Beating Taxes & Inflation
Beating Taxes & Inflation
More dollars that buy less means that you will go broke in the future. Most people with money have taken this investment path with part or all of their disposable income. Inflation, which has run about 6% per year for the last decade, cuts the buying power of a dollar in half every 13 years. If your tax-free interest income is less than 6%, you are losing buying power as you accumulate more dollars. If you must pay Federal & State income taxes on your interest income, you need a 10% return on your investment. Due to the 2005 jump in oil prices, The U.S. Dept of Labor projects the Consumer Price Index (CPI) to rise by 50%. This means that inflation this year will be around 9%. To breakeven on a taxed investment, you must earn 15%.
Finding breakeven or better rates of return for your investments, without increasing your risk of losing your money, is difficult. It isn't impossible. Sound investments with limited risk are available to those who take the time to look. However, no investment is totally safe. Municipal Bonds have a 0.02% failure rate. Banks fail and while the American taxpayer bailed out the banks and Savings and Loans in the 1980s, at some point the future, a bailout won't happen. You are seeking risk levels equal to those of municipal bonds and banks, but with an after tax return of at least 6%-9%. You say impossible. I say they are there for those who understand the need to find them.
A Real Estate Example
Residential Real Estate has worked well for investors in the past few years. Let's assume on January 1, 2004, you purchased a three-bedroom home for $300,000. You put down 20%. Your fixed interest and tax deductible 30-year mortgage is 5.75%. You've risked $60,000 in the down payment. At the end of 2004, residential home prices had risen by 15%. Your house is now worth $345,000. You've made a 75% tax-free return on your $60,000 risk capital investment. The $45,000 your house has appreciated is a percentage of your leveraged investment of $60,000. The $45,000 is tax-free while you own your home. Currently, you can permanently avoid taxes on the profit by doing a 1031 Exchange and investing your profit into a bigger house in a better neighborhood.
If you are the winner in the residential real estate game, who is the loser? As usual, it's the lender. They are getting a 5.75% interest rate and must pay taxes for 2004 on their profit. This means they were net losers of 5.25% on their "safe" investment. In 2005, the breakeven taxed interest rate is projected to be 15%. Your mortgage lenders will lose 9.25% on their investment. Yes, they will have more dollars in their bank account. The reality is that those dollars will buy less than they did one or two years ago.
There are risks with real estate investments. In cold markets, property is difficult to sell, so your investment can be illiquid. Market bubble's burst, as did the Commercial Real Estate Market in Texas and Oklahoma in the 1980s. And there are areas where real estate prices remain static or even fall. But, Real Estate is one of many examples of what a savvy investor can do to beat taxes and inflation.
My wife is a veterinarian. Years ago, when we were dating, she asked me about an investment offer being made to her by the local Sub-Chapter S Veterinary Emergency Hospital (VET). In essence, the VET was paying its shareholders an annual 50% of the requested risk capital investment being requested from her. They had been consistently paying the dividends for five years. I advised her to invest and she did. She has been earning 50% to 100% on this investment for over 20 years. She has to pay the State & Federal 40% tax in the dividend income. However, she still earns 30% to 60% a year. There is always a risk that people will become less attached to their pets and not rush them to the hospital at night or on a weekend. However, in my area, the trend has been toward more caring and commitment to pets, not less.
In both these examples and others, the basis to yields above the tax/inflation threshold is low risk. Historically, real estate keeps its value and pet owners have been willing to spend money on maintaining a quality life for their pets. Sadly, the easily discovered high yield investments range from excessive risk to ripoff. Angel investors and venture capital funds are betting against odds of 1 winner in every 100 losers with a return on investment about equal to my two examples above. It doesn't matter the return on investment if the investment is almost certain to be a loser.
You can beat the tax & inflation income barrier. It requires a willingness to search for low risk/high return opportunities. It requires that you investigate, investigate, then investigate more. However, they are out there for those willing to intelligently search for them.
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
You can email Mr. Cate at: Beowulfinvestments@Earthlink.net
Real Estate For Beginners Residential Property Taxes
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