What Is Short Selling?

By Dennis Jaconi 

Short selling stocks is an investment technique where an investor plans to profit off the declining price of a security. A short seller borrows shares of stock they do not own and sells them out on the open market. When the value of the stocks fall, the short seller can then buy back the borrowed shares at a lower price (or close out their short positions) for a profit. During times of economic uncertainty or bear markets, shorting stocks becomes a popular investment strategy.
How Short Sellers Profit Short sellers are traders and investors that believe the price of a stock or other security will decline. For example, if an investor believes shares of XYZ will fall from their current price of $10 per share, they will short the stock by borrowing shares from a broker to sell the stock. If shares of XYZ fall to $8 per share at a later time, the short seller can close out their position by buying back the cheaper shares. The short sellers profit on the short sale will then end up being $2 per share before fees. When shorting stocks, the profit potential is limited to a 100 percent of the current share prices.
Risks of Short Selling While investors and traders can profit by shorting stocks and other assets, there is significant risk to a short strategy. Using the above example, if share prices of XYZ had increased to $12 per share as opposed to dropping to $8 per share, the short sellers would actually lose $2 per share instead of netting a profit. Given that there is no limit to how high share prices of a stock can go, theoretically, the potential for losses in a short position is also unlimited. This is why it is recommended that investors and traders shorting stocks should use stop orders to limit downside risk.
Trading Volume and Stock Price Often times, trading volume will spike up or down when impending news is about to be released. A rumor about quarterly earnings a few days before the earnings are actually announced can send the average daily trading volume up by 50 percent or even more.
When the average daily trading volume stays level or declines, it can be a sign that there is less interest in the stock from investor and traders. When stock trading volume goes down, the stock loses some liquidity as there are less buyers and sellers to make trades. This can also cause prices to become more volatile.
Stock Trading and Volume When stock trading volume is extremely high, an investor may find it easier to execute larger order sizes of shares at desired prices without dealing with too much volatility. Conversely, if an investor tries to buy or sell large blocks of shares of a stock that has low trading volume, the price to execute the trade and fill the order can fluctuate greatly.
Experienced investors pay close attention to both a stock's trading volume and price movement to see whether a directional shift is sustainable. Knowing how stock trading volume affects a stock's price can significantly enhance an investor's strategies.

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Understanding the Home Buyer Tax Credits

By David Champley

In an effort to boost the economy, several tax credits programs were created. The first program was for new homeowners. For tax year 2008, the maximum available credit was $7,500. For tax year 2009, the credit was increased to $8,000. For married couples filing individually, each claims one-half of the credit on their separate forms.
Owners who decided to sell and buy another home were offered a different tax credit program. The maximum credit for existing homeowners trading up was $6,500. As with the new homeowner tax credit, if the credit was being claimed by a married couple filing separately, then each would
claim one-half of the available credit on their separate tax forms.
A purchase price ceiling applied to each of home buyer tax credit programs. No home over $800,000 was eligible for the credit. The ceiling is an all-or-nothing deal, without any gradual incrementing. So a house purchase at $799,999 would qualify, but a house purchase at $800,000 would completely eliminate any possible credit.
The definition of "first-time" home buyer, for the purposes of the home buyer credit, is anyone who has not owned another residence during any of the prior three years. If the home buyer is a couple, and if either one of the couple had owned a home within the prior three years, then the purchase would not qualify for the first time home buyer credit.
While for most citizens the availability of the credit will soon expire, there are some exceptions. Individuals who are in the Foreign Service or in the military, serving outside of the United States, will be given an additional year to claim the credit.
Because of the wording of the act, individuals who owned homes for vacation or rental purposes are not excluded from claiming the tax credit. They meet the primary requirement of not owning a primary residence. However, if they used the vacation or rental property as a primary home at any time during the preceding three-year period, they credit is disallowed.
Another critical difference between is how the credit is treated. For home purchases in 2008, the first-time home buyer credit is to be repaid over a fifteen-year period. For home purchases after 2008, there is no repayment requirement.
The tax credit comes into play when the buyer files their federal tax return in the year following the purchase. If the credit was for a 2008 purchase, then one-fifteenth of the tax credit amount becomes an additional tax for the next fifteen years of tax filings. If the buyer sells the property before the fifteen years is over, then the remaining tax credit amount not yet repaid becomes fully due in that year.

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Tax Statements and Private Money Lenders

By Karen Rittenhouse

It's tax time... Have you borrowed hard money? Have you lent private money? When lending and borrowing, are you mailing and/or receiving 1098′s or 1099′s? Do you know how to use them?
At a recent Triad Mastermind Meeting, there were questions concerning who gets 1099 income and 1098 statements. We asked our CPA and here is some of what was shared:
You should provide 1099 INTs to whomever interest is paid. Whether a 1099 is sent or received, the person or entity who receives the interest is responsible for reporting the interest income.
You have proof that you are paying the interest even if the recipient does not send you confirmation of the payment. If the recipient does not report it, then the recipient would face fines and penalties for unreported income. There is a $50 penalty for forms not filed.
The 1098 is filed by the interest recipient of mortgage interest. You should send 1098s to any owner financed properties on which you received interest. If private money is linked as a mortgage on a specific property, then the interest recipient should send to you a 1098. There are penalties if the IRS pursues and discovers that 1098s were not filed.
By the way, the IRS has made a decision to target real estate professionals for audit. Why has the IRS targeted real estate professionals at this time? According to their own December 20, 2010 report:
Actions are needed in the identification, selection, and examination of individual tax returns with rental real estate activity.
In August 2008, the Government Accountability Office stated that "at least 53 percent of individual taxpayers with rental real estate activity for Tax Year 2001 misreported their rental real estate activity, resulting in an estimated $12.4 billion of net misreported income."
As always, check with your CPA for all tax questions and discuss with your closing attorney so these issues can be handled correctly from the beginning of all transactions.
What does your CPA say?
**UPDATE** You should be aware that there are penalties for failure to send a required 1099 (Misc, Div, Int, etc.). The good news is that the penalty is based on how late you're filing. If it's just 30 days late, the penalty is only $15 per information return. It increases to $30 if you file by August 1, and goes to $50 if you file after that. So, if you're late, procrastination will only make it worse.
You may be able to avoid the penalties completely if you can show that failure to comply was due to reasonable cause. But that's not as easy to do as it sounds. Failure to file a W-2 results in a $50 penalty per W-2. Failure to file the W-3 summary of the W-2s starts out at $15.

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