Well, it’s Friday again already, time for another installment in my questions series.   Better get started:

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Q & A: 3 October 2008: Housing Inflation

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Question: Larry wrote in with this one, thanks Larry and to all others who take the time to ask:

Maayong Buntag
From what I have read about moving to the Philippines it is by far better to rent. Almost all expats will tell you this. The only reason I could see in buying is to hedge against inflation. The thing is that I have been noticing rampant inflation in the Philippines on almost everything but housing. The price of houses and property seem to be going up but at a much slower pace than say food or petro. The rate housing in the Philippines seem to be going up is much slower than the return on investments. Could I get your assessment on the rate of inflation on housing in the Philippines?

Answer: It is very hard for me to give an overview on Philippine inflation that speaks with any authority.  I spend little and do not participate actively in the real estate market.  But the world is certainly entitled to my opinuion, so here it is ;)  Dave’s opinion is, a single family house that you plan t live in is a liability, not an asset.  It produces nothing and is never guaranteed to go up in value.

It is true that you must live somewhere, so depending upon the ‘numbers’ and your personal preferences it may make more sense to buy than to rent, but buying a house as a hedge against inflation strickes me as a poor way to invest.  If you want a hedge against inflation, buy shares of stock in companies that actually produce something of value … yes, even today … anyone want to bet that Warren Buffett is dumb in buying up General Electric at bargain basenent prices, for example?

General Electric powers the world’s electric utilities, railroads and airlines … they actually produce product which is unlikely to evr suffer long-term drops in demand, so there is a money for future value equation.

A single family house may be worth more than what you paid for it years down the ‘pike .. or it may not.  Unlike something that produces consumable goods for value, a single family house produces nothing and consumes a lot over the years.  Philippine tax laws, especially capital gains taxes, are nothing at all like the US, where buying and selling houses are virtually non-tax events for home owners. (and of course you will be subject to Philippine capital gains and value added taxes even as a foreigner … you can’t escape taxation by the Philippines for transactions within the Philippines as you can with outside the Philippines income/profits).

In the two years I have been living here I have had my ‘eye on’ three houses in my local community that I would be happy living in.  All were already for sale when I arrived.  All are in the 4 to 5 million pesos asking price range.  All are also occupied by caretakers as the owners are elsewhere already … thus the monthly costs for keeping these homes ‘alive’ are all in the red as far as benefits to the owners.  (You can not, by the way, safely leave a house unoccupied here, it will likely become occupied by squatters and getting them out could prove expensive, problematical and even deadly if you try to throw your weight around.)

Last month, one of the three sold for 2.8 million.  Would you want to be the owner of one of the other homes waiting more than 2 years to get nothing, or would you rather be the owner of the one that just sold at about a 30% discount?   Frankly neither situation holds much attraction to me.

Places where a lot of expats congregate … Angeles City is near me and a good example … are just loaded with very attractive homes built … even overbuilt .. by foreigners and now for sale at greatly discounted prices.  The type of home that most middle class Americans would lkely build here is way too much house for the very tiny Philippine middle class and the Filipino rich are highly unlikely to buy in other than exclusive”way, way spendy” areas that midedle class Americans can’t afford.

You are likely to get stuck waiting for another willing American to come along if you want to unload it.  Houses that buy and sell readily here in the Metro Manila area are not what the average foreigner wants to live in.

I realize that is a lot of words for a pretty non-definitive answer, but in the long run it is all up to each individual anyway … if you want to buy a home as aplace for you and your family to live, for your kids to grow up in, more power to you … but a house as an investment? There are no guarantees, good or bad.

Commercial real estate is another story completely … I’ve written about it here before and likely will write more.  You might like It Can Be Done or It Can Be Done —Part 2

Warning. reading this post may be very taxing. Do not attempt if you suffer from heart disease or have any other health condition that requires a physicians (or accountant’s) care.

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Q & A 25 Sep 2008 Do I Have To Pay taxes?

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Question: I currently live and work outside the US so I don’t owe US federal or State income tax on my wages. If I start making money online, and come to live in the Philippines, do I have to pay US taxes, especially Self Employment taxes? What are some ways to minimize the US tax bite?

Answer: First of all, you have to really understand I am not an expert … and especially if you are setting up a business … which one hopes would be successful … you really need advice from a qualified professional. My answers are personal opinions, based on personal experience and may be injurious to your pocketbook if you don’t check and double check what you are doing. Setting up a business the wrong way and then changing it to fix errors made at the beginning may prove much more expensive that making the investment in sound professional advice at the start.

Issue 1: Do you have to report? Better to read what the IRS has to say than what I say:

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

cash earned from side jobs, (my emphasis)
barter exchanges of goods or services,
awards, prizes, contest winnings and
gambling proceeds. ….

Taxpayers must report all income from any source and any country (my emphasis) unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands….
It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.
All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040…

Much more explaining tax liabilities on the IRS website … it is likely better that you learn before you burn. In particular a lot of people seem to believe some fairy tale that money earned online isn’t taxable … or isn’t taxable if you live outside the US. Not so.

As a matter of fact, Google and other regular US corps routinely report all payments to others as the US tax law requires. eBay and PayPal,two other places people seem to think money can be hidden, always report when subpoenaed. I recently read of an eBay power seller who was failing to report thousands per year in income. Seemed like a great deal to him, saving all those taxes. He got caught when one of his buyers was involved in a phony credit card scam.

In response to the credit card scam investigation the seller’s income amounts just happened to come to the attention if the IRS. Ooops.

Issue 2: Self Employment Tax: Many people balk at the thought of paying (currently) 15.3% of their self employment earnings into the Federal kitty. Sorry, can’t help much there. The truth is every single tax payer pays thise taxes but wage earners normally have more than half paid by their employer so they don’t see such a whopping deduction. You pay it though, one way or another. Again, the IRS is pretty clear about this:

What is Self-Employment Tax?
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners….
SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)…

Again there is a lot of authoritative information that seems clear enough to me … even when I don’t like what it says … on the IRS’s own site. Many people I’ve talked to over the years seem to get their information from Yahoo Group discussions or bar room conversations. Probably not the best source. If you form a corporation, as just one example, you may be able to legally avoid some of the SE tax bite. Probably a wise thing to consider. You need better assistance than what I can offer on that, though.

Speaking from experience, when my wife and I had our own corporation in the US we essentially didn’t pay SE taxes. However, the overall cost of running the corporation and all the other taxes and reporting requirements I believe came up to more that our SE tax bite would have been. And we gained no earned income toward our Social Security retirement in those years either … once you have a zero year for Social Security, you have a zero year … there is no going back.

Some Conclusions: Well once again I seem to be creating an opus here. Time to wrap things up. My one last, perhaps most important pice of advice on these complex issues. When you seek professional assistance, remember this abut the professionals you are likely to encounter.

Accountants are trained in the practice of accountancy and such subjects of the procedures of how money flows in your business, the best methods to handle your banking and issues along these lines. All accounts have professional training in tax matters and some have a great deal of expertise, but I personally do not recommend you go to an accountant for advice in setting up the basic structure of your business … nor in answering questions about what is and isn’t reportable, what techniques you can use t legally exclude income and minimize taxes, etc.

Who do I recommend then? Simple. A tax attorney. First, a tax attorney is by definition and by professional accreditation an expert on the law. You must be sure you are complying with the law before you get into the intricacies of accounting procedures. Choose an attorney who specializes in tax law and who is enrolled to practice before the IRS.

Other individuals, including CPA’s may also become enrolled to practice before the IRS but there is an important difference. If you engage an attorney, communication between you and that attorney becomes privileged. It can not be disclosed to the IRS. Taxpayer-accountant relationships do not have that advantage of legal privilege. Why is this important?

Neither an attorney nor a lawyer can legally advise you to do something illegal … but you’ll never know if your ideas are legal unless you ask, now will you? If you ask about procedures which later turn out to be illegal, an accountant can be forced to testify about this in court. Your attorney can not. It’s only Dave’s opinion, of course, but I feel that if I am undertaking something which might land me in court later, I might as well protect myself properly from day one.

OK, what other questions do you folks need answers to? A couple came in today. I’ll try to keep this a regular weekly feature of PhilFAQS the source of information about moving to, living in or retiring in the Philippines.