As we’ve been moving through all of our quarterly meetings this year, one of the questions clients (and friends) have been asking is, “What do you think is going to happen this year?”
2023 did not go as expected. For the last 18 months, experts were warning of a recession within the next six months … which never happened.
So I keep reminding myself that nobody is a great fortune teller … if we were, the equities market would be a great ATM.
With that said, let’s look at some of the time-sensitive tax planning strategies and investment opportunities in 2024, as well as what we’re watching in Congress, so we can have a financially fantastic year regardless of what the economy does… Imagine That™!
2023 In A Nutshell
If you recall all the way back to this time last year, economists forecasted recession based on the markers. Scary times! But, instead, the plane angled in for what experts are calling a “soft landing,” i.e., recession avoided. Well, hopefully. It’s still not a sure bet.
The major points:
- Inflation came down
- Interest rates went up
- Equities recovered (at least temporarily) with a roar!
What About 2024?
Most of the news outlets seem tentatively optimistic – still hoping for that soft landing and avoiding a recession. However, many still warn of a possible economic decline. One of my favorite sources is still giving us a 50% chance of recession, as is the Chairman of JP Morgan, Jaime Dimon.
“A lot of things out there are dangerous and inflationary. Be prepared. Interest rates may go up and that might lead to recession.” – Jaime Dimon
While many economists, as well as the Fed Chair himself, said to expect to see rate reductions as early as May, a March rate reduction is unlikely. Kiplinger reports that “we think the May or June Fed meeting is a likely time for an initial interest rate cut.”
This makes real estate interesting. I’ve long encouraged clients and friends to hold investment real estate as part of a diverse portfolio. Interest rates coming down should increase residential demand. The trend last year was that older generations were holding on to their homes because purchasing a new one at much higher interest rates didn’t make good financial sense. As well, higher interest rates reduced the availability of reverse mortgages, which negatively impacted many older Americans.
Lower interest rates will provide a boon for younger borrowers to buy homes they were priced out of and should open the doors to more reverse mortgages with the tax-free income they provide.
For commercial real estate, 2024 promises to be a mixed year. Sectors like office space have more pain ahead, but the picture isn’t so dark in other sectors. In fact, some sectors will either do well or continue to do well.
What We're Talking to Clients About This Year
While many of the other indicators of the economy are important to note, such as unemployment rates, GDP, consumer spending, etc., we’re more focused on what affects our clients’ abilities to reduce, defer, and even eliminate taxes, as well as build their wealth and ability to commit to philanthropy.
"Thank You To Ag!" Tax Break
American farmers continue to feed us here at home and much of the world. That said, farming has never been more challenging than today between the weather, the cost of seeds, lack of irrigation, insects, etc., etc. Farming isn’t for wimps!
In the late 1980s, Congress put into the tax law favorable planning benefits for those in Ag that very few other practitioners seem aware of.
We call what Congress has done to benefit the Ag industry, “Thank you to Ag!” It lets farmers (and ranchers, vintners, timberlands, and the like) defer capital gains taxes on the sale of their land and/or production for 30 years.
Read more here on the TY2Ag Tax Break.
Alternatively, even if you aren’t selling a farm but are appreciated assets or non-Ag real estate, you can still sell and defer taxes for up to 40 years! Read more here.
"Interest-Free Loan from the IRS" to Buy Income Producing Real Estate
Earlier this month, we recorded a webinar with our good friends Sly Pusiri and Jeff Feinstein. It is about the special opportunity put into the tax laws in 2017 that defers taxes on the sale of a business or other appreciated assets (even the sale of crypto!) And, thanks to pending bi-partisan sponsorship by both parties in Congress, it stands to have even more favorable tax treatment!
The idea is that the Fed wants investors to invest in making our communities better – more affordable housing near schools, getting middle-income families like teachers, police, first responders, social workers, nurses, etc, into areas where they want to raise their families.
Congress allows us to roll over taxable gains from selling appreciated assets into these income-producing real estate vehicles. You can keep the basis in your pocket and move only the gains from your sale into the new asset.
In short, you get to delay paying the capital gains on the sale until April 15, 2027. And, with the new legislation, it is proposed that the dates for paying tax on your original sale will be extended to April 15, 2029!
And, not only that, but there will be a mechanism to release 40% of your investment back in a tax-free distribution to pay your taxes on the original sale. And, if it wasn’t compelling enough, they proposed reducing taxes on the gain by 10%.
One last biggie … when you leave your money in the investment of income-producing real estate for ten years, 100% of the gains on the real estate in the fund will be NON-taxable to you, the investor.
If you’re curious, give us a call to schedule a complementary 20-minute consultation.
Estate Taxes Exemption Increase Sunset
The fantastic reduction in estate taxes through increased estate tax exemption is scheduled to sunset on December 31, 2025. Congress might extend it, but it’s not something I’d bet money on, especially not to the tune of $15 million dollars for a married couple (or half that for individuals.)
In 2024, the Federal Estate Tax exemption for an individual is $13,610,000. A couple gets a $27,220,000 exemption.
On January 1, 2026, economists’ best guess of what it will revert to is $6,080,000 for individuals and 12,160,000 for couples. That’s a $15,060,000 difference for a couple. And, let’s see, 40% of $15,060,000 comes out to a $6,024,000 bonus to Uncle Sam … which would be less painful if your heirs got a thank-you card.
There’s still time to capture this tax planning benefit, but having these more specialized estate trusts in place this year will take one of the big weights off the to-do list. (A side note from our attorney friends. If you want to hire the best attorneys to help, they’re filling up their calendars already! Best to get the ball rolling by March or April of this year at the latest to get the new documents done and signed before year’s end.)
Read more here on ways to make good use of the increased estate tax exemption while it lasts.
When to Re-Enter the Stock Market?
There have been a lot of tough (and, at times, animated) conversations this year already about how to allocate investments. Buy equities? Bonds? Annuities? Real estate? Sit at home with your hands over your head and money under the mattress?
The primary platform we use for our more sophisticated clients has rigorously tested algorithms honed over 13 recessions to provide “counsel,” mathematically speaking, on when to eject from the equity markets (and bond) and when to reenter the market to still make a profit before the equities (or bonds) get overvalued.
These rules take the emotion out of investing. Emotional investing is precisely why the average retail investor only earned a 3.66% return on their equity investments over the last 30 years when doing this by themselves. (Yikes, that’s lower than inflation was last year. You can see why these rules are important.)
No one investment strategy or platform gets it right 100% of the time … or even over 50%. But, having a system that is “right” more often than it is underperforming takes a great deal of angst out of sitting on the sidelines, wondering when to re-enter the equity or bond markets.
Bringing Home the Bacon
Bottom line, according to the Wall Street Journal (and the American Economic Association, to name several sources) the Federal Reserve has helped the US economy avoid a recession only once over the last 60 years. That said, it looks very likely that they will stick the hoped-for “soft landing.”
We received some really lovely emails from last month’s letter and hope you find this one equally helpful in preparing your assets no matter what 2024+ brings. Making money no matter what the economic cycle … Imagine That™!
Imagine That!™ is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.
R. J. Kelly, Wealth Legacy Group®, Inc. – January 2024
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