Monday, June 21, 2010

China's Yuan Getting Stronger

It was announced over the weekend by China's central bank that it would loosen the yuan's peg to the dollar and allow it to gradually strengthen. This decision will have a mixed reaction on the market. In one end, it is expected to add buying power to its exploding middle class. This is a win for American electronics industry, which can sell more computersi and iPods to a hungry market. However, at the same time, it puts a squeeze on U.S. retailers like Walmart because Chinese imports suddenly cost more. The impact is so mixed the same company that seems a winner could be impacted negatively. For example, Apple can sell more iPods and iPads to China, where customers will now be able to afford more. But Apple also depends on China to manufacture many of its products, so its production costs could rise.

China's decision to allow the yuan to rise is mainly political: China was seeking to defuse complaints that it deliberately keeps its exports artificially cheap to strengthen its hand against inflation and keep its economy humming.

Winners
Big machines: From construction machinery to cars to planes, U.S. manufacturers should benefit. Automakers could earn more profit from the cars they make and sell in China.

Coal producers: Several U.S. coal companies could benefit. How much is uncertain. A stronger yuan would make that coal cheaper for China to import. China is the largest coal consumer in the world, though Australia dominates the Chinese market.

Poor countries: As pay rises in China, the production of lower-value items such as toys and textiles has already begun to shift to countries like Indonesia, Pakistan and Vietnam, economists said. A stronger yuan could accelerate that trend.

Fast food restaurants: A rising yuan should help Yum Brands Inc., which owns Taco Bell, KFC and Pizza Hut. About 10 percent of its nearly 35,000 restaurants are in China. McDonald's Corp., which has about 1,110 restaurants in China's mainland, should also benefit.

Losers
Retailers: Eight of the 10 largest importers from China are retail companies, according to Panjiva, an international trade data service. They include well-known giants like Wal-Mart Stores Inc., Lowe's Companies Inc., J.C. Penney Co. Inc. and Macy's Inc. A more expensive yuan should make Chinese-made goods sold in U.S. stores, particularly clothes, more expensive, analysts say. But Walmart and other merchants with stores in China would also benefit because their goods would be more competitively priced there.

Consumer electronics: Components for cell phones, personal computers and other consumer electronics are largely manufactured in China. So as the yuan rises in value, those parts get more expensive.

Sunday, June 20, 2010

Saturday, June 12, 2010

Lawmakers Working on Extending Homebuyer Credit

Homebuyers may get an extra three months to finish qualifying for federal tax incentives that boosted home sales this spring. Senate Majority Leader Harry Reid, D-Nev., wants to give buyers until Sept. 30 to complete their purchases and qualify for tax credits of up to $8,000.

The proposal is intended to for those who already have signed contracts to finish at the later date. Joining Sen. Reid, were Sen. Johnny Isakson, R-Ga., and Christopher Dodd, D-Conn. There is preassure from the constituents of Se. Reid who faces the highest foreclure rate in the nation. Also, the National Association of Realtors has been pushing hard in Congress for the extension.

Tax Changes Affecting Real Estate Investing

On Friday, May 28, 2010, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act of 2010 (the “Act”). It is not certain when the Senate will consider the legislation. One of the changes with this new act, is the ordinary income treatment for carried interest. The proposed legislation would treat part or all of a partnership’s carried interest as regular income, as opposed to a capital gain. The legislation is primarily aimed at private equity funds and venture capitalists, but would have a huge knock-on effect on commercial real estate since many property investments are structured as LPs and LLCs. Carried interest is the portion of the venture profits paid to general partners of such structures after the property has been sold, separate from the fees the general partners earn for managing the property.

The measure is now in the Senate, where it is expected to be modified. This modification decreases the amount of carried interest that is recharacterized as ordinary income from 75 percent to 65 percent and increases the amount treated as capital gains from 25 percent to 35 percent in taxable years beginning after December 12, 2012. The change further decreases the amount of carried interest that is recharacterized as ordinary income to 55 percent and increases the amount treated as capital gains to 45 percent for gain or loss attributable to the sale of an asset which is held for 7 or more years.

Please keep in mind that eventhough most of the focus has been geared to investment funds, it impact goes beyond that. For example, it is expected to dramatically change the taxation of developers in the typical real estate operating partnership. As currently drafted, the rules may curtail the ability of real estate developers to use tax depreciation and other losses from the property and would accelerate tax on certain transfers of the Carried
Interest.

The Act is intended to be effective immediately after enactment, with income for the year of enactment allocated between the pre- and post-enactment portions of the tax year.

Monday, June 7, 2010