patrick.net

Also, just from an upside point of view, USO may not perform better than XLE. XLE's performance pretty much tracks that of the oil price. USO is constructed through options and derivatives contracts to mirror the price of a barrel of crude, and as we all fear, anything that doesn't hold the physical oil itself and is a pure paper claim based on complicated financial engineering techniques may face a higher risk than a straight paper claim on the companies that hold and explore oil.

The same principle actually applies to DBC as well. The only reason I am holding it because I want to get exposed to agricultural commodities and currently this is the only way to do so, only game in town.

*not an investment advice*

Owneroc,

Thanks for the info.

You are right about DBC. That's the only way to get exposure to commodities like wheat etc. I just sold my DBC today. I got a small profit in a month as I only had a small position. Now I don't like it's basket nature. It's composition is overweigthed for gold and oil. Other commodities won't have much effect. Why not just trade in GLD and USO ?

What I meant about double taxation ...

When you own a fund/stock/ETF that pays foreign tax, you can claim credit for it. I own some, and my broker reports foreign tax paid on form 1099. Depending upon your unique case, you may or may not get full credit for it.

There is nothing much you can do about this, and should just be considered cost of doing business. But something to keep in mind.

Slightly off topic, but not too far. Here's a CEB article about avoiding capital gains tax on your own personal real estate investment:

http://ceb.com/newsletter/rptax.htm

Converting Personal Residence to a Rental — The Super Tax Break
Mary Kay Kennedy, Vice President and Counsel, First American Exchange Company, LLC, San Jose

***

Did you know that you can avoid paying tax on more than $500,000 of gain on your home? Many people are aware of the advantages of Internal Revenue Code Section 121, which allows a married couple to exclude up to $500,000 of gain on the sale of their personal residence ($250,000 for a single taxpayer). Although this amount of gain is generous in most areas of the country, in California and a few other states, many people expect to receive more than $500,000 of profit when they sell their home.

What is much less understood in the real estate world is that a homeowner can avoid paying all of the tax on their home by converting it to a rental. Once the home is converted to a rental, the owners can sell it and use both the Section 121 exclusion of gain and the Section 1031 deferral of gain provisions to exclude some of the gain and defer paying tax on the rest.

Case Study — Converting Property to a Rental
Let’s go through an example to better understand how this works. John and Mary Smith have lived in their home for twenty years. They acquired it for $100,000 and it is now worth $1 million, so if sold, they would have $900,000 of gain. If they sell it without converting it to a rental, they would be able to exclude $500,000 of gain but would have to pay state and federal capital gains tax on the additional $400,000 of gain.

John and Mary Smith decide, however, to convert their property to a rental. After renting it for a year or two, they sell it for $1 million. Since they used the home as their personal residence at least two of the past five years, they are able to exclude $500,000 of the gain. They can then use the remaining funds to acquire replacement investment property and defer paying tax on the balance of the gain.

***

Revenue Procedure 2005-14
Of course, investors need to comply with all of the rules of Sections 121 and 1031 in order for this to work. The IRS recently published Revenue Procedure 2005-14, which explains how the two statutes may be combined for one property. This includes guidance not only on the situation mentioned above, but also on a sale of personal residence with a home office or separate guest house that is rented.

Industry Response
To take advantage of the $500,000 exclusion ($250,000 for single taxpayers), you must own and have lived in your home for at least two of the past five years;

Section 121 doesn’t allow you to exclude any gain attributable to depreciation deductions taken since May 6, 1997, but that gain can be deferred under Section 1031; and

To take advantage of the deferral of gain under Section 1031, all or a part of the property you sell and the property you acquire must, at the time you sell and acquire them, be used in connection with your business or held for investment.

AND FARKLEY SAYS, I OFFER THIS ARTICLE FOR ACADEMIC PURPOSES ONLY, NOT AS INVESTMENT OR LEGAL ADVICE. I BARELY UNDERSTAND IT MYSELF AND CAN'T VOUCH FOR IT PERSONALLY

Maybe this topic has been addressed, but can anyone offer real, practical strategies to prepare for a true hard landing? You know, place seat backs and tray tables in the full upright position? Place head between knees. Kiss your butt goodbye?

Once upon a time, Max said,

Save your money. Save it up, and also, save.
When the easy credit goes away, cash will be king.
So if you haven’t started, start now.
You won’t regret it.

Those of us who advocate an especially landing -- i.e. a crash -- have been warned to watch what we wish for. I'm not sure but I think it's Randy who's cautioned that hard deflationary cycles have unimaginable consequences. Soup kitchens are just the start. But my grandpa did OK in the '30's because he had a job. Not a great job, but we never lost the old homestead in Idaho. Anyone who had any job at all was OK.

Are there real strategies to prepare for a rough descent? Saving, investing, budgeting, employment decisions? If the debt bomb really does explode what will ground zero look like and how does a reasonable person prepare for that possible outcome?

Don't get me wrong, I don't advocate this or even really expect it, but as the boy scouts say, be prepared.

-those of us who advocate an especially landing

+those of us who advocate an especially hard landing

P.S.

If anyone is interested in my topic, may I suggest, only real ideas, not wacko militia bullshit.

Garth,

I was fortunate to be able to sit in with a CPA as this was explained to a client. Their situation was a little more complex b/c they were self employed and claimed their home as a business address for a few years but a very similar circumstance played out for them. What is even better is that we were able to fund a DBP (Defined Benefit Plan) with liquid investments. That in and of itself isn't all that remarkable until you dig a little deeper. They ran a cleaning service that barely paid the bills, in short they were house rich and money poor. Implementing the strategy you describe they were able to exclude ALL of their homes from cap gains in time and we are still winding down the process. This older couple should be the "poster children" for this loophole!

NOT LEGAL ADVICE

Garth,
I've been thinking about both possible outcomes- whether it be a hard landing or soft one. To me, neither seems like a terribly terrific outcome, but I personally am in the upright position, as you say- praying for a hard crash. Not just one that exists due to housing, but all along the board throughout the economic spectrum. I say this because unfortunatly in the BA, it seems like the crash isn't happening. Instead the prices are simply sticking stubbornly high. Homes in my neighborhood have been for sale sometimes for over 6 months or more. Still they sit with the same price on the sign. Some just got taken down period and are being turned into rentals.
It seems that where the richest people live there naturally is less dramatic changes occuring. I just happen to live where all the Lawyers-executives-ceos-etc-ect happen to reside, and these people just make too much damned money to be hurt as badly as devalued housing. Of course I could be wrong and perhaps some of these people are just stuipid rich people who can't control their finanances.
I'll admit I'm a teetering on the fence as we speak. I was banking on a crash here, because truthfully, me and my wife make 90k together,and the only way in hell we'll be able to afford is if an economic calamity not seen in decades grips the BA and forces a shakedown.Basically, the prices would HAVE to come down 30% or more. If it doesn't, then I guess I'll have to admit defeat and move to another state like the rest of the folks my age. For those that stay, I guess they'll have to make Law or medical school a requirement for their kids. Maybe this will be the new high school diploma standard for the area.
As far as directly answering your question- a I ready for a terrfic depression-like crash? I think I would be just fine. I'm about the cheapest bastard there is. I already live like there's a depression going on because every penny I make goes into savings for the ellusive house we're trying to buy someday. Come a depression, we'll be set.

I just filled up my truck this morning. $3.08 a gallon! I am VERY glad that back when I bought this truck in 1996, I opted for the compact, 30MPG 4 banger model. It still costs $30 to fill er' up. I cannot even begin to imagine what the guy next to me in a Ford F250 was having to shell out.
If gas goes much higher, this is going to start having some serious consequences in middle America

Garth,

Non-wacko doomsday MRI ideas.

disclaimer: may still be considered wacko by others, also not to be construed as advice for anyone, do your homework...and don't blame me when your radish crop fails.

Nomadtoons2 actually have a good start. He knows how to repair mechanical things. I can see that as a very useful skill when American purchasing power does down.

If you have a sunny spot in your yard, consider building a vegetable garden.

Rest of the yard, consider paving lawn over with rocks or something, to save on water.

Learn to cook with rice and beans. They help 3rd world peasants survive on virtually nothing at all.

As always, keep your overhead costs low and flexible. In case of real trouble, it's almost always better to run than to stay.

Owneroccupier,

I'm not sure I follow totally on the whole ETF tax issue. Yeah, dividends are dividends and if they are paid out to you well then we have a taxable event. However; your cost basis is YOUR cost basis. If you bought an ETF at $10 a share and at the end of the year it was trading at $15 the only way you should have a taxable event is if you sold on or before December 31st. Randy, Peter P?

newsfreak,

The Okies ran west, the Mexicans ran northward, the Germans ran west and the Jews ran into Switzerland. In case of anything short of global nuclear war, there's usually somewhere slightly better to run to.

disclaimer: I could be paranoid, though I don't stock MRIs, because they're gross

DinOR,

Tax deferrals are great for ongoing businesses and in high inflation environments, and they're kind of nice for estate planning. But for the average homeowner, what's so bad about locking up $500K of appreciation to today's high prices and paying LTCG on the rest?

Newsfreak,

Your family's approach was certainly not wacko, they did what they had to do and survived. So they did it right.

I've heard pilots say that a good landing is one you walk away from.

As to the wacko idea, I was thinking of my facetious post about hoarding liquor and guns. I also suggested teaching your wife and kids to shoot. Afterward someone sent me a web site called "Whiskey & Gunpowder." I'm not saying that site is wacko -- I didn't read it. But that's what I'm getting at. Militia trolls need not apply.

newsfreak,

You're already doing a very smart thing by buying a wood burning heater and living in a relatively small house. This winter, folks in DC have been hit with $600 natural gas bills for 1800 sq ft homes.

I also don't think it's wacko to realize that banks could take a holiday.

I'm not a taxpert by any measure. I think DinOR is right about ETFs just being standard dividend and gain tax accounting.

What Peter P and I were talking about was derivatives tax accounting, which gets more complex, especially if you're using derivatives to offset risk (hedging).

I'm not sure what happens when an ETF uses derivatives as part of its strategy. Don't some mutual funds do this but the taxes aren't passed on to the investor, instead spread out among the fund as fees? We need a taxpert to chime in.

Garth,

Hording guns are plausible where law enforcement broke down but the system of government hasn't. But generally, it's better to run in those situations than to stay and stick it out.

Astrid,

Since I was born in Idaho, they might let me back. I love my cousins, aunts and uncles and it's God's Own beautiful there. But I'm not sure I could handle it, even as a moderate/liberal R myself. I'd bet that if Roe v. Wade ever gets reversed the ID legislature will move quickly, or even beforehand.

newsfreak,

I better clarify too, that was $600 for one month. And we had an extremely mild winter here.

It's the end of the world as we know it.

It's the end of the world as we know it.

And I feel fine.

I feel fine.

Garth,

But worst case scenario probably won't happen. :P

So I'm sticking to: living close to work, keep my fixed costs low, learn a useful trade, and defer having kids for a few years to see how it all pans out

newsfreak,

My family usually keeps the house at 50F. So my mom and dad has $150 or so gas bills. I think my parents would go even lower if not for the water pipes.

Falun gong = Scientology

newsfreak,

Chicken butchering may also be a useful skill :P

Have you considering chickens for your home? They're good with bugs and true free range ones taste much better than store bought ones.

Garth,

We love to go up to Priest Lake ID in the summer! You're so far north that it seems like it's still light at 10:00pm. On our first trip we were suprised at how nice everyone was and that the sterotypical militia type is really more hype than anything. Makes for great movie scripts though.

When I was growing up, my dad got a deal on a Vermont Casting wood stove. These are usually at least $3500, but this one was forest green, which in the early 80's was unpopular. Anyhow, it was small, but it had a complex draft, oxygen control system that allowed you to crank down the oxygen enough so the fire would barely burn all day on only 1-2 logs. Once the stove got hot, it would heat the entire downstairs. But dad cut out vents to the upstairs and installed some fans that basically pushed the warm air upstairs. We would use about 3 pickup trucks full of wood, which we got for free anyway. As a result, it didn't cost hardly anything to heat the house even when it got very cold.
Here in Alameda, I don't bother to turn on the heat, but my wife gets cold easily, which is funny since she's from PA, so I crank it on from time to time if it gets below 45 degrees. I could go on and on about penny pinching. My grandad taught me all about it, so I bet I've probably got most of you all in here beat!

Nomad,

You had more practice.

However, my grandma would have you beat. We used to have 8 watt bulbs in Shanghai. And she used to use water to wash vegetables, then cloth, then use it to flush the toilet. Back in the early 60s, my dad's family raised rabbits and chicken in their urban home, for meat. They also made noodles by hand to save on the processing charge.

astrid,

What I feel is wrong about the 500K cap gain exclusion could fill a book so I'll try to keep this brief.

1. It instantly created an uneven playing field amongst asset classes.
2. De-stabilized neighborhoods
3. Left everyone with the impression all is well with the economy
4. Created more "greater fools" than you can shake a stick at
5. Fosters an environment where innovation is not rewarded

Other than that, nothing really. It's Friday so I'm better with everything!

newsfreak,

We'll have to check that area out! I've heard a great deal about it over the years (particularly from fisherman). In so far as the stars they look like they are lower on the horizon (optical illusion?) as if you could reach out and touch them. On Priest Lake it would have been nice to have built a place there years back but they started to put up mansions right up to the lake so you can go to one of the many islands to get away from them.

DinOR,

I totally agree. Which is why I think it's better to lock it in now, because it'll be an easy target for repeal in a couple years.

newsfreak,

The last thing I want to labeled as is the "I like Capital Gains Guy". The reason I bang on this drum is that as written the original IRS ruling had it right.

We were allowed to be exempt ONE TIME as we downsize toward retirement, and it was good.

This was never intended to BE the retirement! We have people right here in town that have lived in I lost track of how many different states over the last 9 years that have built and sold mansions and pocketed tax free money ALL ALONG THE WAY! We just can't have a viable economy if all we do is go around selling mansions by the beach, the lake, the mountains to each other.

DinOR,

I'll be more extreme and say that this country's tax policy is quite horrible, in that it taxes work much more than it taxes capital. Housing deductions and exemptions are the extreme manifestation of that unfairness, where the most unproductive capital received the most advantageous tax treatment of all.

newsfreak,

I'm a huge fan of the "night sky"! It always kind of ticks me off when our neighbors in the country would have have these "beacons" on all night and ruin the night sky! They would say it's for "security" purposes. Really? If your wheel barrow is that expensive maybe you should put in the barn! We've seen things like Hale Bopp and other celestial events like the space station pass by that get "washed out" in major metro areas. Have you ever seen a satelite photo of the U.S at night?

However, the $500K exemption is pretty sweet for anyone who cashed out in a boom area. I just can't believe people can stare at $1M tax free and not make run for it, prop 13 or not.

hmm, fuzzy thinking again.

-$1M tax free
+$1M after tax

newsfreak,

Most flippers pay normal capital gain on the profits. I believe California also has a state tax on sale of non-residences.

newsfreak,

Thanks for not taking that in the wrong light! We have a couple here in town that are salvaging a home that is under 900 sq. ft! All done "period perfect". We stop by on our walks and always make sure we give kudos for the fine work they are doing. They're from CA, the husband was a telecom exec. and they just enjoy what they do. If they make a buck I'm happy for them, and you're right, there are droves of people out there giving it a bad name! They can't finish fast enough to move on to their next debacle.

newsfreak,

What you and Linda in LA does is productive. Flippers are like day traders, except with SEC to watch over them.

goober,

Where do you live? And what kind of corn do you use? I heard people use waste corn (too poor quality for feed) for corn burning stoves.

Dinor,
I totally agree. All the houses that are anywhere close to anything with natural beauty is chopped up, sold, and bouht as vacation homes, etc. I can't tell you how many times I go home and see mountain homes in North Carolina and TN that are basically never lived in except once a year for a month. The other day I was on CL and there was a guy asking if he should invest in Memphis, and he had NEVER been there! It's like people don't even care about the neighborhoods anymore, just as long as they can buy cheap and sell high. This pattern, if it continues, will assure people like myself that we'll have to live in the middle of nowhere in suburban wastelands while the areas we cold've lived in will simply be rental homes owned by investors.