Online Financial Tips

Archive for December, 2011

Depreciation is a difficult subject in the area of cost accounting for commercial real estate.

Accountants do strive to make their financial statements accurate, and so they must recognize a fundamental principle of the universe that has troubled philosophers for tens of thousands of years. As George Harrison sang years ago, “All Things Must Pass.”

There is nothing permanent in this three-dimensional world of space, time, matter and energy. Just as any Buddhist.

No building will last forever. Even the pyramids of Egypt will someday erode into dust.

Therefore, real estate property owners are allowed to deduct an expense from their gross income, called depreciation, on the theory that every year, the building is being worn down somewhat by the wear and tear of the universe. What physicists call entropy, according to The Third Law of Thermodynamics.

This depreciation expense is often calculated by dividing the total cost of the building by the number of years it’s expected to have a useful life.

If you pay one million dollars for a building, and it’s expected to last 10 years, that’s a straight-line depreciation expense of $100,000 per year.

Notice that $100,000 in cash is not actually paid out of your pocket. Depreciation simply reflects the reality that sooner or later, that building won’t be useful, and so the $1,000,000 you paid will be gone.

Although this is not practical, the ideal would be for you to pay someone $100,000 a year for ten years to build you a new, replacement building.

And when you take the depreciation expense, that is also deducted from the building’s cost basis. So after 10 years, in the above example, that building is officially worth nothing, even though it may still be in great condition in a prosperous neighborhood. If it’s well-maintained and in a good area, it can be useful for an indefinite period.

So one of the big problems is deciding what the useful life span of a commercial building is.

Of course, when we’re talking about shopping malls, we’re assuming their function is to lease space out to retail stores and restaurants, not to act as tourist attractions. So we can rule out multi-thousand year old spans such as represented by the Coliseum of Rome and the ruins of Angkor Wat — which attract tourist money even though they’ve fallen down.

Yet even when we come down the level of commonplace apartment building and shopping strip centers, we just don’t know for sure how long they’ll last. Sure, there’re castles in Europe hundreds of years old — but also stone farm houses where farming families still live.

So it’s entirely possible for a building in a good area to be bought or built, to have the depreciation expense taken on them . . . and 20 or 30 years later they’re now worth far more than you originally paid.

So, in a long-term sense, depreciation reflects something real, but it’s difficult to know just how much of an expense to take every year — without a crystal ball.

For example New York City’s Empire State Building is nearly 80 years old, but would be worth many millions if sold. The World Trade Center’s useful life ended prematurely in a way that couldn’t be predicted.

So when a Real Estate Investment Trust calculates its net income, it is required to apply Generally Accepted Accounting Principles. It will figure out its gross revenues, then subtract its operating expenses, then subtract a substantial figure representing depreciation on the buildings it owns — even though they may in fact have appreciated in value.

Let’s say XYZ REIT had gross revenues of $1,000,000 and operating expenses of $$700,000. That leaves $300,000. Then they deduct another $100,000 for depreciation. That leaves $200,000 as their net operating income.

The law requires them to pay at least 90% of this to their shareholders in the form of dividends. So they must mail out $200,000 X .90 = $180,000 to their investors.

But wait — the $100,000 depreciation expense is a “book entry” only. That is, it’s only on paper.

The $700,000 operating expenses represent cash that left the REIT’s bank account to pay for salaries, repairs, and other necessary expenditures.

Depreciation does not represent a cash payment to anybody. That $100,000 is still sitting in their bank account.

So why not pay it out to their shareholders also?

That’d be $180,000 plus $100,000 = $280,000 available for dividends for shareholders, making them even happier.

Why not, indeed? That’s what many of these companies do — pay out more in dividends that the law requires.

And receiving some dividend payments that represent depreciation should make the shareholders even happier than usual. Here’s why.

The percentage of the dividend checks they receive from real estate investment trusts that represents depreciation is not immediately taxable to shareholders.

Because it represents money that’s available only because the company took a depreciation expense, according to the IRS it’s officially a “return of capital,” not income.

A return of capital is not taxable because it’s not income. But it does reduce the cost basis of your REIT shares.

When is the only time you care about the cost basis of your shares of stock?

When you sell them.

If you don’t sell them . . . you don’t have to ever care.

Let’s say you bought 100 shares of XYZ REIT for $10 each. Your cost basis is $1000.

In the first year got a dollar back for each share, of which 25 cents per share was for depreciation. Which means your cost basis is reduced by .25 X 100 = $25.00.

So your cost basis in those 100 shares is now $975 instead of $1000.

You do have to pay taxes on the dividends, but only on $75, not the full $100.

If next year you decide to sell the shares of stock for $11 each, you’d get a total of $1100. You’d owe capital gains taxes on $125 instead of $100.

In effect, you’re now paying the taxes on that 25 cents per share depreciation in dividend checks you received the year before.

But let’s say you’re smarter than that. You don’t sell your shares of XYZ. You just keep collecting the dividends for as long as you live.

When do you pay taxes on the depreciation percentage? Never.

The implications of this aren’t widely known or understood. Even the best known REIT book writer, Ralph L. Block, doesn’t mention this in his book INVESTING IN REITS until the first Appendix.

The percentage of dividend checks that represent return of capital because of depreciation varies from company to company, and can of course vary over time. Historically, it runs 25% to 30%.

The bottom line for real estate trust shareholders is that — if they never sell their shares — their effective, net after-tax yields are significantly higher than they think. The exact amount depends on their marginal tax rate.

Let’s say that in the above example, your marginal tax rate is 35%.

You’ll owe ordinary taxes of .35 X $75 = $26.25.

You received $100, and paid $26.25 in taxes, leaving you with an after-tax net of $73.75.

Your after-tax net yield on your shares is 7.375%.

If this was an ordinary dividend-paying company in some business besides real estate, you’d have to pay taxes on the entire $100 in dividends, for a total tax owed of $35. For a net of $65. For a net after-tax yield of 6.5%.

Therefore, to figure out the true net, after-tax yield of a REIT, you must multiply its stated yield by (one plus the depreciation percentage X your marginal tax rate).

Thus, in the above example, the apparently yield is 10%. (One dollar in dividends for ten dollars worth of stock).

.10 X (1 + ((.25 X .35)) =

.10 X 1.0875 = 10.875% net after tax yield

Purists would argue that you should use the new cost basis, but my argument is that it’s irrelevant so long as you never sell the stock. In that case, your “practical” cost basis is what you originally paid for it.

So never sell it.

However, once you understand the differences between these loans and the requirements to get approved for them, you can work to solve the obstacles and apply successfully for a student loan that suits your needs and situation.
You won’t be able to get approved for any loan type as some loan requirements are either met or not. But other requirements can be overcome like credit requirements and income requirements. So, knowing exactly what you need will aid you in the process of finding the right student loan for you.

Federal Loans And Subsidized Private Loans

Though these loans have little to no credit requirements, they have additional requirements for approval that cannot be easily bypassed. In order to get approved for these loans you need to meet exceptional non credit qualifications. Federal Student loans are awarded according to the needs of the applicant. Thus, only those going through underprivileged situations can qualify for these loans. If you have a good repayment capacity, chances are that you won’t be able to qualify for these loans.

Subsidized private loans are awarded by private non profit organizations and work with the same system. There are however, some loans provided to those who can show certain merit. These loans based on merit, are awarded to those that have shown an outstanding performance on their previous studying courses and thus deserve to be financially supported on their careers’ next steps.

Regular Student Loans

As opposed to the previous loan types that have requirements that you either meet or not, private student loans have regular credit and income requirements that can be overcome with certain means. In order to do so, you first need to know what these requirements are and whether you qualify for the loans or not and why.

Private student loans have credit requirements just like any other kind of loan. A good credit score is preferred in order to get approved for an unsecured private student loan. For secured private student loans, there are bad credit options but the interest rate charged is significantly higher. Though there are some unsecured private student loans for people with bad credit, the interest rate charged is too high. In these cases you should try to analyze, whether you can get approved for a subsidized loan.

There are also income requirements that need to be met and usually have to do with the repayment capacity of the loan’s installments. The lender needs to know for sure that your income will let you afford the monthly payments of your loan even if unexpected expenses modify your budget.

Both these requirements can be lowered and lessen by offering collateral. But if that’s not possible, you can always apply for a student loan with the aid of a co-signer. A co-signer with a better credit score and a good income can be a good enough guarantee for the lender. Thus, a co-signer can aid you overcome the obstacles on your student loan approval.

There are many sleep disorders that can affect children, which could lead to them being unable to get a sufficient amount of sleep. One of the most common sleep disorders in children, particularly younger children, is night terrors. This disorder is common in children aged two to six, though it can also occur with some adults. Night terrors can often prevent the sufferer from gaining consciousness completely, resulting in them moaning or even screaming when they eventually awaken.

Another sleeping disorder that can affect children is sleep apnea. Obstructive sleep apnea is common in children and can be difficult to diagnose. Sleep apnea occurs when the sufferer takes short pauses in breathing during sleep. There are certain symptoms in children to watch out for that can help to diagnose sleep apnea, such as sleeping constantly throughout the day, behavioural problems, enlarged tonsils and difficulty sleeping. A paediatric specialist can help to diagnose sleep apnea in children and treatment can include removal of the tonsils, nasal steroids or weight loss. Obesity is one of the main causes of sleep apnea so children that exercise regularly may have less chance of developing the disorder.

Children, like adults, can also suffer from insomnia. Children that are unable to fall asleep after a certain amount of time may be suffering from insomnia, which can lead to mood swings, irritability, hyperactivity, depression and aggression. Some of the causes of insomnia in children include depression, anxiety and poor sleeping habits. It is important that younger children between 6 and 12 need much more sleep, usually up to 11 hours every night. The recommended amount of sleep for teenagers is around 9 hours. Children that stay up late playing games or watching television may experience problems with insomnia, so cutting down the amount of time they spend on these activities and getting an earlier night will help to reduce the risk of developing it.

To recognise the signs of a sleeping disorder in their child, parents must watch out for symptoms such as excessive sleeping during the daytime, snoring in sleep, inability to fall asleep straight away, learning difficulties and behavioural problems.

Putting your money to work for you means getting the best return on investments as possible. Unfortunately the best rates also bring the highest risk. If you aren’t in a position to handle a loss of your capital or if you just prefer to play things safe, savings bonds can offer a decent return with next to zero risk.

Bonds almost always outperform other savings rates such as savings accounts and money market accounts. With an average interest rate of 5%, bonds pay nearly double the interest rate of the average savings account. Purchasing these bonds is easy and offer many advantages to investors.

Where to Buy Series EE Bonds?

All government bonds, including Series EE, can be purchased at most banks and other institutions such as brokerage houses. These days, many employers, especially various levels of government, offer easy payroll deductions to purchase bonds. This is a good technique in that you never see the money and thus don’t miss it. Soon, you’ll have a sizable investment.

The U.S. Government offers bonds for direct sale through Treasury Direct, their online bond merchant. Treasury Direct allows buyers to manage their bond holdings online and even sell them electronically from one’s account.

Value of Series EE Bonds

Series EE bonds come in a variety of redemption or “face” values. The most popular are $50, $75, $100, $200, $500, $1,000, $5,000, or $10,000. An individual may purchase up to $30,000 worth of EE bonds each calendar year.

Benefits

EE bonds pay one of the highest interest rates of any government bond, almost always staying ahead of inflation. A weak economy rarely affects these bonds due to the perceived strength of the US Government. The best time to purchase any bond is when they are paying the highest interest rates. One of the advantages of bonds is that the interest rates are fixed and guaranteed.

Before investing in bonds, you must understand some things about bonds. Understanding what kind of bonds to purchase, what maturity date to purchase, is necessary before you begin to invest in them. Par value, maturity date and coupon rate. These three characteristics of a bond are the most important things to consider before purchasing a bond. Buying a bond without thoroughly studying these characteristics of a bond is the surest way to make the wrong decision.

The par value of a bond refers to the returns on your investment once the bond matures. It is the amount of money that you will receive at the maturity date. In other words, when buying a bond, it is important to note that you will be receiving your entire investment plus interest only at the maturity date. This is the bond’s par value.

Naturally, the maturity date refers to the date that your bond reaches its full value. This is the date that you receive all the returns of your investment. However, when purchasing corporate, state and local government bonds, you do not need to wait until the maturity date before you obtain the money back. Such bonds can be ‘called’ before they reach the maturity date. When the bond is called, the corporation or government issuing the bond will return your investment as well as any interest your bond has earned up to that point in time. However, federal bonds are unable to be ‘called’.

The coupon rate refers to the interest rate. This determines the amount of money that you will receive when the bond matures. This is specified as a percentage. For example, a bond with a $1000 par value with a coupon rate of 10% will earn an annual interest of $100 until the bond matures. Similarly, a bond with a $2000 par value and a coupon rate of 5% will also earn an annual interest of $100 until the bond matures. This is important to note as the different bond value means a different initial investment, even though the annual interest is the same.

However, many people still do not understand how to purchase a bond. This is because bonds are not sold by banks, but rather by the government. This makes things slightly more confusing for most people. However, there are two ways of buying a bond.

The first way, is to go to a broker or a brokerage firm. The broker is able to make the purchase from the government on your behalf. However, you are likely to be charged a commission fee. Shopping around for the lowest commission fee is prudent if you want to use a broker.

On the other hand, you can purchase bonds directly from the govnerment. This process, although more troublesome is not nearly as difficult as it used to be. With the introduction of the program called Treasury Direct, all your bonds can be purchased and held in one single account that you have easy access to. If you choose to buy directly from the government, you can avoid using a broker and thus saving on the commission.

Sleep disorders (scientific name – somnipathy) is a medical disorder that interferes with an individual’s sleep patterns. As we all know sleep is essential and lack of sleep can cause problems with an individual’s physical, mental, and emotional functions. The amount of sleep an individual requires usually depends on age. For example, infants need up to 16 hours of sleep a day; teenagers about need about 9 hours of sleep a day; and the average adult needs between 7 and 8 hours of sleep a day. Many adults do not get the amount of sleep they require and the cause may be from a sleep disorder.

Occasionally, we all suffer from a sleepless night. But persistent lack of sleep can cause problems. An individual suffering from a persistent lack of sleep needs to seek medical assistance because persistent lack of sleep can cause physical side effects such as: depression; blurred vision; weight loss or gain; heart disease; hypertension; diabetes; irritability; and memory loss just to name a few.

Some of the most common are sleep disorders are: insomnia, narcolepsy; sleep deprivation; snoring; and sleep apnea.

As mentioned above, everyone suffers from insomnia occasionally, but some individuals really suffer from insomnia and have chronic difficulty falling asleep or staying asleep. Often there is an underlying problem that is the source of insomnia such as a side effect of medicine, stress, environmental issue, or another health problem. Finding and correcting the underlying problem is the solution for ending insomnia.

Narcolepsy is a neurologic problem where an individual’s body cannot properly regulate sleep cycles. Individual’s suffering from narcolepsy fall asleep at uncontrollable times throughout the day. Narcolepsy can be treated with drugs and behavioral therapies.

Sleep deprivation is not really a disorder. Basically it is an individual not getting enough sleep. Sleep deprivation is broken down into four categories: lifestyle, health issues, side effects of medication, and clinical disorders. Lack of sleep can cause an individual to be anxious, unable to handle stress, irritable, and have impaired concentration and/or memory. Medical tests are conducted to pinpoint to cause of sleep depravation and once the cause if found – the proper treatment is applied.

Snoring is a sleep disorder that affects people at any age or sex. However, it seems to occur more frequently in men and individuals that are overweight. Occasional snoring is not a problem; however, frequent snoring can interrupt an individual’s sleep pattern to the point they cannot get quality rest. Medical tests are conducted to pinpoint the cause of snoring (such as narrowed airways or enlarged tonsils) and once the cause if found – the proper treatment is applied.

Sleep apnea is a medical problem and there are various categories of sleep apnea. Medical tests are conducted to find the cause and severity of an individual’s sleep apnea. Treatment can vary once the cause has been determined.

Treatment

Sleep disorders are not to be taken lightly – they can be the symptom of an underlying problem and it is strongly suggested that individuals suffer from sleep disorders seek medical attention.