term, the lender usually renews it.
Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.
Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself – or the "property side" of the decision. You then have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.
Also, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway – especially if it's in a popular location such as Vancouver Island or Whistler, B.C., but the U.S. tax-deferred exchange rules do not qualify when trading for properties in other countries.
With investment property in the United States, you can defer your capital gain if you buy a "like kind" property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase it within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this country is not "like kind" so no capital-gains taxes can be deferred.
Many investment advisors say that folks looking to purchase property abroad – for investment or a principal residence – often refinance or take out a home-equity loan on a property in the U.S. and pay cash for the "offshore" home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.
Smokey will be talking about entity structuring and how you can use it to your advantage when doing cross-border investments in a little while.
Bye for now.
Forget about the fact that Canada is a sovereign nation (so I guess it qualifies as foreign), there are other energy issues as well.
There are also real estate opportunities in Canada as well. Of course there are issues that a savvy investor should be aware of before jumping in with both feet.
Financing is one of them
Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and ability to enforce simply make the package unattractive to most U.S. lenders.
And, if you do choose to buy and borrow Canadian, don't expect to see the loan options available here. The interest-rate structure could be as different as the locale, and the pricing may not be as favorable as you might expect. Owner financing, or "carrying the paper," is also available.
Many folks "from the states" are drawn to Canadian property during the summer months for a variety of reasons, but the big bargains brought by a favorable exchange rate are not as big as they once were. A U.S. buck can now bring approximately $1.18 in Canadian goods, down significantly from years past.
Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as "open"), each typically amortized over a period of 25 years.
"Open" does not mean the borrower's monthly payments adjust as the monthly market fluctuates; it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules only allow for prepayment once a year. When a loan reaches its term, the lender usually renews it.
Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.
Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself – or the "property side" of the decision. You then have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.
Also, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway – especially if it's in a popular location such as Vancouver Island or Whistler, B.C., but the U.S. tax-deferred exchange rules do not qualify when trading for properties in other countries.
With investment property in the United States, you can defer your capital gain if you buy a "like kind" property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase it within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this country is not "like kind" so no capital-gains taxes can be deferred.
Many investment advisors say that folks looking to purchase property abroad – for investment or a principal residence – often refinance or take out a home-equity loan on a property in the U.S. and pay cash for the "offshore" home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.
Smokey will be talking about entity structuring and how you can use it to your advantage when doing cross-border investments in a little while.
Bye for now.
Taxation without representation?
Whatever happened to the founding principles?
Smokey was shocked to see the following...
Charlotte Observer, The (NC) (KRT) via NewsEdge Corporation :
Oct. 5--Bo Horne of Seneca, S.C., sold a $695 software program to a New Jersey casino eight years ago.
Now, the N.J. Treasury Department says Horne must pay $600 in corporate income tax and fees each year for as long as the casino uses the program -- even though Horne says he's never collected additional revenue from the one-time sale.
As states across the country cope with budget shortfalls, an increasing number are turning to out-of-state companies to boost corporate tax revenues, according to a study released Friday by the Tax Foundation, a Washington, D.C., think tank that advocates lower taxes.
Companies that have fleeting contact with certain states may find tax bills in their mailboxes years later, says Chris Atkins, the study's author.
The trend is occurring in part because state officials are finding it easy to hunt for revenue from out-of-state firms because "there's no political price to pay," Atkins says.
Horne's case centers on New Jersey's interpretation of his connection with the state, or nexus, as it's called in tax law. Most states require companies have a physical presence, such as a building or employees, to establish nexus -- and the right to levy taxes.
An increasing number of others, including New Jersey, North Carolina and South Carolina, now say providing a service in their state could be enough to trigger income tax liability.
A N.J. treasury spokeswoman said Horne must pay corporate income tax because his software is an "intangible asset" and gives him a significant enough presence in the state to pay the minimum annual corporate income tax of $500 a year, plus fees.
"It's a sleeper issue for small businesses," says Horne, owner of ProHelp Systems, Inc., which he runs out of his basement with wife Katherine. "States can make your life miserable, if they choose."
He worries such aggressive tax collecting will chill commerce, particularly for small businesses. He's stopped doing business with N.J.-based customers.
It's easier these days for states to track multi-state sales because more government agencies use electronic databases. Such activity could go undetected years ago.
Last week, Horne testified before a House subcommittee in support of a bill that would prevent states from applying income tax to businesses that provide a service but don't have physical assets located there.
The bill, the Business Activity Tax Simplification Act of 2005, has 30 co-sponsors, including three S.C. representatives. No N.C. lawmakers have signed on.
The Carolinas helped birth this trend of applying corporate income tax to out-of-state service providers.
In a 1994 landmark ruling, the S.C. Supreme Court ruled that the taxpayer's physical presence isn't required for the state to levy income tax.
This fall, the U.S. Supreme Court is expected to decide whether to consider an appeal from a similar N.C. ruling. Both cases are often cited as precedents when similar lawsuits are brought up around the country, those familiar with the issue say.
Today, South Carolina levies corporate income tax on a case-by-case basis, said spokesman Danny Brazell. For example, if an out-of-state mortgage lender had one S.C. client, they probably wouldn't be required to file income taxes, he said.
But if that same company had 50 clients and ran radio advertisements, they probably would, he said.
Brazell said the state levies the tax to even the playing field between out-of-state corporations that make money off S.C. sales, and in-state companies that pay property tax and contribute to the community.
"Certainly, there's an issue of what is fair," he said. The state collects an average $8 million annually from out-of-state companies, roughly 5 percent of total corporate income tax revenues.
In a decision that bodes badly for Horne, a N.J. appellate court ruled last month that out-of-state companies with no physical presence in the state can be taxed on sales of their licensed goods.
For Horne, who enjoys fishing on Lake Keowee and visiting historical sites, that decision, if it ultimately stands, could cripple the country's economy.
"If you sell someone in New Jersey a box of paper clips you'll be hit with a $600 tax," he says. "This just destroys small business."
Smokey was shocked to see the following...
Charlotte Observer, The (NC) (KRT) via NewsEdge Corporation :
Oct. 5--Bo Horne of Seneca, S.C., sold a $695 software program to a New Jersey casino eight years ago.
Now, the N.J. Treasury Department says Horne must pay $600 in corporate income tax and fees each year for as long as the casino uses the program -- even though Horne says he's never collected additional revenue from the one-time sale.
As states across the country cope with budget shortfalls, an increasing number are turning to out-of-state companies to boost corporate tax revenues, according to a study released Friday by the Tax Foundation, a Washington, D.C., think tank that advocates lower taxes.
Companies that have fleeting contact with certain states may find tax bills in their mailboxes years later, says Chris Atkins, the study's author.
The trend is occurring in part because state officials are finding it easy to hunt for revenue from out-of-state firms because "there's no political price to pay," Atkins says.
Horne's case centers on New Jersey's interpretation of his connection with the state, or nexus, as it's called in tax law. Most states require companies have a physical presence, such as a building or employees, to establish nexus -- and the right to levy taxes.
An increasing number of others, including New Jersey, North Carolina and South Carolina, now say providing a service in their state could be enough to trigger income tax liability.
A N.J. treasury spokeswoman said Horne must pay corporate income tax because his software is an "intangible asset" and gives him a significant enough presence in the state to pay the minimum annual corporate income tax of $500 a year, plus fees.
"It's a sleeper issue for small businesses," says Horne, owner of ProHelp Systems, Inc., which he runs out of his basement with wife Katherine. "States can make your life miserable, if they choose."
He worries such aggressive tax collecting will chill commerce, particularly for small businesses. He's stopped doing business with N.J.-based customers.
It's easier these days for states to track multi-state sales because more government agencies use electronic databases. Such activity could go undetected years ago.
Last week, Horne testified before a House subcommittee in support of a bill that would prevent states from applying income tax to businesses that provide a service but don't have physical assets located there.
The bill, the Business Activity Tax Simplification Act of 2005, has 30 co-sponsors, including three S.C. representatives. No N.C. lawmakers have signed on.
The Carolinas helped birth this trend of applying corporate income tax to out-of-state service providers.
In a 1994 landmark ruling, the S.C. Supreme Court ruled that the taxpayer's physical presence isn't required for the state to levy income tax.
This fall, the U.S. Supreme Court is expected to decide whether to consider an appeal from a similar N.C. ruling. Both cases are often cited as precedents when similar lawsuits are brought up around the country, those familiar with the issue say.
Today, South Carolina levies corporate income tax on a case-by-case basis, said spokesman Danny Brazell. For example, if an out-of-state mortgage lender had one S.C. client, they probably wouldn't be required to file income taxes, he said.
But if that same company had 50 clients and ran radio advertisements, they probably would, he said.
Brazell said the state levies the tax to even the playing field between out-of-state corporations that make money off S.C. sales, and in-state companies that pay property tax and contribute to the community.
"Certainly, there's an issue of what is fair," he said. The state collects an average $8 million annually from out-of-state companies, roughly 5 percent of total corporate income tax revenues.
In a decision that bodes badly for Horne, a N.J. appellate court ruled last month that out-of-state companies with no physical presence in the state can be taxed on sales of their licensed goods.
For Horne, who enjoys fishing on Lake Keowee and visiting historical sites, that decision, if it ultimately stands, could cripple the country's economy.
"If you sell someone in New Jersey a box of paper clips you'll be hit with a $600 tax," he says. "This just destroys small business."
Wednesday, October 05, 2005
Accredited Investors
A lot of people have questions about some really "neat" investment opportunities that they may have heard about - you know the kind, the ones with 35%+ ROI!
And somewhere in the fine print it says that you must be an "Accredited Investor". What the heck is that all about?
Well, the Securities Exchange Commission was established (among many other things) to minimize the number of disreputable investments being offered to the general public. As such, any investment being offered has to follow some clear reporting requirements and register with the appropriate departments before being allowed to offer the investment. The resulting scrutiny has worked very well to reduce the number of "scams" that were floating around.
On the other hand, some investors want to test their skills and luck by finding opportunities that have spectacular rewards to go along with the spectacular risks. Usually, these opportunities only have a short window for investment, and as such, don't really have the time to go through all the SEC processes. In response to this demand a designation (and associated disclaimer) was created, that of "Accredited Investor".
Simply stated, an accredited investor waives their right to whine about "losing it all" if the investment opportunity doesn't pan out - for any reason.
So, Smokey Says that if you want to play in the unregulated marketplace make sure you understand the risks and are able (financially and emotionally) to survive the fallout if your choice doesn't return the "pot o' gold" you were wishing for. Be aware that you are the one responsible for "self-declaring" your status. No one else cares about your money as much as you.
The details of the SEC information are reproduced below.
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."
And somewhere in the fine print it says that you must be an "Accredited Investor". What the heck is that all about?
Well, the Securities Exchange Commission was established (among many other things) to minimize the number of disreputable investments being offered to the general public. As such, any investment being offered has to follow some clear reporting requirements and register with the appropriate departments before being allowed to offer the investment. The resulting scrutiny has worked very well to reduce the number of "scams" that were floating around.
On the other hand, some investors want to test their skills and luck by finding opportunities that have spectacular rewards to go along with the spectacular risks. Usually, these opportunities only have a short window for investment, and as such, don't really have the time to go through all the SEC processes. In response to this demand a designation (and associated disclaimer) was created, that of "Accredited Investor".
Simply stated, an accredited investor waives their right to whine about "losing it all" if the investment opportunity doesn't pan out - for any reason.
So, Smokey Says that if you want to play in the unregulated marketplace make sure you understand the risks and are able (financially and emotionally) to survive the fallout if your choice doesn't return the "pot o' gold" you were wishing for. Be aware that you are the one responsible for "self-declaring" your status. No one else cares about your money as much as you.
The details of the SEC information are reproduced below.
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."
The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.
Flipping houses?
Many investors buy run-down houses, fix them up and sell them for a profit [a happy day]. Is that called a flip? Well, if it takes less than a year and a day we call it a flip. The time frame determines the tax strategy. Longer than a year and a day would be taxed as long term capital gains (15% in 2005) and you would be able to claim some depreciation.
Any shorter time frame falls into short term capital gains which are taxed at your highest income tax rates as active income and there is no depreciation >groan<.
One way to manage your taxes would be to separate this income into active and passive portions through the use of a Limited Partnership (LP). Since an LP does not exist alone, but needs to have a General Partner (GP), you can decide how much goes to the GP and how much goes to the LP. The LP only receives passive income and the GP receives active income (by IRS definition). Frequently the GP is a "C" company or corporation and would only take a small percentage of the profits as compensation for managing the partnership. One GP can manage many different LPs, so an investor can partner with many different groups and "re-use" the same GP.
As the GP accumulates cash (as a "C" it only pays 15% on the first $50,000 net income) it is able to invest as its own person since a "C" tax election is the only entity that files its own tax return and can act as a separate legal "person".
Somebody find a brush - I'm shedding all over the keyboard. Bye for now
Any shorter time frame falls into short term capital gains which are taxed at your highest income tax rates as active income and there is no depreciation >groan<.
One way to manage your taxes would be to separate this income into active and passive portions through the use of a Limited Partnership (LP). Since an LP does not exist alone, but needs to have a General Partner (GP), you can decide how much goes to the GP and how much goes to the LP. The LP only receives passive income and the GP receives active income (by IRS definition). Frequently the GP is a "C" company or corporation and would only take a small percentage of the profits as compensation for managing the partnership. One GP can manage many different LPs, so an investor can partner with many different groups and "re-use" the same GP.
As the GP accumulates cash (as a "C" it only pays 15% on the first $50,000 net income) it is able to invest as its own person since a "C" tax election is the only entity that files its own tax return and can act as a separate legal "person".
Somebody find a brush - I'm shedding all over the keyboard. Bye for now
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