Another Reason to Own Rental Property: 20% Tax Break

Another Reason to Own Rental Property: 20% Tax Break

Earlier this month the IRS clarified the rules on the 20 percent deduction on qualified business income from pass-through entities that include sole proprietorships to S corporations. 

The 199A deduction, commonly referred to as the qualified business income deduction, was a welcome (and vague) part of the Tax Cuts and Jobs Act Congress passed in December 2017. 

The deduction was designed for businesses owners who pay their taxes on their personal tax returns — partnerships, limited liability companies and S corporations if they earn less than $157,500, or $315,000 for a married couple. In it’s first year, however, tax professionals were left scratching their heads when it came to interpreting the code when it came to real estate activity.

The language stated real estate activity must rise to the level of a ‘trade or business’ and wasn’t clear enough for most tax preparers to act on.

This year’s proposed regulations added much needed clarification and has been welcome news to an estimated 15 million investors nationwide. To qualify for the deduction property owners, including the people they hire (think painters, contractors, etc) must spend at least 250 hours a year on the business and keep records of all activities.

The proposal further qualifies a real estate business as  “…services performed by owners, employees, and independent contractors and time spent on maintenance, repairs, collection of rent, payment of expenses, provision of services to tenants, and efforts to rent the property. Hours spent by any person with respect to the owner’s capacity as an investor, such as arranging financing, procuring property, reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, and traveling to and from the real estate are not considered to be hours of service with respect to the enterprise.” 

If you have rental properties and think you qualify, share the 199A details with your tax professional for review. 

January 26, 2019

Facebook and Alphabet No Longer Tech Stocks? Time to Check Your Portfolio

Facebook and Alphabet No Longer Tech Stocks? Time to Check Your Portfolio

Late last year, the S&P Dow Jones Indices and MSCI Inc., provider of research-based indexes and analytics, announced the Telecommunication Services Sector will be changed to Communication Services and will evolve to include companies that facilitate communication and offer information through various media.

The changes, expected to take place September 28th, 2018, will move the weighting of the sectors and could increase your existing investment risk so it’s important to understand them. Companies that were classified as Information Technology such as Alphabet (Google) and Facebook will move into this new Communication Services sector, along with Disney and Netfix. 

Before the change, Telecommunications made up just 3% of the S&P but under it’s new structure it will account for over 10%, making it the fourth largest sector after Information Technology, Financials, and Healthcare. 

How does this affect you?

Telecommunication Services – now named Communication Services will change greatly. Prior to the change, the 5 largest companies in the sector as of 2018 were Verizon, China Mobile Ltd, AT&T, Vodaphone Group, and Japan’s Softbank Corp. Alphabet and Facebook alone will now make up 49.9% of the total market cap for the Communication Services sector. 

The Information Technology sector will feel the loss of Alphabet and Facebook as Apple, Inc’s percentage of the total market cap will move from 15% to 20%. Amazon, which falls under Consumer Discretionary in the Communications Services sector will now account for 35% of Consumer Discretionary up from 27%.

The takeaway for us here is to pull up our investments including our 401k’s and evaluate how these changes might affect our investment strategies and certainly our risk tolerances, and rebalance where necessary. For example, if you are invested in any Telecommunication ETFs such as Vanguard’s Telecommunication Services ETF you will want to consider how  these changes could possibly add additional risk to your investments. We learned this year that just one negative news cycle about customer data and privacy can cause a 20% drop in stock price. If you were invested in a telecommunications ETF to avoid volatility, now is the time to pull up your investments and make changes that fit with your risk tolerance. 


‘Square’ Up and Ride These Double-Digit Gains

‘Square’ Up and Ride These Double-Digit Gains

Chances are you use a Square product regularly, whether it is paying for your cup of coffee, craft beer, haircut, or use one in your own business. This financial technology company has grown rapidly along with mobile device sales over the last eight years and the stock (NYSE: SQ) is up 180% in just the last 12 months. We have enjoyed 56% of this gain here and with strong expecations and new products hitting the market, we can only expect more growth ahead.

Square Register

The first Square Point-of-Sale device, and it’s largest to date, has two displays one for the seller and one for the customer. Square CFO Sarah Friar notes that Square Register is it’s the priciest POS device thus far, but customers are loving the display and it’s attracting larger retailers.

Square  For Restaurants


Square has indeed came a long way from it’s single product beginning in 2010 with Square Reader, which accepted credit card payments by connecting to a mobile device’s 3.5 mm audio jack. Another new product from Square this year is taking on the restaurant Point-of -Sale competition in a fierce way. Beyond payments, to inventory, menus, table map, and full on marketing, Square Restaurant is a complete out of the box solution.

Setting up the system is a very ‘user-friendly process’ says Square CEO Jack Dorsey, and says that 60% of new Square for Restaurants customers are able to easily set up their own system. “That includes their table map, all the menus, basically all the operations that they need to focus on to run the restaurant … the ability for a restaurant to take that on and self-onboard and do all their menus, do all their table layouts with our software is pretty awesome because it creates efficiencies.”


Based on the first eight years of business this innovative fin tech has a very strong future. Square is expanding it’s hardware line to attract more verticals and rapidly growing it’s software and services business including employee management, payroll, appointments, and customer solutions to name just a few. Expect much more to come from Square.

Images: Square

How to Ride the ‘Melt-Up’

How to Ride the ‘Melt-Up’

It’s starting to feel like 1999 again.

Not in the ‘Party like it’s…’ kind of way, but in the ‘stock bubble’ kind of way. It’s called a Melt-Up, and it happens at the end of the bull market when everyone on your block and their yellow dog is suddenly buying or talking about stocks. It’s the herding in of otherwise wouldn’t be investors who are afraid they are going to miss out on the market’s rapid rise. It’s what happens right before the lights go out on the fun and there’s a market Melt-Down, crash, or major correction. 

Let’s look at how we know we are actually in a Melt-Up.

  1. There’s a kind of stock mania everywhere you go. References to the stock market in unfamiliar publications and media. Talk of the bull market by those around you at the store, at work. Remember the last high of Bitcoin when suddenly everyone was talking about Bitcoin when six months earlier they didn’t even know what it was? Like that.
  2. High investor sentiment. Consistently above 50% is how the professionals gauge it. This week we are ending at around 30%. Of course it fluctuates all the time, but this could indicate there is still room to run in this market.
  3. There is a high inflow of both new money into the market, especially ETFs, and a flood of new online trading accounts set up.
  4. There is usually a strong focus on one area of the market. Like the Bitcoin example earlier this year, or the most famous of all, the tech stocks (aka the ‘Dot Com Bubble’) that began it’s burst in March of 2000. Before the burst, however, there was indeed a Melt-Up. The NASDAQ, which usually travels in the general path of the Dow Jones and is the market that trades many of the tech stocks, suddenly diverged and drastically outperformed the Dow.

This is the Dow Jones compared with the NASDAQ July, 1999 to March, 2000.


This is where we are today from November, 2017.


See the similarities as the NASDAQ is beginning to launch into orbit away from the Dow? It certainly feels like the mid-stage of a Melt-Up.

So how do we proceed? One, with caution and ownership of those that are driving the NASDAQ higher: strong tech companies.

Two, remember to not be greedy and maintain smart position sizes relative to your portfolio. This could be the final push of this bull market and if history has taught us anything … one with incredible gains.

Shopping for Income? This Stock is On Sale

Shopping for Income? This Stock is On Sale

In good times and bad, people love a bargain. Today we have an opportunity to own a company who provides bargains at a bargain –with the possibly of 40% growth in stock price while earning a dividend of 6.2% along the way.

Understand, I’m not someone who loves shopping, and evidence of what some call the retail armageddon is clear. Thousands of stores are closing every year, bankruptcies for retailers are at an all time high, and ecommerce hit it’s crescendo last holiday. I never would have believed that I would be recommending a stock based on brick and mortar retail, but amidst the rubble and destruction there are winners, and Tanger Factory Outlet Centers is one worthy of our consideration.

eCommerce hasn’t put a dent in this outlet powerhouse who’s been in business since 1981. Outlet stores in general have doubled their sales over the past 5 years to $50 billion, and Tanger, who has properties in both the US and Canada continues to grow as well through thoughtful planning and execution. With high profile tenants such as Nike and Polo Ralph Lauren, their occupancy rates have not dipped below 96% since the company went public 1993.

CEO Steven B. Tanger, in their Annual Report, proudly reported their 14th consecutive year of net operating income growth and their 24th year of consecutive dividend increases.

Tanger is still family owned, and the business is organized as a real estate investment trust (REIT). If you’re familiar with REIT’s you know this model doesn’t pay corporate income taxes, but is required to return most of it’s cash flow back to investors via distributions or dividends. Their annual payout per share has only grown since 1993 as well, from $0.1338 to it’s current day $1.3525. At it’s current price, this is a 6.2% yield – not too shabby.

Our opportunity here is that Tanger’s share price has temporarily fallen because Wall Street has mistakenly lumped it in the same basket as retail stocks most of which I wouldn’t touch with any length of pole. Today we can load up on this bargain below $25 (it’s at $23 as of this writing) and wait for it to return to it’s 2017 high of over $37 per share.

So what would investing in 108 shares today look like in 5 years’ time?

Investment cost: $2,484; 108 shares @ $23/share, 6.2% dividend yield reinvested for 5 years

















You would end up with $3,403.66 for a total gain of 37.02%. Since this is over 5 years, that would make your average annual gain 7.40% and this is doesn’t even factor in any rise in share price, which could easily be in the double digits. 

ACTION: Buy shares of Tanger Factory Outlet Centers (SKT) up to $24.50

Tax Hacks: How to Make Your Capital Gain Taxes Easier to Swallow

Tax Hacks: How to Make Your Capital Gain Taxes Easier to Swallow

Selling your real estate, stocks, and securities for a capital gain is a wonderful thing, after all making a profit is the whole point. But before Uncle Same comes to take his cut you may want to use a little strategy to avoid paying more tax than you want to. Yes, you can lower you tax bill, but it will require knowing how to better time purchases, sales, and understand tax rules.

Long-term and Short-term capital gains

When you sell an investment such as real estate or stock for a profit, it’s called a capital gain. A long-term capital gain is made on an asset you owned for at least 366 consecutive days.

Long-term capital gains are taxed at more palatable rates than short-term gains. Short-term capital gains are taxed as ordinary income, while, the IRS will reward you for holding on to your investment for a longer period of time by reducing your long term capital gain tax rate to the following:

Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
15% $38,600-$425,800 $77,200-$479,000 $51,700-$452,400 $38,600-$239,500
20% Over $425,800 Over $479,000 Over $452,400 Over $239,500

Data source: Tax Cuts and Jobs Act.

For example, if you are single and earn $50,000 annually and you sell a stock for a gain (that you’ve held for less than year) you will pay 7% less tax on that gain (22%-15%=7%)

Short-term capital gains are taxed as ordinary income, which means any income you receive from investments held for less than a year must be included in your taxable income for the year.

2018 tax brackets:

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $600,000

Data source: Joint Explanatory Statement of the Committee of Conference.

Simple Ways to Cut your Tax Bill

Sell Losing Stocks

If you have sold investments for a gain, you can offset these realized gains by selling stock that isn’t doing as well, capturing these losses to reduce your income. This can be done using a long term strategy for the stocks or funds you plan on holding long term in a process called ‘harvesting’. It works like this: You plan on holding XYZ fund/stock for a very long time, however, you also want to reduce you tax bill this year. Sell (aka Harvest) and take the loss for your reportable income this year, and repurchase it later — as long as it hasn’t shot up beyond you buy-up-to price. The only stipulation here is you cannot repurchase it within 30 days due to a regulation called the wash-sale rule.


If your income fluctuates year to year, save the sale of any investments for a lower income year. Your capital gains tax is determined by income levels, so delaying can make sense in some situations.


Take any gain from a security you’ve held for more than a year and donate it. Receiving a charitable deduction for the market value and avoid having to pay capital gains. Most brokers such as Schwab and Fidelity have accounts available to help you do this.