Guardant Investments

STOCK MARKET & CREDIT MARKETS

October 15th, 2008

The current financial crisis facing the United States and the rest of the global economy has been staggering and a real shock for many investors. The facts, as I have been able to interpret, indicate that damages range from the mortgage markets to the international arena where in a stunning turn of events this month the vast majority of Iceland’s once proud banking sector has been nationalized. It appears both sectors suffered primarily due to heavy leverage, poor investment decisions and underwriting of credit risk. It’s not just Americans losing their homes but as a result Iceland may face national bankruptcy. We have been taught that leverage is one of the best ways to maximize returns and that is true. Leverage is also defined as debt. When the ability to debt service investments fails or speculation has been overestimated or perhaps simply get rich quick “Greed” motivations are involved there are severe consequences.

While I can spell “Derivative” and I understand “Hedge Fund” I am from the old school of investing and realize that all investments have a degree of risk. The basic law is the higher the return, the bigger the risk.

A Basic Non Correlated Alternative Investment

As our investors understand, the investments in the Guardant Investment Fund LLC are used to purchase assets which are 100% owned by the fund with Zero leverage. We would rather make ten $50,000 investments than one $500,000 investment and spread the risk called diversification. Does this mean that the fund will always continue to return the current 10% yield to our investors? Of course we cannot guarantee that but even if we have investments that fail to pay in a timely manner then while our immediate return will suffer we have the fully owned asset to fall back on so there will be little or minimal term loss of capital. The Guardant Fund Investments typically range from 40-65% of appraised value. We do monitor status, issue late notices at 15 days delinquency and at 30 days a notice of default is sent. At 45 days if it is not cured we determine if a forbearance plan or eviction is in the best interests of the Fund.

Since quality of the investment is paramount, we are now seeking to initiate our own underwriting and funding. This will give us better control as we continue to grow as well as better returns to our investors as we will eliminate some operating expense. We anticipate opening this phase early 2009.

Guardant Investments, Inc. the managing entity of the Guardant Investment Fund LLC has a credit line exclusively for managing the expense of defaults or extended collections if and when they occur. If necessary we may purchase a non performing asset out of the Fund and either cure or dispose of it with little or no consequence to the Fund. Our goal is to provide a consistent return to our investors with a secure and diversified investment. The Fund will never provide 20%, 30% or 40% returns. In this market our goal is our current risk based return of 10%.

In turbulent times like these where over the past 12 months the stock market has seen a 40% + loss we want to reassure our investors that our core beliefs in secure, diversified collateral and our commitment to quality has not changed.

Posted in Blogroll, Self Directed IRA, Mortgage Pool, Trust Deed Investing, Mortgage Industry Crisis, foreclosure, Investment, Opportunities, California | Comments Off

Another Real Estate Tax Loophole closed - Important to know

September 16th, 2008

This Capital Tax Code change caught me by surprise as I just learned about it. I had not heard anything about it and perhaps other real estate professionals are in the same situation. In the past I have had numerous clients that have used this section of the IRS code and several that are currently taking advantage of the code (including myself) but will now be affected as this goes into effect January 1, 2009. Unfortunately there is nothing preventative that can be done. A synopsis of the Internal Revenue Code follows:

A Modification of Internal Revenue Code §121

The federal government recently heightened the restrictions for those who seek to exclude capital gains on the sale of real property held as a primary residence under IRC §121. This legislation will go into effect on January 1, 2009.

IRC §121, also known as the 121 exclusion, permits homeowners upon the sale of real estate they have owned and lived in as their primary residence to exclude up to $250,000 of the capital gains ($500,000 for a married couple filing jointly) that would have otherwise been recognized. To qualify for this exclusion the real estate sold must be, or have been, the primary residence and lived in by the taxpayer for any two of the last five years. Certain exceptions apply for the two year “lived in” requirement. Taxpayers can take advantage of the 121 exclusion once every two years.

The careful utilization of the 121 exclusion has permitted taxpayers to implement strategies to take full advantage of its benefits. Such examples include:

* A taxpayer acquires investment property, not purchased as part of a 1031 exchange, and then converts the investment property into their primary residence. The taxpayer, after living in the property for at least two years, may sell the property and take the full 121 exclusion.
* A taxpayer acquires investment property as part of a 1031 exchange and then converts the investment property into their primary residence. In order to take advantage of the 121 exclusion the taxpayer must live in the property for at least two years and additionally must have owned the property for at least five years.

The latest change to IRC §121 restricts a taxpayer from taking the full 121 exclusion for periods of “non-qualified” use prior to it being held as their primary residence. Non-qualified use is any use of the property other than as a primary residence (i.e. second home, vacation home, rental). A “qualified” use is then, by default, any period in which the property is held as a primary residence.

Upon the sale of the property, the capital gains attributable to the Non-qualified time period prior to its conversion to a primary residence is no longer excludable. Any periods of Non-qualified use after conversion to a primary residence is not counted against the taxpayer, as long they would otherwise qualify for the 121 exclusion.

The allocation of capital gains between the Qualified and Non-qualified periods involves a simple fraction that takes the total capital gains associated with the sale and divides that amount between the respective periods. The Qualified period represents the amount of the capital gains that can be excluded and is determined by the number of years the property was held as the primary residence over the total years of ownership. The Non-qualified period represents the amount of capital gains that can no longer be excluded and is calculated using the same fraction, the number of years held in Non-qualified use over the total years of ownership. Keep in mind, any Non-qualified periods after the conversion of the property to a primary residence is not counted against the taxpayer.

For example, a taxpayer acquired real property in January of 2009 and owned the property for eight years. The property was held for investment for the first six years. It was then converted to the primary residence for the last two years of ownership. Of the total capital gains associated with the sale only one-quarter (2/8) can now be excluded under the 121 exclusion. The remaining three-quarters (6/8) can no longer be excluded as they are allocated to the Non-qualified period.

These changes will undoubtedly impact those that have acquired investment property and intend to change the character of the property to their primary residence in order to take full advantage of the 121 exclusion. ”

Keith Webb
CEO

Posted in Blogroll, Investment, California, DST, Deferred Sales Trust | Comments Off

The Deferred Sale Trust™ vs. The 1031 Tax Deferred Exchange

July 14th, 2008

Let’s first get to the Elephant sitting in the room regarding the DST™ and the controversy regarding whether the DST™ is simply a Private Annuity Trust with a different name.

Under the U.S. tax law, U.S. Citizens and residents must declare their income by filing tax returns and must pay tax on their income, and the taxpayer has a legal right to avoid or minimize taxes. Commonly established tax deferral methods include 1031 exchanges and installment sales (IRS 453). Various types of trusts are used by millions of taxpayers to protect and transfer assets to their heirs outside of probate and to minimize having to sell estate assets to pay estate taxes.

The Private Annuity Trust

The creation and implementation of Private Annuity Trusts (PAT) were banned by the IRS in October of 2006. The basic idea of the PAT was to utilize capital gains deferral by transferring a highly appreciated asset to a Trust in exchange for payments for life. After the Taxpayer’s death, the annuity in the PAT would go to the heirs of the Taxpayer as designated in the annuity beneficiary designation. The cited legal authority for the PAT were based on Treasury Regulations, which can be (and were) change(d) at a moments notice. The PAT could sell inventory. Depreciation recapture is not immediately taxable upon exchange and the Trustee of the PAT could be family members who allegedly were not controlled (but were in reality controlled) by the Taxpayer.

The Deferred Sale Trust™ or the DST™

The DST™ is based upon Statutory Authority, Internal Revenue Code section 453. The DST ™ is not based upon a Treasury Regulation and it would take an ACT OF CONGRESS to change the legal authority by which the DST™ is founded.

The next consideration is the Trust structure. In order to be a valid Trust, the Trust analysis has to pass a two part inquiry: (1) is there a legal trust in existence and (2) is the Trust a SHAM for income tax purposes?

A trust must have 4 elements to satisfy legality and include: Intent, Trust Property, Lawful Purpose and an Identifiable Beneficiary. Once the 4 elements have been established for the creation of a trust, then the trust must be analyzed to determine if it is a tax sham and an additional 4 factors must be reviewed in detail to ascertain economic substance for Federal Tax purposes. This “Test” is commonly referred to as BUCKMASTER vs. Commissioner, TC MEMO 1997-236 and briefly includes:

1. The taxpayer’s relationship to the Asset before and after the trust formation.
2. An INDEPENDENT Trustee (no ownership or control vested in the taxpayer)
3. No economic interest passed to other beneficiaries of the trust.
4. No restrictions imposed on the taxpayer by the trust or the laws of the trust.

So…..is the DST™ an IRS Accepted Tax Strategy?

I have recently obtained a written legal opinion from a California Law Firm licensed to practice in the U.S. Tax Court that THE DEFERRED SALES TRUST™ ALLOWS FOR THE (1) LEGAL DEFERRAL OF CAPITAL GAINS, (2) PASSES SCRUITNY UNDER THE BUCKMASTER TEST (3) NOT A REPORTABLE TRANSACTION (4) NOT A STEP TRANSACTION AND (5) IS CLEARLY DISINGUISHABLE FROM THE PRIVATE ANNUITY TRUST. In addition a Private Ruling Letter has been requested from the IRS and is pending.

The DST™ is founded upon IRS accepted Strategy to Defer, not the avoidance, of the lawful payment of Capital Gain taxation. While this is a relatively new strategy combining existing statutes of established tax law and trusts, it must be PROPERLY administered by licensed and trained DST™ Estate Planning Professionals, Trust Attorneys and Trustees. This is not a do it yourself project or one to be undertaken with untrained and inexperienced advisors. Done properly the benefits may be extremely rewarding. On the downside, the consequences could be devastating if not done correctly and interpreted by the IRS as a tax sham.

Has the Elephant left the room yet? I hope you are still with me because here is where it gets interesting.

Will the DST™ eliminate the 1031 Tax Deferred exchange?

No way. It is strictly another option for the taxpayer who may for a variety of reasons “Want Out” of ownership of assets that have a large capital gain tax consequence. For Example:

(1) You may want to sell because you are seeking retirement and feel managing your real estate or business is no longer something you want to undertake.
(2) You may want to sell because your investment appreciation is worth more than the monthly cash flow.
(3) You may want steady income and asset protection.
(4) You simply hate to pay the taxes.
(5) You may want to sell but cannot locate an acceptable property to complete a 1031 exchange.
(6) You realize that with the DST™ structure you can invest ALL your sale proceeds including the capital that would have been paid to capital gains taxation and receive an increased income stream.
(7) You realize that properly structured with estate planning you can pass on assets to beneficiaries free of estate taxes.

It is interesting to note that while capital gains tax at the federal level is 15% and while some states do not have capital gains tax, California has a 9.3% capital gain tax for an overall 24.3% tax rate. Now that hurts. So while the real estate market is currently having issues, a taxpayer could actually sell his California property 10% below market value enhancing a sale and still have 14.3% more capital in the trust earning income. Does this make it easier to complete a sale and still provide a benefit to the taxpayer?

Interested in obtaining more in depth information?

There is so much more to the Deferred Sale Trust ™. A brief article called Strategic Management of Tax Liability was the subject of our blog last month. If you see a need for the DST, act now. Go to New 1031 Alternative to view some powerpoint presentations and request an illustration that applies to your own personal needs. As with all estate planning, the DST takes some advance planning to implement.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Posted in Blogroll, Mortgage Pool, Trust Deed Investing, Investment, Opportunities, California, DST, Deferred Sales Trust | No Comments »

Strategic Management of Tax Liability

June 24th, 2008

This is a bit long, but thoroughly informative. This is information you will want to have if you have any concerns about Capital Gains Taxes in your future.

“A Way Out”

There is a perfectly legal way to defer capital gains tax and reduce your overall tax burden that may be better than anything you have previously heard about. A Deferred Sales Trust can provide a new way out.

Those of us who own highly appreciated assets such as homes, commercial real estate and businesses, are often reluctant to sell that asset because of the capital gain tax and depreciation recapture costs associated with the sale.

How many times have you heard, or made these comments?

“If I sell my property I am going to get killed with taxes”

“It would be better to let my kids inherit my assets at stepped up value when I pass away”.

Sound too familiar? Most people don’t realize estate taxes are almost 50%, above varying exemptions, and that non-spousal “step-up” values are set to cap at $1.3M in 2010!

There is a smart, functional, and legal way to address these issues. The answer may lay with a powerful tax tool called the Deferred Sales Trust™.

If you own a business or real estate with a large amount of gain and are not selling your property because of capital gain taxes, or can’t find suitable, qualified, property exchanges, then you may want to consider a Deferred Sales Trust™, (DST).

The DST is a legal method that allows the seller of the property to defer capital gain taxes due at the time of sale over a period of time, even beyond your lifetime.

Deferring taxes, legally, is not new. Some commonly used tax deferral examples are 1031 exchanges, land trusts, and installment sales.

Trust law predates the formation of the U.S. law and tax law. Various types of trusts are used by millions of Americans to protect and transfer assets to their heirs outside of probate and to reduce and even avoid selling their assets to pay estate taxes.

There is no maximum to the size of value of the transaction. The DST can also be used with any kind of entity, i.e., LLC, S or C election corporations as well as individuals who own real estate , rental properties, vacation homes, commercial properties, hotels, land, industrial complexes, retail developments, and raw land, to name a few.

What are capital gain taxes?

Capital gain is the profit we are taxed on when we sell an asset. It is calculated by subtracting what you paid for the asset from the net selling price. The current rate for an asset owned for one year or longer is 15% for Federal taxes. Most states charge 5% to 10% on top of that (CA is 9.3%), making the total tax run as high as 25%. If there was depreciation taken on the asset, the cost basis is lowered by that amount, thus increasing the taxable gain! Even with your primary residence, factoring in your tax exemption of $250,000 each for husband and wife, you may still have a hefty tax surprise when you sell your property.

That isn’t the end of the story for the total tax effect though. Capital gain is added to the taxpayer’s adjusted gross income (AGI). This may raise the “floor” above which one can take a number of itemized deductions and affect Alternative Minimum Tax.

This could result in a large decrease or total loss of those deductions. This makes the effective, but hidden capital gain rate much larger than the stated federal and state rates. And, of course, tax payment obligations would begin immediately.

To make matters worse the capital gain and depreciation recapture taxes must be paid in the following tax quarter after the sale of the asset.

How does the Deferred Sales Trust ™ work?

The process starts with a property owner, “grantor”, selling ownership of the property to a dedicated trust set up for them.

Next, the trust pays the grantor for the property. The payment isn’t in cash, but with a special payment contract called an “installment contract”. It is strictly a private arrangement between the trust and the grantor. The term of payment can be for life or a stated term.

The payments may begin immediately or they may be deferred for some period of months or years.

The trust then sells the property. There are zero taxes to the Trust on the sale since the Trust “purchased” the property for what it sold it for to a third party.
The grantor is not taxed on the sale since he has not yet received any cash for the sale. Often grantors will choose deferral because they have other income and don’t need the payments right away. Of course, the payments may begin immediately.

Deferral is strictly an option. It is important to understand that payment of the capital gain tax to the IRS is done with an “easy installment plan” as the grantor receives the payments. Part of the payment received is tax free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest.

There is no interest or penalty on these deferred payments of the tax.

On top of that the tax payments will be made with depreciated dollars. The tax dollars will likely be worth less than they are today due to inflation. If invested properly, the money in the trust could potentially grow at greater rate than that of inflation and even the distribution rate.
(The interest rate in the note to you is dictated by the IRS to be a competitive rate, i.e., 6% to 10%.)

While we have primarily focused on the capital gain tax, the amount of gain due to straight line depreciation is also deferred with a DST. But if you have taken accelerated depreciation in excess over straight line, this amount is not deferrable.

There is substantial flexibility in investing the trust’s funds. The money may be invested in securities, real estate, or even in a new or existing business. Reinvestment of the proceeds may result in more or less risk depending on the nature of where the proceeds are reinvested.

The primary requirement of the trust’s investment objective is simply to produce the cash flow necessary for the annual payments to the grantor.

There are significant benefits for the property which the grantor transfers to the trust:
1. Whatever is left in the Trust at the time of the grantor’s death will pass to the beneficiaries completely free of estate and gift taxes.
2. This arrangement does not trigger any gift tax consequences no matter how much trust assets are worth.
3. Trust assets will not need to go through probate when the grantor dies.

The deferral of capital gain tax can potentially produce an increase in growth of trust assets. That is not the only benefit;

1. Everything from the sale proceeds and all trust earnings either go to the grantor or to the heirs. There are several options available to accomplish these goals.
2. The trust can make a cash sale. It is not forced to make an installment sale to the outside buyer in order to spread out the capital gain tax. This is an advantage because you never know whether the outside buyer will make all the payments on an installment sale.
3. The DST payment amount and term is designed for what you want per your needs and objectives.
4. The formal mechanics of the trust provide the discipline that some find helpful in providing for their own retirement.
5. The DST works equally well for single or married grantors.

Nothing is given away to charity as happens with the competing strategy known as a Charitable Remainder Trust.

The DST allows all the principal and accrued interest to be paid to the grantor, whereas the Charitable Remainder Trust pays income (interest) only. The DST has the potential to yield more bottom line dollars to the property seller than the Charitable Remainder Trust.

The DST has the ability to generate substantially more wealth over the long run than a direct and taxed sale. It may be superior to the Charitable Remainder Trust, installment sale, private annuity, or like-kind property exchange in many respects. Consult your tax advisor to ascertain the potential benefits of this option.

Frequently Asked Questions:

Q. How can I know the amount of my payments from the trust?

A. The payments are what you, the grantor, desire. Depending on your income goals and other objectives, the amount and length of term are your choice.

Q. What happens if I live longer or die sooner than my life expectancy?

A. Payments continue for the term that you have chosen. You can extend the term. After your death (or the surviving spouse’s), the payments can continue on to your beneficiaries. The remaining net assets of the trust go to them estate tax free per your terms.

Q. Are there any flexibilities or variability in the payment stream, such as increasing the payments over time?

A. Yes. The payments can increase. In any year you could also elect to not take a payment.

Q. Can I cancel the whole deal after a few years and get my money?

A. If the parties agree, you may terminate the trust and get the cash out. However, you would owe all the taxes, plus interest, on the unpaid capital gain plus taxes on gains of trust assets.

Q. What happens if capital gain tax rates are changed after I set up the DST?

A. Politicians, from time to time, discuss changing capital gain rates. If that happens you would pay the new rate on the capital gain portion of your annual payment. However, there is usually adequate notice to make a sound financial decision.

Q. Can the trust buy property at a later date?

A. Yes, the investments of the trust are extremely flexible. The main focus of the trust is to be able to make payments, as agreed, to the grantors.

We recommend that you work with
Estate Planning Team’s Advisors who
are experienced in trust law, trust asset
management and tax law.

Q. When the trust sells the property may I keep some of the cash from the sale?

A. Yes, in that case you would pay taxes only on the capital gain portion of the money which you kept for yourself outside the trust.

Q. How can I have my tax advisor or attorney analyze the DST strategy?

A. For detailed technical information, have your CPA contact us for a full legal and tax cite package. The names Deferred Sale Trust™ and DST are trademarked names and are not found in the code. All of the legal and tax authority used in the DST are in the tax code.

Q. I’m interested in finding out if this works for me. What should I do next?

A. It’s very easy.

Your next step is to complete an “illustration request on-line at:

www.New1031Alternative.com

Or, you can call and request a “free tax savings analysis” which will illustrate your particular circumstance.

This summary is typically sent to you within 48-72 hours. Once you have received the illustration summary, you can then review this information with a trust case manager and share this information with your CPA or tax attorney for further review.

Keith M. Webb or Laura Riffel
Guardant Investments, Inc.
Guard Equity Holdings, LLC
801 E. Chapman Ave, Suite 200
Fullerton, CA 92831-3848

www.New1031Alternative.com

Posted in Blogroll, Trust Deed Investing, Investment, Opportunities, California | No Comments »

A 2008 Update to: What Happens When The Buying Stops?

April 3rd, 2008

That the was headline of a published article I wrote in June of 2005 when the real estate market was surging with sales activity enabled by loan programs with ridiculous terms enhanced with the most liberal of underwriting consideration and little thought to the future consequences. At the time I was ridiculed by many in the industry who said that I didn’t understand the real estate market, it was not like the stock market, and housing would always appreciate. Have you ever seen a real estate agent who preached a conservative approach to future values? Everything was always going to go up. But as I wrote in my article “What happens if interest rates rise 2%… or if the secondary markets start taking losses and have to change their underwriting guidelines”?

Ah hah!….it would probably lead to a mortgage market meltdown. I must admit however, I did not foresee the extent of the damage to the financial industry that has actually taken place.

So what now? What is in store for the real estate market? The best answer for that will start with the necessary and inevitable corrections that must take place, starting with the credit markets and working backwards to the valuation of real estate.

Underwriting has now turned 180 degrees. In order to sell a 30 year fixed rate mortgage into the secondary markets, which are saturated with non performing loans, the lenders that have survived are taking a most cautious approach. They can not risk adding a loan to their portfolio which hinders their ability to fund additional loans. As we all have learned recently, mortgage loans are securitized and sold to investors enabling a lender to fund more loans. As an industry we are going back to the basics of underwriting, more commonly known as the three C’s; Credit, Capacity and Collateral.

Credit is relatively easy to evaluate. Do you have established credit? Do you pay your bills on time? Do you have too much debt? Do you have unsatisfied liens or judgments? Your FICO score will give a snapshot evaluation which takes all of the above into consideration. History has a chance of repeating itself, so the way someone has approached their financial responsibilities in the past is probably the same way they will approach their future responsibilities. An important underwriting consideration.

Collateral is the security for the pledged debt, or in the case of a mortgage, the value of the property. This is an issue and will continue to be an issue for the next 3-5 years until property values, like water, finds its own sustainable level. Location will always be the key, with amenities and condition adjustments. Cost has nothing to do with value. Remember, the key to value is what a willing and knowledgeable buyer is willing to pay a willing and knowledgeable seller. This is also an important underwriting consideration.

So now we come down to what I consider the most important factor - Capacity or Affordability. When all is said and done, if it is a fixed rate loan, adjustable rate loan (potential issue), or an interest only loan it comes down to can the borrower realistically afford to make the payments. Consider:

1. The Average US household annual income in 2006 was $48,000 or $4,000 a month.
2. The Average California household annual income in 2006 was $74,500 or $6,208 a month.

Let’s make an assumption that the average family income is 33% higher or $100,000 annually or $8,333 a month. What can this family afford for a monthly mortgage payment? Let’s further assume this better-than-average family has sold a home, or saved, had a gift or somehow has available $100,000 to use for down payment, closing costs, and still have a couple of months in reserves.
• If they negotiate a purchase price of $480,000 and have a down payment of $80,000, they will need a mortgage of $400,000.
• If we use an interest rate range of 6-7% for a 30 year fixed rate loan, they would have a payment of $2,998 - $3,261 including taxes and insurance.
• That would be housing debt ratio’s of between 36-39% the absolute maximum they can afford to sustain assuming they want to have an auto or two, put gas in the tanks, provide some amenities like clothing, food, electricity, water, repairs and health insurance.
• Expensive vacations and extravagant expenditures will be put on hold for a few years.
• Note this above-average income family with $100,000 cash will be hard pressed to purchase a home of $480,000.

For those buyers of million dollar tract homes, simple math tells you that you have to have a family income around $250,000 (+/-), as jumbo loans are priced higher (yes, even the new FNMA conforming jumbo loans), and while we have many families with those income levels I am here to tell you there are far more “million dollar tract homes” than there are people who can afford to buy them.

Note the History of Home Values compiled by Yale economist Robert Shiller. This chart shows the inflation adjusted values since 1890 to present. It does not take a PhD to quickly determine that property prices escalated beyond income growth or affordability during the past 8 years and property values will need to adjust accordingly. The highest sustainable run up in history was the post world war II boom which was a sustainable index increase of 30. From 1997 to 2007 the index increase was 83. There is a tremendous adjustment we are facing if we are going to be realistic.

Congressman Chris Dodd has recently stated that every foreclosure costs each homeowner in that neighborhood about a 1% decrease in their property value. The point is that property value was illusionary in the first place. Cheap money given to unqualified buyers competing against each other drove up those values, and like a cheap house of cards, those inflated values will have to come tumbling down.

The various proposals being offered in Congress to put a temporary stay on foreclosures is going to do nothing but forestall the inevitable. Other than the lenders working out individual forbearance solutions, which may include reducing the loan amount and taking some future percentage of appreciation, are all unrealistic. If the income is not there, they cannot afford to keep the home…. it is that simple.

I have an associate who is raising funds in a private placement with a minimum investment of $350,000. The purpose is to purchasing estate property in Beverly Hills for cash and after a holding period of 5 years sell. They feel that the ultra rich (actors, professional athletes, etc.) can always afford and want the most extravagant. That is probably a true assumption.

Our approach is completely the opposite. Our focus is investing in the lower rung of the housing market which is the manufactured housing and mobile housing market. The default rate of approximately 1%, comparable to the 5-6% rate of conventional housing today, makes this an extremely attractive investment. Our approach is affordability with responsible underwriting will be what provides an investor secure, consistent and attractive yield for their investment.

Time will tell, but to me, as in 2005, the problem and the solutions are obvious. The corrections will take time as values seek their own sustainable levels.

Keith Webb
CEO

Posted in Blogroll, Self Directed IRA, Trust Deed Investing, Mortgage Industry Crisis, foreclosure, Investment, Opportunities, California | No Comments »

Self Directed IRA Refresher

April 2nd, 2008

Traditional individual retirement accounts and Roth IRAs are both good ways to save for your retirement while enjoying either a tax deferral or tax free benefits. In a traditional IRA, you invest pre-tax dollars and pay taxes when you withdraw the money. A Roth IRA on the other hand, you pay taxes on what you invest and are tax free when you withdraw.

Both types however lack choices and options in terms of the type of investments that you can participate in. Usually, you are limited to a portfolio of stocks, mutual funds, money market funds and CDs. The majority of the banks, insurance companies and stock brokers that are the custodians and plan administrators of these IRAs do not offer any other investment choices.

If you want more options and better control of your investments in an IRA, you will have to find a plan administrator that specializes in self-directed IRAs. Self-directed IRAs gives you all the tax benefits of the traditional or Roth IRA, but more freedom to invest in different types of assets.

What it means to be “self-directed” is as simple as it sounds. You, the individual investor, have complete control over selecting and directing your own IRA or 401K investments.

“In a self directed transaction, you make all of the decisions regarding your investments. The self directed IRA custodian or self directed IRA administrator completes the documents required to establish your account and purchase your investment.” – The Entrust Group

Here is a list of some of the assets approved by the U.S. Treasury regulation and IRS that can be held in a self-directed IRA, but not available in the non self-directed type:
• Real Estate
• Limited Liability Companies
• Private Limited Partnerships
• Secured and Unsecured Notes (Mortgages and Deeds of Trust)
• Partnerships and Joint Ventures
• Private Stock
• Judgments/Structured Settlements
• Tax Sale Certificates
• Car Paper
• Factoring
• Accounts Receivable
• Commercial Paper
• Equipment Leasing

The main benefits of the self-directed IRA are the variety of assets that can be invested in. There are restrictions that have to be complied with, like the penalties for early withdrawals when dealing with traditional IRAs; self-directed IRAs are no exception. Individual asset types for self-directed IRAs may have its own set of rules and restrictions when made part of a retirement plan as well.

It is beyond the scope of this article to go into all the details of the different type of assets and the many creative ways of using them to your advantage, but here are several scenarios.
1. Lending your IRA fund as a loan to friends and family; why pay a bank interest when they can pay you? A win-win for both parties.
2. Investing in raw land and turning the profits back into the tax deferred IRA for reinvesting
3. Investing in a start-up company through a private placement

There are countless ways that a self-directed IRA can be used to invest your money. Self-directed IRA accounts will require a specialized custodian or administrator to open an account and invest with. These accounts have to be held with a custodian who allows non-traditional investments in the IRA.
To learn more about self-directed IRAs you can visit www.PenscoTrust.com for additional information. They are a specialized plan administrator, FDIC insured, and offer free education to the public in the self-directed retirement planning arena.

Laura Riffel
President

Posted in Blogroll, Self Directed IRA, Investment, Opportunities, California | No Comments »

Investor Concerns

March 4th, 2008

“Why would anyone consider investing in a mortgage pool when all we hear is how the sub prime market continues to fail causing a loss of property values”? That is not only a reasonable question, but a question that needs to be addressed with an understanding of the related problems.

Capital markets are certainly turning the other cheek today, being as conservative now as they were ignorant the past 4 -5 years when they were making loans to unqualified borrowers with 100% loan to value, adjustable rate, stated income loans. Unfortunately the barn door was closed too late. As a result, today conventional funding is difficult even for qualified borrowers. Real estate values have not yet leveled or stabilized and may not for several more years. The main problem is affordability. Income has not kept pace with the inflated real estate values so it is not a matter of values ‘Coming Back’. Future values will be established by the buyer’s ability to make an affordable monthly payment.

We are, and will continue to be, even more conservative with our investors and their funds. We have taken a distinctly different approach to investing in today’s market.

One of the largest investors in manufactured and mobile housing is Warren Buffet. Why? Because he is a smart man. Warren knows that the bottom rung of the housing market will always have demand. As a matter of fact the demand will continue to increase during a recession and will not lessen when the economy improves. In this low end housing market there is a less then 1% default rate. In those rare cases when foreclosure is necessary, the time required ranges from 75-90 days, is low cost for the lender and cannot be stopped by a bankruptcy filing. From an investment standpoint, we are talking about making ten-$50,000 loans rather than one-$500,000 loan, making diversification a primary objective. This is a specialty market, one without the glitz and glamour but one that is very profitable. Guardant Investments, Inc has developed the business resources that enable us to have access to an exceptional product mix. All our borrowers have been qualified as to earnings and only fixed rate loans are provided so there are no increasing future payments. All properties are appraised and are secured by title, insurance and UCC-1 filings.

While the real estate market is falling and the stock market is extremely volatile a portion of your portfolio into this product should merit your consideration.

Keith Webb
CEO

Posted in Blogroll, Self Directed IRA, Mortgage Pool, Mortgage Industry Crisis, foreclosure, Investment, Opportunities, California | No Comments »

Wealth Wisdom

February 26th, 2008

We all know that social security is at best tenuous and that working for one company for a lifetime and retiring on the company pension is something our grandparents or perhaps our parents could do is something in the past. In the 1970’s I was personnel manager for two large corporations and initially if someone had less than 5 years with their previous employer they were considered unstable. Then it quickly became 2 years and then if they moved for financial or other gain it did not matter if they were only 6 months with employers. The point is that in all probability the only entity we can count upon for retirement is ourselves as individuals.

One of the wisest decisions one can make is preparing for their long term financial security and one of the best tools available is the government sponsored Individual Retirement Account options available be it an employer sponsored 401 (k) account or an individual IRA with the immediate tax deduction or the much preferred Roth IRA which grows lifetime with no tax ever to be paid at time of withdrawal.

Most people don’t know that they pay fees for their 401 (k) plan or IRA accounts let alone their traditional mutual fund investments. Don’t be fooled. Even though most people maintain that fees are an important consideration in their investment decisions, most plan participants say they lack basic knowledge concerning them.

A recent AARP survey showed:

• 79% of those who make decisions about their investments consider fees to be an important consideration in making investment decisions.
• 83% admit they actually do not know ho much they pay in fees and expenses associated with their plans.
• 54% say they do not feel knowledgeable about the impact that fees can have on their retirement savings.

The same applies to other investment decisions. Many investors are not aware of the fees they pay and may believe they are not charged fees. Unfortunately they are not aware that fees can fit into many categories.

Most fees fit into these general categories:

• Investment Fees – the largest bite comes from fees you pay to a mutual fund companies that manage the investments.
• Administrative Fees – Operational expenses paid to your plan administrator such as record keeping, account services, accounting and legal services.
• Individual Fees – for operational, individual services, withdrawal or wire transfers.

Mutual funds charge management fees as a percentage of the assets invested in a fund. This is called an expense ratio and these can run from .50 to 1.75% or more. If the fund has a rate of return of 8% before the expense ratio then your individual return is going to reflect those expenses.

Did you know you can buy real estate with your self directed IRA account? Not likely a financial planner from a large brokerage house will advise this as they will not be paid fees on your account if you take it outside their asset control. Yet the opportunity for some outstanding investments in real estate will take place over the next 2-5 years.

You can never start planning for your retirement too early. Your money should work as hard as you did to earn it in the first place. Compounding interest and investment growth are the answer to wealth creation. Finding the right investment vehicles and fee based financial advisors; legal advice such as with estate and trust attorneys will help you attain the financial security you desire for your family.

Keith Webb
CEO

Posted in Blogroll, Self Directed IRA, Investment, Opportunities, California | No Comments »

MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007

January 4th, 2008

The Treasury Departments recently announced sub prime mortgage relief plan required legislation for an exclusion of mortgage debt forgiveness from a home owner’s income. Otherwise those homeowners would receive unmanageable income tax debt as discussed in our December BLOG. The centerpiece of this legislation (H.R. 3648) was signed by President Bush on December 20, 2007 and contains a three (3) year exemption for debt forgiveness on qualified home loans. While there were a handful of other real estate benefits in the new law our focus here is the area of Foreclosure Relief.

When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the unpaid mortgage debt as in a short sale, the Tax Code considers the canceled debt to be taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act of 2007 excludes from taxation discharges of up to $2,000,000 of indebtedness that is secured by a principal residence and is incurred in the acquisition, construction or substantial improvement of the principal residence. This special relief is available for the three year period beginning January 1, 2007 and ending December 31, 2009. The provision was made retroactive to January 1, 2007 to help as many homeowners as possible.

Mortgage renegotiations are included in the laws new exemption. When a lender determines that foreclosure is not in the lenders best interest it may offer a mortgage workout where the terms of the mortgage a changed to result in a lower monthly payment. Once such workout plan would forgo adjustable rate resets for up to five (5) years. This and other mortgage forbearance plans technically result in forgiveness of indebtedness that would be taxable to the homeowner if not for this new law.

Specifically the new law applies to qualified principal residence indebtedness which qualified means acquisition indebtedness. This is indebtedness that is incurred in the acquisition, construction or substantial improvement of the principal residence. It also excludes refinancing of such debt to the extent that refinancing does not exceed the amount of the original indebtedness. Homeowners who took advantage of the run up in real estate prices to do “Cash out” refinancing and used the cash to pay off credit card debt, tuition, medical expenses or other expenditures are not covered by the new law exclusion for the cash out amount. That indebtedness is fully taxable unless other exclusions such as insolvency or bankruptcy can be met. The new law does not apply to vacation homes or second residences which a taxpayer may have overextended family finances to purchase. Needless to say it does not cover many speculators who purchased property hoping to take advantage of the rapid appreciation taking place and while using leverage and adjustable rate loans to make “It happen”.

Again, the purpose of this legislation is to shelter homeowners who enter foreclosure or forbearance of debt to become saddled with unmanageable income tax debt.

Keith Webb
CEO

Posted in Blogroll, Trust Deed Investing, Mortgage Industry Crisis, foreclosure | No Comments »

Tax Consequences of Foreclosure and Short Sale

December 18th, 2007

The current real estate market may have some unpleasant surprises for borrowers who lose their property due to abandonment, foreclosure or need to utilize a short sale.

When a lender forecloses on real estate, the IRS requires the borrower to treat the event as a sale of the property and possibly recognize gain or loss. A recognized gain may be taxed to the borrower either as capital gain or ordinary income. Generally the portion related to cancellation of indebtedness is treated as ordinary income to the borrower.

In cases where the borrower is not personally liable for the loan such as a non-recourse loan or a purchase money loan(s) and there is a gain, the borrower will receive preferential capital gain treatment on the foreclosure.
In California acquisition debt is typically the amount of debt a debtor borrowed to purchase the property and is considered a non-recourse loan.

If the borrower is personally liable for the loan, as in a refinanced loan or a loan that was not an acquisition loan, then a gain on the foreclosure could contain a combination of capital gain and ordinary income. The capital gain portion would be he difference between the taxpayers “Basis” and the fair market value of the property immediately prior to the foreclosure. The ordinary income portion which represents debt cancellation is the excess of the principal loan balance over the fair market value of the property immediately prior to the foreclosure.

Tax on the cancellation of debt will not be owed by the borrower if the debt is discharged in bankruptcy, the borrower is insolvent, the fair market value of the property is greater than the canceled debt, or the canceled debt is treated as a gift by the lender. The IRS has said that it will not allow any canceled debt by a commercial lender as a gift.

Congress is considering legislation which will not tax a borrower on the forgiveness of acquisition debt (purchase money loans) in a foreclosure or short sale on real estate that is used as a primary residence. This bill is now being considered by the senate.

Unfortunately the circumstances of foreclosures and short sales usually are under duress and not something a borrower wants to initiate. It is difficult to deal with the stress involved and the aftermath of possible consequences with the IRS. Obviously in most situations if it involves recourse loans a short sale would be more beneficial to both the borrower and the lender and have a lesser financial tax impact than a complete foreclosure.

IF one finds themselves in such a situation it is highly recommended that they seek appropriate legal advice from professionals. The advice may not be what you want to hear but ignorance does not keep the tax man away. David Dunner, CPA for Guardant Investments, is our source for legal advice and opinions in this article. David may be reached from the affiliate page of our executive team on our web site.

Keith Webb
CEO

Posted in Blogroll, Mortgage Industry Crisis, foreclosure | No Comments »

STOCK MARKET & CREDIT MARKETS

Another Real Estate Tax Loophole closed - Important to know

The Deferred Sale Trust™ vs. The 1031 Tax Deferred Exchange

Strategic Management of Tax Liability

A 2008 Update to: What Happens When The Buying Stops?

Self Directed IRA Refresher

Investor Concerns

Wealth Wisdom

MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007

Tax Consequences of Foreclosure and Short Sale

Categories

Archives


Home \| About Us \| Seminars \| Webinars \| Contact Us \| Blogs \| Resources