Greetings!

I can't believe it is already December.  Merry Christmas and Happy New Year!  I hope you have a wonderful Holiday Season.

Speaking of holidays, Thanksgiving was another investment learning experience for me...thanks to the Green Bay Packers.  The Packers started out the season 6-0.  Aaron Rodgers was on top of his game and there was nowhere to go but up.  Or so it seemed... Just like the Packers, the hot asset class or the "can't miss" advisor or fund family can go somewhere other than up.  Be careful of chasing trends or hot ideas.  More often than not they don't continue.  For an example look at quarterly performance of real estate, commodities and emerging markets this year.  They pretty much change places every quarter from "best" to worst" and back to "best".

I kick off this edition of Financial Strategies with a word of caution about moving back into your rental property to sell it.  That rule of 2 out of 5 isn't quite as simple as it seems.  The second article covers some common Estate Planning mistakes.  Some of these may be a mistake for one person, but not the other.  At least consider them...

My quick comment concerns Gold in an IRA.  There are a lot of reasons you may not want gold in your IRA, here are a couple others.  I'm not against gold (or any other commodity) but there are a lot of details to work out when you try to put assets that are not securities into an IRA.   The last two articles cover topics that may be of interest in December.  The first puts some perspective on S&P performance when the fed raises rates (past performance does not guarantee future results) and the second article talks about when you might want to take gains (vice losses) in a tax year.

Enjoy the articles and the holidays!

Curt

Curtis L. Sheldon, CFP®, EA, AIF®
C.L. Sheldon & Company, LLC
(703)542-4000 or (800) 928-1820

 
Featured Article
Movin' Back Into Your Rental?  Hold on There Partner!

I think most home owners are aware of the 2 out of 5 rule when it comes to selling your primary residence.  For those who aren't, the rule basically states that if you lived in your house for 2 of the last 5 years (there is an extension for active duty military) you can exclude $500,000/$250,000 (Married/Single) of Capital Gains from your income.  That means no taxes. 

When you look at that you might get the idea that you can move back into your rental house for two years and sell it and not pay taxes.  You'd be wrong on two accounts. 

First of all, you have to pay taxes on any "depreciation recapture" (not the topic of today's article).  You also have to pay taxes on gains attributed to "nonqualified use".

So, what is nonqualified use?  Here is what the IRS says:

Generally, a period of nonqualified use is a period after 2008 during which neither the taxpayer nor his spouse (or former spouse) uses the home as a principal residence.

What? You say.  I never heard of this.  I have to admit that the Congress snuck this one through pretty quietly.  I picked up on it a year or so ago during some tax continuing education.  Not all is lost though, there are some exceptions.

 

If you move out of the house and don't move back in during the 5-year look-back period of ownership, the non-residence use is not considered non-qualified.

 

You meet the military exception which includes a period (not to exceed an aggregate of 10 years) during which the taxpayer or spouse is

  • a member of the military, or
  • called or ordered to active duty for more than 90 days AND
  • serves at a duty station at least 50 miles from the principal residence or lives in government quarters under government orders

In other words, if you moved out due to orders and the time away hasn't exceeded 10 years, then the time away isn't considered nonqualified.  It is my opinion once you retire, the exception ends (i.e. nonqualified use begins).

 

If you move temporarily due to a change in employment, health or unforeseen circumstances and the period of temporary absence does not exclude an aggregate of two years

 

The taxable gain is pro-rated based on the time of non-qualified use, not the actual market changes.  So for example, if you owned the house for 10 years and 4 of the years were nonqualified the nonqualified gain would be 40% of the total gain.  It the gain is $100,000 you would owe taxes on $40,000 even if the market tanked during those 4 years of nonqualified use.  The depreciation recapture mentioned above does not really affect this calculations in most cases.

 

As I mentioned, this one was a surprise to me when I learned about it (post 2008).  That is why I generally complete 50 hours a year or more of continuing education...To keep myself on top of these changes and my clients out of trouble.  One thing I've consistently learned throughout the continuing education process is that it is generally easier to plan for tax or other issues than correct problems after the transaction is complete.  That is why It think a plan is so critical.  Plan.  Don't React...

Second Thoughts
Common Estate Planning Mistakes -- and How to Avoid Them
 
Estate planning can be a minefield of potential missteps, some of which could have far-reaching consequences. Many of the poor choices individuals make when planning for their own future or passing assets to their families are caused by "one-size-fits-all" planning strategies or well-intended advice from family or friends. Following are some common and potentially costly mistakes along with suggestions for avoiding them.
 
Failing to plan. Whether drafting a basic will or crafting an elaborate strategy involving trusts and tax planning, an estate plan can help reduce estate taxes, save on estate administrative costs and specify how your assets are to be distributed. Today, the majority of Americans have no will. If you die without one, your estate will be divided according to the intestacy laws of your state -- not according to your wishes. This could create problems if your intended beneficiary is a minor child, a child with special needs, a favorite charity, or a combination of the above. In these cases, you need a will that details each contingency and a trust or multiple trusts to accomplish your goals.
 
Not maximizing your marital estate exemptions. Perhaps one of the most important pieces of tax legislation passed recently is referred to as the "portability" provision. This means that if one spouse dies without using up his or her federal estate tax exemption -- $5.43 million in 2015 -- the unused portion may be transferred to the surviving spouse without incurring any federal estate tax.
 
How might the portability provision work in a real life situation? Consider the following scenario involving the hypothetical $8 million estate of Jim and Helen:
 
If Jim dies in 2015, the executor of his estate can elect to use the unlimited spousal exemption and can also transfer Jim's unused $5.43 million federal estate tax exemption to Helen. If Helen dies in 2015 with $8 million in assets, her estate will have a total of $10.86 million in federal estate-tax exemptions: the $5.43 million exclusion transferred from Jim and her own $5.43 million exclusion. As a result, none of Jim and Helen's $8 million estate would be subject to federal estate tax.
 
As welcome as the portability provision may be, it still does not account for future appreciation of assets from the first spouse's estate. Nor does portability offer protection from creditors and others aiming to lay claim on an estate's assets. Traditional strategies like credit shelter trusts and bypass trusts do provide these benefits and therefore are still essential planning instruments for married couples.
 
Naming a family member as executor. Your executor is the person who will be responsible for administering your estate after death. The responsibilities of an executor are serious, and you will want someone who will take them seriously. There are many important reasons to choose a paid executor -- a bank or trust company, for instance -- along with (or instead of) a spouse or family member. A professional executor is familiar with the probate process and may actually save the family money, keeping expenses under control. This will undoubtedly be an emotional time for your loved ones, and a family member may find it difficult to focus on the details involved with settling an estate. In addition, when you name a family member, especially a beneficiary as executor, you introduce the potential for conflict of interest. The larger the estate, the more likely those conflicts become.
 
Relying on advice from family or friends. Would you go to a friend or relative for surgery or to fix your car if he or she was not a skilled surgeon or auto mechanic? Why would you take their advice about estate planning issues if they are not professional planners? When seeking a professional, look for a specialist -- someone who knows trusts, estate tax law, and probate issues. A specialist will have more experience and skill in his/her chosen area -- and that will translate into higher quality services provided in the most cost effective manner.
 
No set of rules or advice can apply in all cases, but a sure way to avoid these and other problems is to rely on a trusted team of tax and legal professionals led by your financial advisor.
 
This communication is not intended to be tax and/or legal advice and should not be treated as such. Each individual's situation is different. You should contact your tax/legal professional to discuss your personal situation.
 
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Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
 
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Around the Horn
Curt's Quick Comment
Got the itch to Put Gold in Your IRA?  Before you do, realize that you can't keep the gold at home in a safe or own gold that would be considered a collectable (some coins) inside an IRA.  Break either of these rules and the IRA will be disqualified.
A Counter-Balance to the Wall Street Spin Machine
U.S. stock indexes dropped sharply on a recent Friday, after retailers reported disappointing earnings, setting off jitters among traders who feared the weakness could portend a weak holiday shopping season. Associated Press said it was the second-worst weekly loss of the year, and it broke a streak of six consecutive weeks of gains. Energy and commodities companies contributed to the poor performance, as oil prices continued their slide. Read More...
Why You Might Harvest Gains Now
Here's an unconventional approach for investors who want to minimize taxes on investment profits. Instead of focusing on harvesting losses at the end of the year, you might consider realizing gains now by selling some of your winning positions. You could leave the losers in your portfolio to use next year or later.  Read More Here...
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
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