Monday, January 15, 2018

The US estate tax trap

The US is still the world's largest economy and home to some of the world's best companies and a huge array of investment opportunities in real estate, fixed income, equities and other assets. And just about everything is denominated in USD which, in spite of the best efforts of the Federal Reserve and successive administrations of spendthrift politicians, is still the world's reserve currency of choice.

It's a great place to invest but non US-persons should take the time to familiarise themselves with an egregious provision of US tax law. US citizens get a lifetime federal estate and gift tax exemption USD5.49 million for an individual.  For non-US citizens the exemption is USD60,000 – most US situated assets will then be taxed at the relevant rate of estate duty which is currently 40 percent. They will also have the not inconsiderable pain-in-the butt of having to fill in and file the US's typically mind-numbingly confusing returns with the IRS (and possibly state authorities as well) and may well need a lawyer to handle the paper work.

A simple example: If I purchased a property in the US for USD1.0 million in cash today and died tomorrow, my estate would be faced with a USD376,000 federal tax bill even though no profit or gain has been made on the investment.

Two useful plain-English links:US Tax 1 and US Tax 2 are provided with a laundry list of disclaimers including that I am totally unqualified to advise on tax laws (or anything else), that I do not endorse the information in the links and that the information should be checked to see if it is up to date, correct etc.

For my purposes, the risk of my heirs receiving an unexpected tax bill can be mitigated by not investing directly in the US. For US equities, I would invest in a non-US equity fund and for real estate, I would invest through an offshore company.

Unfortunately, I did not become aware of this until after I had invested in some land banking syndicates. They're in Mrs Traineeinvestor's name so I've made it clear that she is not allowed to die until after we have fully exited. I've also made the decision not to add to our existing investments in this area.

Monday, January 01, 2018

Previewing 2018

After a financially fabulous 2017, my primary focus for 2018 is simply to avoid messing up by becoming overconfident.

Equity markets are at levels ranging from very expensive (USA) to moderately valued (several emerging markets). The same can be said about real estate prices. Cheap is hard to find and I have no expectations that further capital gains will be achieved in 2018. Accordingly, my focus will be on cash flow from investments. Specifically, I would like to see my net cashflow from investments grow by enough to compensate for inflation (say, 3%) without simply reaching for yields that may not be sustainable over the longer term.

Part of this growth should come from companies paying higher dividends. The balance will come from a combination of deploying cash into new investments and some from recycling existing investments. I am not factoring in any increase in rental levels. Given the dividend expectations for my larger equity holdings, one small mortgage being paid off later this year and the proposal to reduce the corporate tax rate on small businesses the target increase of 3% appears almost too easy but ....

.... all properties are currently leased but some leases fall into break periods this year and, if the tenants move out, not only will there be a loss of rental income but there will also be the not insignificant cost of redecorating and finding a new tenant; and

.... I am considering buying a completely unnecessary car which will involve not only shifting the cost of the car from an income producing asset to a cost generating liability but also the loss of income from a car parking space; and

.... I received a small consultancy fee in 2017 and it uncertain whether that will be repeated in 2018; and

.... FX changes can have an impact.

Later in 2018 a small mortgage will be paid off. I am considering whether to remortgage the property and invest the money elsewhere. I some respects, applying for a new mortgage would be a test as to whether the banks will still lend to me now that I am no longer employed?

Longer term, I still wish to acquire an additional property in Hong Kong but high prices and the double stamp duty make this a non-starter at present. I also wish to buy another property in Auckland but, once again, high prices are a deterrent.

On non-financial matters, I have reluctantly accepted that I will not be doing the Hong Kong marathon this year but hope to be able to train for 2019. Also on the list is self publishing my second novel  (hugely optimistic) and completing both the substantive chapters of my thesis and my remaining coursework credits by year end.

Sunday, December 31, 2017

Annual Review - 2017

Financially speaking, 2017 was a fantastic year with our household NAV up by 19.4 percent. Gains were across the board and divided almost equally between property appreciation* and other gains/income streams/ FX movements. Needless to say, I do not mistake the benefits of favourable market movements with any particular genius on my part.

We also finished the year with household gearing (borrowings + accruals) being at 8.8 percent of gross household assets. The rise in gearing was due to drawing down on a facility to buy bonds - a basic carry trade. While the rise in interest rates and a flattening of the yield curve have reduced the spread, it remains a profitable trade and I intend to increase it slightly in 2018.

Liquidity remains high, with reductions on my side of the balance sheet being matched by increases on Mrs Traineeinvestor's side.

As part of a year end tidy-up, some smaller and/or loss making investments have been disposed of: Specialty Fashion (ASX: SFH) and Platinum were sold and I also sold my profitable investment in PG Wrightson (NZX: PGW). I also have identified another loss making investment which will be sold in the next week or so (possibly two) and small amounts of non-HK dollars sitting idle which will be redeployed in an effort to simplify my balance sheet.

On non-financial matters:

  • while I completed a very slow marathon early in the year, recurring back problems have derailed plans to do the HK marathon next month;
  • I have completed a very rough first draft of my second novel (it needs a huge amount of work);
  • I am slightly behind schedule with my research degree but still hope to complete it in mid-2019;
  • I have done a small amount of consulting work which I will continue but the levels are so low it is close to being more trouble than it is worth to continue.

All in all, 2017 was a great year.

* We do not have ready to hand valuations for some properties, so they are included in the accounts either at cost or the amount of an unsolicited offer received a few years ago.