Monthly Archives: August 2018

Help the Community, Save Taxes

opp zone

August 27, 2018

Opportunity Zones were established in the US last year under the Tax Cuts and Jobs Act.  An Opportunity Zone is a geographic area where government is seeking to stimulate private capital investment through tax incentives.  This new community development program encourages long-term investments in low-income urban and rural communities nationwide.  All 50 state governors have already nominated areas of their respective states for inclusion.  The objective of the federal legislation is to encourage capital investment that will bring new jobs and economic vitality to these areas.

The investment opportunities in the Opportunity Zones will be through qualified “Opportunity Funds”, which are investment vehicles organized as corporations or partnerships with the specific purpose of investing in Opportunity Zone assets.  These investment vehicles must hold at least 90 percent of their assets in qualifying “property” such as an operating business, equipment or real estate.  To confirm an investment in a qualified Opportunity Fund, an eligible taxpayer self certifies by completing an IRS form which is submitted with their federal tax return.

There are several specific tax incentives for investors.  First, an investor can defer a capital gain if they roll the proceeds within 180-days into a Qualified Opportunity Fund.  Investors can defer these gains until the earlier of the date the Opportunity Zone asset is sold or exchanged, or December 31, 2026 which is over 8 years.  Not only is there a deferral, but in certain cases 10-15% of the original gain can be waived provided the Opportunity Fund is held for more than 5-7 years.  Most importantly, if the Opportunity Zone asset is held for at least 10 years, the investor can increase the Opportunity Fund cost basis to fair market value (no gain) on the date of sale or exchange and only pay 85% of the original capital gain (first gain) that was deferred prior to rolling the proceeds into the Opportunity Zone asset.  As you can see, this community development program could be very beneficial not only for the Opportunity Zone but for the investor.

The Opportunity Zones are mostly in rural areas, but certain urban areas have also been included.  In fact, the top 10 Opportunity Zones are in Oakland, Los Angeles, San Jose, San Diego, Seattle, Portland, Phoenix, Nashville, Atlanta, and New York City.  For Atlanta, the Zones include the areas of Bankhead, Grove Park and English Avenue.

This new legislation could be a boom for all kinds of investors, provided the right opportunities present themselves.  If a significant real property gain was invested in an Opportunity Zone, and held for more than ten years, much of the earnings would be sheltered through accelerated depreciation.  Typically, this would result in a negative cost basis situation, but, in this case, the cost basis increases to fair market value at sale or exchange, and thus the capital gain is eliminated.  Knowing these Opportunity Zones will be available for the next several years, we encourage you to consider the possible opportunities, and related tax incentives, in consultation with your tax adviser.

Gary B. Martin, CFA

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Get Your House Delivered?

manufactured home

August 20, 2018

Trailer parks have long suffered a negative reputation but “manufactured homes” are becoming increasingly mainstream, and now represent 10% of new single-family home starts. The popularity of manufactured homes reflects the high cost of site-built houses. With home building becoming so expensive in some areas, many people are opting to have their houses delivered right from the factory.

Rising construction costs have been driven by an increase in the price of raw materials and commodities. For example, lumber prices are still close to all-time highs because of high demand, a severe Canadian wildfire, and the new 20% trade tariff on Canadian lumber (which accounts for 97% of US lumber imports).

Estimating the cost of a custom, site-built home is difficult because of the wide range of options. Generally, custom, site-built homes cost between $100 and $400 per square foot. Location and materials will play a major role in the price of your custom home, but the current average price in the United States is $295,000. Roughly 50% of costs come from materials, 48% come from labor, and 2% come from machines. By comparison, the average new manufactured home in the U.S. was $73,400 or slightly over $50 per square foot, according to U.S. Census Bureau data that was last updated in February.

Manufactured houses are built in factories, then assembled and are transported to the housing site via trucks and trailers. These homes cost at least 10-20% less than the cost of site-built homes and are cheaper for a multitude of reasons. The factory uses an assembly line to build these homes, so the process becomes more efficient. The home is built inside so there are no weather delays. Manufacturing is not disrupted by theft. The scale of production enables manufacturers to buy large quantities of materials at lower prices. Lastly, the property taxes on manufactured homes are also lower than on-site homes.

Homes built in factories are not only more affordable but have also become very customizable “without the old trailer-park stigma” says Jeremy Hill of Bloomberg. Options like vaulted ceilings, rainforest showers, built-in entertainment systems and electric fireplaces are very appealing, especially to young home buyers who require the latest bells and whistles. Buyers are also no longer limited to single or double wide homes. Many manufactured home builders offer two-story homes with five bedrooms. Technological advances, evolutionary designs, and a focus on quality are also driving forces behind the growth of manufactured housing.

Over the five years ending 2017 the number of manufactured home shipments has risen by 50%, according to information from the Manufactured Housing Institute. The companies benefiting from this growth include Skyline-Champion, Clayton Homes (owned by Berkshire), and Cavco Industries – the three largest players in manufactured housing who currently control over 70% of the U.S. market. It would not be surprising to see further significant growth, especially in expensive home building areas where families can save hundreds of thousands by getting their home built at a factory.

Dan Hall

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