Aug112016
The safest real estate investments are in underwater markets like Las Vegas
The more underwater homeowners a market has, the less likely it is to see much inventory on the MLS until prices exceed peak values.
Many people leave Las Vegas broke. Most of them lost their money in games of chance, but the latest casualties of Las Vegas were ordinary home owners who bought homes at the worst possible time.
Unlike many markets where only the most indebted late buyers and HELOC abusers have been washed out by falling prices, in Las Vegas, prices have fallen so low that ordinary buyers from before the bubble who paid down their mortgage find themselves deeply underwater, unable to move, and hopeless. Those owners are the true victims of the housing bubble because they didn’t do anything foolish. They happened to buy in the wrong place at the wrong time purely by chance.
Now these ordinary citizens are trapped in their underwater homes unable to move to seek employment elsewhere. Las Vegas is the only desert where people routinely drown.
It used to be that underwater borrowers were trapped in what was known as shadow inventory, but must-sell shadow inventory morphed into can’t-sell cloud inventory. Cloud inventory consists of homes where the owners can’t sell because the resale value of the house is less than the price they need to pay off the debt (and perhaps leave with a 20% down payment). I contend the shortage of properties on the MLS is due to cloud inventory.
The cloud inventory phenomenon isn’t going away any time soon — and that’s one of the reasons I still like Las Vegas real estate for home price appreciation. Cloud inventory stays off the MLS until prices get high enough. This shortage of available inventory becomes chronic, and buyers for years are forced to compete with one another for the few properties available for sale. Not just does this make a price crash unlikely, it also increases the normal rate of appreciation until such time that the market becomes truly unaffordable, or prices exceed peak values.
Las Vegas real estate recovered significantly since early 2012, but it’s still well below the peak, keeping MLS inventories light and prices moving higher.
Underwater in the Las Vegas Desert, Years After the Housing Crash
More than eight years after rotten loans and plunging home values made Las Vegas the center of the housing crisis, thousands of people have yet to recover.
By JACK HEALY, AUG. 2, 2016
Las Vegas is a glittering promise built on a simple truth: The house always wins.
Actually, in this instance the “house” lost. Both the bankers and the borrowers suffered during the bust and even today.
But years after rotten loans and plunging home values made Las Vegas the center of the housing crisis, thousands of people have yet to recover from the cataclysm that tipped the United States economy into a recession.
Even with new resorts springing up on the Strip, home values recovering and record numbers of visitors pouring back to this American playground, thousands of people in golf-course mansions, gated condominiums and stucco starter homes are still stuck in 2008, battling with their banks, owing more than their homes are worth, trying to negotiate a sale to avoid foreclosure. To visit this underwater America is to take a tour of too-easy money, bad choices and worse luck, and of the way the economic toll of the Great Recession still haunts much of America.
They blame themselves, but their scorn for banks and bailouts runs as wide and hot as the desert.
No, they don’t blame themselves. Few take responsibility for anything unless compelled by force.
The crash tarnished their faith in that core American belief that buying a house was a foolproof path to security and prosperity.
(See: Housing bubble’s defining delusion: real estate only goes up)
Housing sales and prices are rebounding across Las Vegas, but the market was in such a deep pit that families who bought at the peak or borrowed against their homes say they may never see any return on their $240,000 starter home. Some who walked away are bouncing from rental to rental, negotiating bankruptcies and trying to fix their credit. And they say the tepid job market — Nevada’s unemployment rate is 6.4 percent, up slightly in the most recent government survey — is an added weight.
To them, the economic recovery was a fickle storm that brought rain to some parched farms while skipping theirs. The frenzied market for million-dollar studio apartments in Manhattan and seven-figure bungalows in Los Angeles might as well be another planet. …
Sometimes I lose focus on the bigger picture because I’m in Coastal Southern California. Housing markets in the rest of the country don’t behave like ours.
One in four homeowners in the Las Vegas area owes more to the bank than his or her home is worth, according to RealtyTrac. That is the third-highest rate in the nation, behind Cleveland and Akron, Ohio. And though prices are recovering, they are still below the frenzy of 2005, when people lined up for open houses and bought homes for nothing down.
There are a great many peak buyers and refinancers who will be underwater for another decade or more.
Las Vegas, Southern Nevada Housing Markets Heat Up in June
By WPJ Staff | July 11, 2016 9:00 AM ET
According to the Greater Las Vegas Association of Realtors (GLVAR), … local home prices and sales heating up last month compared to the same time last year.
GLVAR reported the median price of existing single-family homes sold in Southern Nevada during June through its Multiple Listing Service (MLS) increased to $235,000. That was up 6.8 percent from $220,000 one year ago. …
“It’s shaping up to be a strong summer for our local housing market, and I think most of our members are optimistic that we can continue this momentum in the coming months,” said 2016 GLVAR President Scott Beaudry. “As we’ve been saying all year, we’re still concerned about our limited housing supply, which is about half of what we’d like it to be. But overall, the housing market seems to be moving in a positive direction and avoiding the volatility we experienced in past years.”
The lack of sellers in Las Vegas will be chronic. It will be another decade before those who bought in 2006 are finally above water. In the meantime, expect above-average appreciation until the market is well above peak pricing.
[listing mls=”OC16167465″]
Only a handful of metro areas are worth purchasing a home in.
1) LA/OC
2) San Diego
3) Bay Area
4) Seattle
5) NYC
6) Boston
7) DC
Stay away from a home purchase in any other city.
Perhaps if you provide some reasons why those areas are best, a discussion might ensue. A proclamation leaves us only with your say so.
Over the long term, these metros provided the greatest return to homeowners. You can look at case-shiller since that series started. Since 2000ish, these cities are the winners. For good reason. Good job and job growth. I would not bet against that.
That list is basically correct, but I would add Portland and Honolulu.
L.A./O.C. has nation’s lowest homeownership rate
Despite cheap mortgages and a healthy job market, local folks aren’t choosing the American Dream.
Los Angeles and Orange counties have the worst homeownership rate in the nation, new census stats show.
In the second quarter, only 46.5 percent of local residents lived in a home they owned, down from 49 percent in the first quarter and 48.5 percent a year ago. The L.A.-O.C. area had the lowest homeownership rate in four out of the last five quarters among the 85 metropolitan areas tracked by the U.S. Census Bureau.
For 2016’s second quarter, the New York area had the second worst ownership rate at 49.5 percent, followed by Las Vegas at 50.5 percent; San Jose-Santa Clara at 51 percent; San Diego at 52.1 percent, Fresno at 52.3 percent; and San Francisco at 53 percent.
FYI: Florida’s North Port-Bradenton-Sarasota region had the highest ownership rate at 72.4 percent for the second quarter. And if you’re looking locally for higher ownership levels, try the Inland Empire: 62.6 percent!
Falling ownership is part of a nationwide trend as high home prices, picky lenders, limited home selection and house hunter skittishness make renting a popular option.
U.S. home ownership hit a 51-year low at 62.9 percent in the second quarter down from 63.5 percent in the first quarter and 63.4 percent a year ago.
Rising home prices boost homeowner equity
Rising home prices boost collateral value on underwater loans
The number of homes underwater, where the homeowner owes more than what the home is worth, decreased slightly due to rising home prices, according to the Q2 2016 U.S. Home Equity Report from ATTOM Data Solutions, a source for housing data and the new parent company of RealtyTrac.
In the second-quarter report, 6.6 million properties were seriously underwater, an 11.9% share of total properties at the end of the second quarter. This is down from 12% in the first quarter, and 13.3% last year.
For the report, ATTOM analyzed recorded mortgage and deed of trust data from more than 1,400 counties accounting for 88% of the U.S. population.
“Rising home prices are lifting all home equity boats: bailing out seriously underwater homeowners and enriching homeowners who already have positive equity,” said Daren Blomquist, ATTOM Data Solutions senior vice president.
“Nationwide home prices reached a new all-time high in June on the heels of 52 consecutive months of annual increases,” Blomquist said.
Fewer Housing Markets in the U.S. Have Double-Digit Price Gains
Fewer U.S. housing markets are seeing double-digit gains in prices as affordability becomes more of a challenge in some areas.
In the second quarter, prices rose 10 percent or more from a year earlier in 25 metropolitan areas, down from 28 markets in the first quarter and 34 in the second quarter of 2015, the National Association of Realtors said Wednesday.
Home prices have been outpacing income gains, making it harder for some buyers to compete in many of the strongest markets across the U.S. The median price of an existing single-family home rose from a year earlier in 83 percent of the 178 markets measured, the group said in the report. For the first time ever, a metro area — San Jose, California — had a median price of more than $1 million.
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“Steadily improving local job markets and mortgage rates teetering close to all-time lows brought buyers out in force in many large and middle-tier cities,” Lawrence Yun, the group’s chief economist, said in the statement. “However, with homebuilding activity still failing to keep up with demand and not enough current homeowners putting their home up for sale, prices continued their strong ascent -– and in many markets at a rate well above income growth.”
The median price of an existing single-family home was $240,700 in the second quarter, up 4.9 percent from a year earlier, the Realtors said. Prices declined in 29 metro areas, or 16 percent of the markets tracked.
The people who are truly harmed when cities say no to new housing
The small community of Brisbane, Calif., just south of San Francisco, has a rare opportunity that advocates argue could help ease the region’s massive housing crisis.
The town is home to a 684-acre plot of former industrial land. A developer wants to clean it up and build a mixed-use project, with public parkland, that could include more than 4,000 new units of housing. And the site surrounds a stop on the regional rail line that connects workers to jobs in San Francisco and Silicon Valley.
It’s exactly the kind of flat, spacious, hard-to-find place where you’d want to drop new housing in the Bay Area without displacing current residents or exacerbating traffic. But many Brisbane officials and residents prefer a plan for the land that would include no new housing at all. As the San Jose Mercury News recently reported:
A 2015 community survey found that 43 percent of Brisbane residents opposed any housing on the site, while just 2 percent favored 4,000 units or more. The survey found residents were far more concerned about preserving open space and their quality of life than adding “housing that working families can afford.”
This is unconscionable to people trying to solve a housing and transportation crunch that has turned the Bay Area into a gridlocked and gated community where local teachers can’t afford to live. And the Brisbane episode is a more extreme version of a plot line that keeps popping up, as individual towns stymie efforts to address what is a regional quandary.
Chinese Outbound Investment Reached $17 Billion in First Five Months of 2016
Chinese outbound investment reached $17 billion over the first five months of 2016, already accounting for 65.6% of the total Chinese outbound investment of 2015 at $25.734 billion, according to a new report from DTZ/Cushman & Wakefield.
China was the world’s second-largest source of outbound property investment after the U.S. at $19 billion. China moved up three spots from the end of last year, when the country ranked fifth behind the U.S., Canada, Hong Kong and Singapore.
As for the destination of all those outbound yuan, 62.3% of the total Chinese outbound property investment totaling $10.6 billion went to the U.S. during the first five months of this year, a marked contrast from previous periods in which investors tended to spread capital notably among the U.S., Hong Kong and Australia.
By locality, New York City was the hottest overseas target for Chinese property investors, receiving an estimated $3.5 billion of capital over the first five months of 2016.
“The wave of Chinese investment to the U.S. has far outpaced last year’s total of $4.37 billion by 143% thanks to dollar appreciation and a recovering U.S. economy,” said James Shepherd, managing director, research, greater China at DTZ/Cushman & Wakefield.
Office remains the most popular asset class, accounting for 50% of total outbound Chinese capital from January to May 2016. Top destinations for office investments were Hong Kong and the U.S., accounting for more than 80% of transactions by Chinese investors.
Hotel transactions were not far behind, accounting for 42% of all Chinese outbound transactions and reaching $7.1 billion over the first five months of 2016, already 28% more than recorded all of last year.
“Supportive U.S. visa policy is one important factor that has made it easier for potential Chinese investors and tourists to travel to the U.S., bearing fruit in the form of a flood of Chinese buyers of U.S. hotel properties over the last several years,” said Justina Fan, DTZ/Cushman & Wakefield’s head of outbound investment, greater China, and managing director, Asia Pacific.
DTZ/Cushman & Wakefield is projecting Chinese investors’ presence in cross-border real estate will hit 50% growth this year. The expectation is that the dollar will continue to strengthen and the U.S. economy will maintain steady growth.
Doesn’t this contradict your post from two days ago?
I was thinking the same thing.
One thing that didnt make sense to me was that the article refers to an appreciation in the dollar as the reason there was increase investments in the US. I would have thought that a more expensive dollar would decrease purchasing power and would reduce investments here.
Also if office buildings accounted for 80% of transactions, how could hotels account for another 42% of transactions.
Fannie Mae, Freddie Mac set new all-time low mortgage modification interest rate
Continuing a trend that’s seen the benchmark interest rate set by Fannie Mae and Freddie Mac for standard mortgage modifications fall consistently over the last eight months, the government-sponsored enterprises announced Wednesday that they are about to lower the benchmark rate again – to another all-time low.
Beginning Aug. 12, 2016, Fannie Mae and Freddie Mac will lower the standard modification interest rate from 3.625% to 3.5%.
For the last three months, Fannie and Freddie’s standard modification interest rate was 3.625%, which itself was the lowest level ever – until now.
The new standard rate of 3.5% is also now more than one full percentage point lower than the standard modification rate was when Fannie and Freddie first established the benchmark rate in January 2012.
This is going to affect very few people.
Hillary Clinton on CFPB: Why would you get rid of that?
Hillary Clinton, the Democrat presidential nominee gave a speech Thursday in Warren, Michigan, and unsurprisingly, housing was barely mentioned once again.
This speech follows the economic speech from Republican presidential nominee Donald Trump on Monday in Detroit, Michigan, where he also touched on housing.
What very little she did say, was that Trump intends to disband the Consumer Financial Protection Bureau. Clinton emphasized the help the CFPB brings consumers, and questioned: “Why would you want to get rid of that?”
Does Trump really want to disband the CFPB?
Possibly, but that’s not exactly what he said. To be honest, he hasn’t said much of anything concerning the housing industry.
More specifically, he said on Monday that he would immediately stop all new regulations from agencies. During that time, he’ll analyze current regulations and their effect on the economy.
The Republican party, on the other hand, approved its 2016 party platform, which included changing the structure of the CFPB.
On the other hand, Clinton said in her speech that she supports more government regulations, and would expand upon current regulatory authorities.
Scattered throughout her speech, Clinton made several jabs at Trump, even claiming that his platform relied on fear.
She also touched on taxes, saying that she wanted to make it easier for credit unions and community banks.
“I would propose a new plan that will dramatically simplify tax filing for small businesses to help community banks and credit unions,” Clinton said. “In America if you can dream it you should be able to build it”
Trump expresses support for looser mortgage rules
http://www.washingtonexaminer.com/trump-expresses-support-for-looser-mortgage-rules/article/2599128
Donald Trump expressed support for loosening the new post-crisis rules on mortgages in a speech to a group of home builders Thursday.
In an appearance at a meeting of the National Association of Home Builders in Florida, the Republican presidential nominee said the new rules have made it too difficult for families to get home loans.
“It’s impossible for your people to go get mortgages,” Trump said. “It’s so hard to get mortgages nowadays.”
“It’s so hard for people to get mortgages today unless you have a lot of money in the bank…” he added. “You can’t borrow.”
Trump’s comments echoed the complaints of the housing industry, which has chafed at the imposition of new rules intended to prevent the resurgence of poorly underwritten loans such as the ones that became prevalent in the lead-up to the subprime crisis.
Those rules include the Qualified Mortgage rule set by the Consumer Financial Protection Bureau, which requires loans to meet certain standards, as well as requirements that lenders document borrowers’ ability to repay loans.
Bankers and the real estate industry have expressed concerns that the requirements are too onerous and are preventing some creditworthy borrowers from getting home loans. They have noted that credit scores have risen and delinquency rates have fallen, while house sales remain short of their pre-bubble levels.
While Trump steered clear of specific policy details during his speech Thursday, he did say that the homeownership rate, which fell to the lowest mark on record in the second quarter, is too low.
Trump pulled out a chart of the homeownership rate to show the builders the decline, calling it a “terrible picture.” Homeownership, he told the audience, is the American Dream.
However, the biggest applause lines Trump delivered Thursday didn’t relate to housing regulations, which he called “horrible” and predicted his opponent Hillary Clinton would make worse. Instead, the crowd loudly applauded his call to lower the corporate tax rate to 15 percent and eliminate the estate tax.
Do mortgage bankers really want looser mortgage standards? Don’t you want your competitors to be playing on a level field? Do you want to be forced to lower your underwriting standards every month chasing business you’re losing because someone else continues to lower theirs? We know this leads to a temporary, although it could last years, increase in mortgage volume and revenue; but we know how it’ll end.
Investors are the ones that set mortgage guidelines, not mortgage bankers. If an investor wants to put their money towards a risky product, that should be their business. If they take enough losses, it will cause them to tighten standards or to stop buying those loans.
The one thing that allowed the crisis to happen other than the Fed’s rate policies, was the fraud or incompetence of the ratings agencies. They were giving AAA status to what essentially were junk bonds. This is what caused the mis-pricing of risk and the mis-allocation of capital by investors.
Without the backwards system for how ratings agencies are compensated, the crisis would not have been possible. If you tied ratings agency compensation to the accuracy of their ratings, it would solve the problem overnight and allow investors and mortgage bankers to take any risks they want. If the ratings agencies had to refund their fees whenever a credit instrument defaulted at a greater rate than their implied rating, it would cause them to rate securities conservatively. Since the ratings agencies receive a special oligopoly status from the US Congress, I think this is a fair trade off for their protected market status.
I should’ve placed “mortgage bankers” in quotes. I mean “all folks making money in mortgages.”
I agree about the rating agencies. They were a big factor, among many, causing the 2000s mortgage mess.
Could members of the electoral college go rogue on Trump?
http://www.abajournal.com/news/article/could_members_of_the_electoral_college_go_rogue_on_trump/?utm_source=maestro&utm_medium=email&utm_campaign=weekly_email
The election may not be decided in November, even if there are no hanging chads and disputed vote counts.
That’s because the electoral college doesn’t cast votes for president and vice president until December, and the votes aren’t counted by Congress until January, Pepperdine University law professor Derek Muller wrote in March for the Washington Post.
Muller and other constitutional scholars are considering scenarios where state legislatures choose the electors, or the chosen electors don’t vote in accord with the presidential candidate selected by the voters of their state.
The U.S. Constitution gives states the power to appoint the electors “in such manner as the legislature thereof may direct,” Muller writes in the article, which is noted by the Huffington Post. That means state legislatures could pass laws returning to themselves the power to appoint electors, Muller says.
In Texas, for example, the legislature could reclaim its power and vote for an alternative to Donald Trump such as former GOP nominee Mitt Romney, former Texas Gov. Rick Perry or U.S. Sen. Ted Cruz. That could deny Hillary Clinton the 270 electoral votes she needs to win and would throw the election into the House of Representatives. The candidate chosen by the Texas electors would be one of the top three vote-getters that the House would be obligated to consider.
Writing at his own blog, South Texas College of Law professor Josh Blackman considers a scenario in which the electors refuse to vote for the candidate who received a majority of the state vote. He cites this information from FairVote: While 29 states bind their electors to vote for the candidate winning the popular vote, 21 states do not.
“Contrary to what you may have been taught in school,” Blackman writes, “we do not have a democracy.”
The New York Daily News also looks at the rogue-elector scenario, though the newspaper has a slightly different count—it says 26 states and Washington, D.C, bind electors. And those laws have not been tested in court, Harvard history professor Alexander Keyssar tells the New York Daily News.
Electors could defect or even cast a blank ballot, giving Hillary Clinton a victory or throwing the election into the House of Representatives, according to the newspaper. Each state would vote for one of three candidates who received the most votes in the electoral college. The Senate would decide on the vice president in a similar vote.
Muller looks at yet another scenario at his Excess of Democracy Blog, one he dubs a “Trojan horse” electoral college. Almost every Republican presidential elector has not yet been formally selected under the rules of their political parties, he says. As parties choose their electors in the coming weeks, they could appoint a slate that expressly intends to support another ticket. Maybe it would be Pence-Trump instead of Trump-Pence, or maybe it would be Romney-McCain.
Then the parties would explain very clearly to voters that even though the ballot says Trump-Pence, the electors would actually be voting for the different ticket they are backing. “Trump-Pence” would only be the code name for the real slate. The votes cast by that state’s electors could deny the win to Clinton, or could throw the election to the House.
University of Chicago law professor Eric Posner is troubled by the idea of a rogue electoral college and other scenarios in which “elites” try to block a democratically elected president from taking office.
“Trump will likely lose the election just because all of offensive statements will cost him political support, as they should; that’s how democracy works,” Posner writes at his blog. “And if he doesn’t, our panicking liberal elites will need to decide whether to throw their lot against democracy. …
“If they do, then they will need to acknowledge that the threat to constitutional order is not Trump, but they.”
How Much Does Trump Pay in Taxes? It Could Be Zero
http://www.msn.com/en-us/money/markets/how-much-does-trump-pay-in-taxes-it-could-be-zero/ar-BBvwnkc?li=BBnbfcN
Mitt Romney was excoriated during the 2012 presidential campaign for paying $4.9 million in federal income tax, or an average of just 14 percent of his adjusted gross income, in the two years for which he released returns.
No one should be surprised, though, if Donald J. Trump has paid far less — perhaps even zero federal income tax in some years. Indeed, that’s the expectation of numerous real estate and tax professionals I’ve interviewed in recent weeks.
Even with hundreds of millions in gross revenue from his vast real estate empire, “it’s both possible and legal that Donald Trump would pay little or no income tax,” said Len Green, an accountant and chairman of the Green Group, a tax and accounting advisory firm. Mr. Green is also a real estate investor, teaches at Babson College and is the author of the forthcoming “The Entrepreneur’s Playbook.”
“I would expect he’s paying little or no tax,” agreed Steven M. Rosenthal, a veteran tax lawyer and senior fellow at the Urban-Brookings Tax Policy center.
That’s because Mr. Trump, as a prominent and active developer, can take advantage of some of the most generous tax breaks in the federal tax code to reduce his reported income to near zero, or even report a loss.
Few tax advisers to major real estate developers would speak for attribution, because their clients benefit from the same tax breaks available to Mr. Trump. But all told me they knew developers in Mr. Trump’s league who pay little or no income tax despite hundreds of millions in cash flow.
“Real estate is notorious for throwing off huge deductions,” Mr. Rosenthal said. “That coupled with wide latitude in the timing and recognition of income make real estate development extremely attractive from a tax standpoint.”
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The Trump campaign did not respond to requests for comment, nor did William F. Nelson, a former general counsel to the Internal Revenue Service and partner at Morgan, Lewis & Bockius, one of Mr. Trump’s tax lawyers.
Mr. Trump has said in the past that highly paid corporate executives “get away with murder” on their taxes while boasting that he pays as little as the law allows. At the same time, he has insisted that his federal income tax payments are “substantial.”
No one I spoke to has seen Mr. Trump’s tax returns, because he has not released them. One obvious potential reason is that he reports little or no taxable income, and thus pays very little to support the government he wants to run. He is not obligated by law to make his returns public, but every candidate since Richard Nixon refused to has done so. (Gerald Ford released summaries.) Mr. Romney was harshly criticized for releasing just two years’ worth, and it became a major campaign issue four years ago.
Even though his recent returns are confidential, the notion that Mr. Trump has paid little or no tax is not entirely speculative. It’s consistent with Mr. Trump’s returns from the late 1970s, which he filed with the New Jersey Casino Control Commission when applying for a casino license in 1981. Mr. Trump reported losses and paid no federal income tax in 1978 and 1979 and paid only modest sums — a total of less than $75,000 — for the prior three years.
David Cay Johnston, a former reporter for The New York Times who has written extensively about Mr. Trump, reported in The Daily Beast in June that Mr. Trump also paid no income tax in 1984, citing a New York State Division of Tax Appeals ruling.
Their conclusions are reinforced by Mr. Trump’s extensive financial disclosures required of presidential candidates. His latest filing in May lists 564 entities in which he holds a position, usually president, director or “member.” Most are corporations, usually owned in turn by a limited liability corporation and associated with a specific Trump-owned property, such as the office tower at 40 Wall Street (the subject of four such L.L.C.s, each of which owns a major interest in the other). That does not count entities in which Mr. Trump does not hold any position.
He lists 188 entries under “employment assets and income.” Candidates are only required to list assets from which they earn more than $200; reporting money-losing ventures is optional.
L.L.C.s pass on income tax-free (and, equally important, losses) to their owners. Real estate L.L.C.s can generate enormous losses, even with millions in revenue, because of depreciation, interest payments, real estate taxes and operating costs. Mr. Trump can use paper losses to offset taxable income, such as interest, dividends, royalties and employment income.
That’s a loophole that was eliminated for most investors in the landmark tax reform legislation in 1986. But because of aggressive lobbying by the powerful real estate industry, so-called active developers like Mr. Trump were exempted from restrictions on using such paper losses to offset ordinary income.
The tax value of Mr. Trump’s paper losses may well exceed his investment in the underlying properties, because he and other developers typically make minimal down payments and use as much debt as possible to finance a purchase. To take just one example, Mr. Trump bought what is now the Trump National Doral Miami resort and golf club for $150 million while it was in bankruptcy proceedings and financed the purchase with $125 million in loans from Deutsche Bank.
Interest payments on mortgages and loans are deductible. How much total debt Mr. Trump’s properties have incurred is not known, but based on his latest financial disclosure (which shows only ranges), it’s at least $250 million and probably far more than that, with some estimates close to $1 billion. At an average interest rate of 4 percent, that deduction alone is worth at least $10 million a year and perhaps $40 million or more.
At least interest is a cash payment. Depreciation is a noncash charge, and is largely an accounting conceit that benefits real estate investors. The theory is that real estate loses value over time and is eventually worthless. As everyone surely knows, most real estate has historically appreciated in value.
How much Mr. Trump’s property investments might throw off in depreciation depends on what he paid for them, how much he’s spent on capital improvements and how the assets are categorized (some assets qualify for accelerated depreciation). But the 39-year depreciation schedule for commercial property, and purchases and capital investments of $2 billion (a modest estimate, given that Mr. Trump values his assets at $10 billion), would generate depreciation deductions of $50 million a year.
Depreciation is ordinarily recaptured and taxed when an asset is sold. But Mr. Trump and other developers can benefit from provisions that make that unlikely. If they sell appreciated properties at a large profit but use the proceeds to buy other real estate, the transactions may be considered a “like-kind” exchange. If so, there’s no tax on the gain.
Critics have called like-kind exchanges an outrageous tax loophole that benefits wealthy real estate developers and other investors to the tune of $33 billion in lost tax revenue a year. The Obama administration has called for repealing it, and several bipartisan measures to do so have been introduced in Congress, all to no avail given the gridlock over tax reform.
“It’s a big loophole,” Mr. Rosenthal said of the like-kind exchange provisions. “It allows well-to-do and well-advised taxpayers to defer their tax liability potentially until death.”
Mr. Trump’s business entities also deduct real estate taxes and all their operating costs and expenses, which might well include most of Mr. Trump’s living and travel expenses, because his personal and business lives are so intertwined. (Even his suits are presumably a business cost, because he has a men’s wear line.)
“The difference between business and personal costs can be a very fine line,” Mr. Green said, “especially for someone like Trump.”
If Mr. Trump’s losses exceed his income, they can be carried over into subsequent years and used to offset future income. Politico reported in June that documents from New Jersey’s Division of Gaming Enforcement and Casino Control Commission indicate that Mr. Trump had such tax-loss-carry-forwards in the 1990s, when his casino operations were under stress.
This may also explain why Mr. Trump has not disclosed many large charitable contributions, because the charitable deduction would be of scant value if he has little or no taxable income.
The enormous tax benefits available to real estate developers like Mr. Trump make yet another a compelling case for overhauling the tax system. But that’s not to say he’s done anything wrong.
“People aren’t obligated to pay taxes they don’t owe,” Mr. Green said. “It’s the job of tax professionals to use every legal means to minimize taxes, and I’m sure Trump has some of the best working for him. Many wealthy people pay no tax.”
But they’re not running for president.
“It is disqualifying for a modern-day presidential nominee to refuse to release tax returns to the voters,” Mitt Romney recently said on Facebook.
He, of all people, should know.
Trump wants to end the carried interest loophole, but what about the 1031 exchange loophole? Nah, let’s keep that and abolish the estate tax. That sounds fair.
Your posts are like 90% discussion on trump/right wing bashing and 10% on everything else now. Its almost to the point where I feel like this blog is being hijacked by all this political talk.
I find myself literally ignoring most of your posts now. Not because I am a Trump supporter (I despise both him and Hilary), but because its typically irrelevant to housing and moreso just political bashing.
Can’t please everyone. Please continue to ignore. The next President could have a huge effect on housing/mortgage policies, so I think it’s quite relevant. That’s just my opinion.
Yet, almost all of the things you discuss about Trump has nothing to do with housing. You are always trying to justify yourself through obscure reasoning. Thats always been a common theme in your posts, so I shouldnt be so surprised. Id respect you more if you just stated that you like to talk politics and leave it at that.
Ignore my terrible, non-value-adding posts, please. Thanks.
Happy to do so. Please go spam your political rants on other website.
What is the 1031 exchange loophole?
It’s the ability to sell an investment property, and within 90 days purchase another investment property with the proceeds/gain completely avoiding/deferring any capital gains tax. Real estate is a privileged investment in this sense.
e.g. You can’t sell Disney stock you’ve held for many years and use the gain to purchase Apple stock, thereby avoiding paying capital gains tax.
A loophole is when somebody takes advantage of a law that was not well crafted to avoid the consequences of that law. What you have described is not a loophole, but the actual purpose of Section 1031 as written and passed by Congress. You may not like that they allow the deferral of capital gains for real estate transactions, but that doesn’t mean it is a loophole.
P.S. When you trade Disney stock within the confines of a retirement account, they allow the same exact deferral of capital gains, but presumably you don’t consider that a loophole. Obviously, Congress intended that to be a feature of the accounts, so nobody would refer to it as a loophole.
Fair enough, let’s not identify it as a “loophole.” Is it a fair “provision” (or insert whatever label you prefer) in the tax code?
Nothing about the tax code is fair or was ever meant to be.
The reason Congress incentivizes RE estate investing so much is because if private investors did not step up to create housing, the government would have a massive homeless problem to solve. The 1031 exchange facilitates this because without it, many people would hold onto buildings for decades longer than they wanted to in an effort to avoid paying taxes. It would trap capital preventing it from being put to its best use.
Recognizing this reality, Congress allows RE investors to defer taxes on exchanges so they can invest in bigger and better projects, which adds new supply to the market and attracts newer, younger investors to the market. This has the effect of raising the quantity and quality of housing overall, which benefits everybody.
Agreed, but we could make the same arguments for other non-real estate investments. This is why I roll my eyes every time folks from both parties suggest further tinkering with an overly-complex unfair tax code. In an ideal world, we would get a massive reform bill simplifying the tax code.
“Over the long term, these metros provided the greatest return to homeowners. You can look at case-shiller since that series started. Since 2000ish, these cities are the winners. For good reason. Good job and job growth. I would not bet against that.”
Because it is always a very good idea to project future returns based on past performance. All it took to re-inflate was the suspension of accounting standards.
Good point. I almost forgot about that, GAAP standards do not apply.
Over the very long run San Francisco, LA/OC, and San Diego are the top performing metros in the Case/Shiller index. This is going all the way back to the 80’s before mark-to-model was introduced.
I’m sure we all heard about how the Secret Service talked to Trump about his 2nd Amendment comments regarding Hillary the other day. I personally heard NPR do about a 5 minute segment focusing on how unprecedented it was.
The only problem is it never happened.
Official: No formal Secret Service discussions with Trump camp on remark
WASHINGTON (Reuters) – A federal official on Wednesday said the U.S. Secret Service had not formally spoken with Republican Donald Trump’s presidential campaign regarding his suggestion a day earlier that gun rights activists could stop Democratic rival Hillary Clinton from curtailing their access to firearms.
Following Trump’s comment at a rally on Tuesday in which he suggested that gun rights activists could stop Clinton from appointing liberal anti-gun justices to the U.S. Supreme Court, a federal official familiar with the matter told Reuters that there had been no formal conversations between the Secret Service and the Trump campaign.
Earlier CNN had reported that there had been multiple conversations between the campaign and the agency.
https://www.yahoo.com/news/official-no-formal-secret-discussions-trump-camp-remark-005759040.html?ref=gs