Monthly Archives: August 2011

Another Housing Development In Las Vegas. Really?

Being “ground zero” in the real estate crash, a new 7,000 residential development with a business park has been planned. In addition, this new development will take place near Red Rock Canyon – which is one of the only outdoor recreation areas near the Las Vegas metro area. The Climbing Narc blog states:

Other than the fact that this development seems illogical given the current status of the Vegas economy, it would have a direct impact on the outdoor experience of any and all users of Red Rock.

SaveRedRock.com claims:

The plan does not honor the land use and zoning plans for the area. Nor does the plan honor the local, state and national commitments that led to the creation of the Red Rock Canyon National Conservation Area, an area near and dear to Las Vegas that has become world renown for it’s hiking, rock climbing, cycling, nature walks, photography, and natural tourist draw.

This concept plan also defies reason and economics, asks commissioners to jump the Las Vegas infrastructure five miles from what is readily available, adds 7,000 more homes in Southern Nevada when 20,000 homes sit vacant, proposes major competition to our local university system, and adds 20,000 or more people in an area of drought.

The decision to allow this is a poor one – both from a business standpoint and an environmental one. The homes that will be built will be of the more expensive variety. This comes at a time in which expensive homes are taking up an increasingly larger chunk of foreclosures.

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Ways in Which the IRS Examines the Differences Between a Hobby and a Business for Income Tax

A popular cliche states that a small business is “only a hobby before it is making real money”. Or, at least until it breaks even. For income tax purposes, the IRS is very concerned with whether your enterprise is a spare time activity. The reason for this is basic. The IRS doesn’t want to discover individuals taking tax deductible losses each year regarding an operation that resembles a tax shelter. If you have a business which continually has a loss of profits plus it falls into a niche in which the IRS has considered to be a traditional hobby, you should be very cautious.

To begin with, the business should be opened with your intent of generating positive income. Furthermore, it’s essential to be able to show that you have managed this opportunity like a business venture. This requires being organized by preserving records data, separating bank accounts from personal use, and creating a valid plan to make a profit. The Internal Revenue Service will be looking at other things including additional types of earnings and whether or not you handled your business as if it were a regular, full-time profession. Should you have a deductible loss, you’ll need to be able to demonstrate that you put in the actual time and effort to do everything possible to make a profit.

In addition, if you can show that your company has been profitable in past years, the IRS will likely be less strict with you. Historic profits are valid evidence that the venture idea was logical and that your net losses are reasonable for tax reasons.

Another thing that the Internal Revenue Service will likely ask about is which areas have you engaged in business prior to this venture. For example, let’s pretend you began an internet business in Silicon Valley and made $50 million when you sold this company. Then you make a decision to go into semi-retirement mode and buy a big vineyard in the same region. Realizing that it’s difficult to generate income from the wine business, you incur negative earnings for 3 years in a row. In such cases, the IRS may identify that you previously enjoyed some other source where you received your money. Furthermore, you had no previous experience in the wine sector. Since you are semi-retired, you are not actively employed in the vineyard. On top of that, you’ve got another individual managing the vineyard.

Buying a vineyard could have been a lifelong dream you had. This is also a business whereby other people in equivalent cases have gotten into. The IRS can take this into consideration. This market consists of a large amount of vineyard owners which have not been reliant on the cash flow with this business. Hence, the IRS will identify that your particular vineyard is a hobby.

Using this example, the IRS will likely evaluate the economic track record of the business. If a 5-year duration passes by and you make a profit in 3 of those years, the IRS will likely approve a business loss. The reason is that the winery was profitable most of the time within the past five years. Many times, there is a thin line between hobby and business losses. Whenever you realize you are in a predicament that is questionable, talk to a tax expert.

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Ritholtz Says Home Prices are Still Too High

“The data suggests home prices will continue to drift lower for a couple of years – maybe just go sideways for a decade.”

Video Link:

The federal government is looking to rent foreclosed homes that are owned by Fannie Mae and Freddie Mac. This is completely absurd. The government, being poor allocators of capital and poor investors, thinks it would be better off renting homes rather than selling them. Are you kidding?

Investors are buying most of the foreclosed homes anyway, especially in the most distressed markets. Investors, being much more savvy financially then the federal government, will buy and rent them anyway. If the government engaged in the’ buy, rent, sell business’, my guess is that it would be so inefficient that it would create another money pit for taxpayers.

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Why the Government was Responsible for the Housing Problems

Efficient Market Hypotheses (EMH) – the notion in which asset prices always resemble an sense of balance was demonstrated to be inaccurate in real estate markets during the bubble period. Property costs traditionally had been a reflection of the region’s economic climate. When the economy was doing well, prices would certainly climb until additional residences were built. Afterward, prices would reach a plateau as supply would match the demand. Declining prices, people used to think, were very rare because whenever inventory went up too fast, then developing would simply stop and developers could possibly go out of business. One other popular delusion had been that if anyone paid out too much for a home, it could not get past the appraisal procedure; thereby resulting in not being able to qualify for a loan. The offer would basically fall through or even be renegotiated.

Long periods of rising price trends are emotionally self-reinforcing. “Real estate prices always goes up” became the prevailing bias and resulted in the real estate bubble arriving at an extreme. The more prevalent the bias, the more the speculative funds that the bias draws in.

Crowd psychology is often incredibly crucial with regards to what ultimately transpires in a real estate market. George Soros believes that markets are always biased in one direction or another and markets may effect the incidents they anticipate. This generally leads to a temporary illusion that investing arenas are generally accurate. The truth is, the market merely becomes more unstable.

Precisely what does this have to do with government regulations? A lot. Initially, governments will do practically anything to defend the present model during the boom portion of the economic cycle. Low lending standards are a typical symptom of an over-heating financial sector. Furthermore, financial institutions were allowable by law to be greatly leveraged. Leveraging can result in greater financial gain, but the reverse is definitely true on the downside. When leveraged at a ratio of 40 to 1, a relatively minimal drop in actual value is, actually, all it takes for a portfolio to become worthless.

At the peak of the bubble, politicians had been quick to publicize the prosperity of record levels of ownership. In reality, the situation was such that lots of individuals bought houses which they could not manage to pay for. The housing mania also brought about a great wealth deception, causing a negative personal savings rate. Folks felt financially safe due to the large amount of equity they were building in their properties. The fundamentals didn’t affect the bias, but the bias affected the fundamentals. A false sense of security was the main trigger that eroded the foundation in the real estate market.

The aftermath of the economic downturn in 2001 caused the Fed to bring about artificially low interest rates with the purpose of strengthening the economy. Lending money under the inflation rate results negative real interest rates. Assets that have relaxed financing requirements and low interest rates doesn’t make them less expensive. In reality, cheap financing results in prices to increase. Cheap money impacts selling prices. That is why it’s really a big misconception that low interest rates are always a good thing.

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