Think Inc.
A forum for Hawaii's
business community to discuss
current events and issues.
Think Inc.
A forum for Hawaii's
business community to discuss
current events and issues.
Keeping human capital | Last great tax break
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People are economy's most valuable asset. And so Hawaii needs to think "inside the box" and dip into this treasure if it is to survive the information age. Stemming the tide
How to keep Hawaii's human capital
By Michelle Alarcon
In today's society, the work force has to work smarter as businesses move from physical labor to knowledge-based jobs. This requires new skills, knowledge, attributes and expertise. This trend means firms need new systems in selection, training, compensation and the motivation of employees. This also means government policies must adjust to the changing human resource landscape in order to attract new businesses in its region.
In his state of the state address on Jan. 24, 2000, the governor committed to stronger education, economic diversification and technology. He further said "our children, Hawaii's future leaders, must have the best K-12 education in reading, science, math and technology." But will jobs be ready for them? Will our children serve in Hawaii or will they move out and be leaders in other states or nations?
Hawaii need not only educate its people well but also sustain their growth and development through well-compensated jobs and enriching careers. Will the government's support alone on economic diversification and technology create jobs for them? Let's examine a cyclical phenomenon.
Presently, Hawaii suffers from a drain of precious human capital to neighboring states or other countries due to several factors including low pay in a high cost of living state and lack of good career prospects. It follows that if skilled, educated labor leaves for greener pastures, the market is left with a mostly unskilled, lower-paid labor force. This labor supply drives the region's pay levels, which in turn affects the quality of the work force.
The lack of highly qualified and diversified labor makes Hawaii unattractive to bigger businesses despite lower area wages. It makes it attractive to businesses requiring mostly unskilled, lower-paid labor. This shapes the human resource landscape. The cause and effect of this cycle is something to seriously consider. As the government focuses on educating the future work force, local businesses must be ready to attract them. Otherwise, the cycle continues.
This phenomenon happens to many parts of the world. However, it is most devastating here in Hawaii because our economy relies heavily on people-driven service industries. Some states or countries may sustain this imbalance by having other resources or marketable domestic products. But here, geography precludes the growth of manufacturing and production due to increased transaction costs.
The 1998 U.S. census statistics shows the top three industries in Hawaii based on number of paid employees are accommodation and food services; health care; and retail. Nationwide, service jobs are projected to increase by 18 percent from 99 million in 2002 to 118 million by 2005. So our competition for people is within our own national borders.
To help break the cycle, Hawaii businesses must take their share of accountability. Japan looked to its labor management to become an economic power. Global management trends and buzzwords like total quality and re-engineering sprung from paradigms learned from Japan in the early 1990s. Hawaii businesses should look into its current work force to start rebuilding, attracting and retaining its human capital. Our people must have some economic commitment to Hawaii by having careers to identify with and be proud of.
Businesses should start by helping raise the standards of earnings of employees through strategic compensation plans. They must adjust compensation plans to ensure that pay levels reflect the area's cost of living. In a tight economy, compensation is critical in order to gain partnership and commitment from employees for growth and survival.
Organizations can focus on incentives and rewards to motivate the work force without risking higher labor cost. This may be achieved through incentive programs supported by efficiency plans that encourage employee participation to cut costs or increase productivity, and thereafter share a good portion of these savings or gains with employees. Pay equity serves as a great motivator to high performance while pay expectancy in the form of incentives and rewards brings desire for continuous improvement.
Hawaii's support for education and technology is a great path, but local businesses must partner if the state is to benefit from this investment.
Michelle Alarcon is an assistant professor of management at Hawaii Pacific University. She can be reached at malarcon@hpu.edu.
Star-Bulletin brain drain archive
Expatriates' CornerBACK TO TOP
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April's arrival makes it timely to discuss one of the last great tax breaks Uncle Sam gives to us. For Hawaii residents, many of whom have experienced large appreciation in their real estate investments, 1031 tax-deferred exchanges are an especially useful tool to build wealth. Tax-deferred property
exchanges present one of
the last great tax breaksInvestors can reap substantial benefits
from an old law when selling isle propertyBy David Hwa
Normally when you sell property, you must recognize gain or loss in that transaction. If it is a gain, the IRS will tax it. The federal government takes 20 percent, and some states take an additional tax bite. Hawaii's is 7.25 percent. Because state taxes are deducted against your federal and state tax liability, the effective combined rate (federal + state) for local taxpayers is about 25 percent. Section 1031 of the Internal Revenue Code (IRC), however, provides an exception to that general rule.
It allows the deferment of capital gains tax on the sale of property, provided it is exchanged for other qualifying property. Thus a "1031 tax-deferred exchange" is one of the last great remaining tax breaks allowed by the federal government.
Even though this is an old law, enacted by Congress in 1924, few people know about it. But those that do reap substantial benefits. It is a means of creating wealth, using undimin- ished gains to reinvest into more valuable property.
Originally, IRC 1031 was intended to cover basic barters, such as trading a horse for a horse, with no cash changing hands. But as time progressed and the business of selling and buying real estate became more complex, the original concept of effecting a like-kind barter became archaic. In the early 1990s, buyers and sellers of real estate were helped tremendously when the Treasury formally clarified many aspects of this code. Along with these clarifications has come a much wider use of 1031 exchanges by those in the know.
Following the rules
Today, the IRS allows a 1031 exchange if certain rules are followed.The first key rule is that the properties exchanged must qualify: They must be held for productive use in a trade or business or for investment (e.g. raw land, rental apartments, office buildings, warehouses, industrial, retail). Properties owned for personal use, such as one's primary residence or vacation home, do not qualify.
An exchange is allowed if one takes the sale proceeds of one property and reinvests it in another "like-kind" property (e.g. sell land and buy a rental condo, sell an apartment building and buy a freestanding building in a strip mall, etc.).
To defer all of the capital gains tax, (1) the value of the replacement property must be equal to or greater than the sold property, and (2) all of the sale proceeds must be reinvested.
The second key is the process must be properly structured. The IRS will not allow someone to "sell A" to "buy B" without paying tax.
Once the property is "sold" and you accept money for that sale, you must pay capital gains taxes. A 1031 exchange, on the other hand, allows you to "relinquish" (rather than "sell") and "replace" (rather than "buy") properties.
When you "relinquish" property A rather than "sell" it, you never physically receive the sale proceeds. Instead, an independent middleman does. For an exchange to be recognized by the IRS, an independent middleman must be used. That middleman -- also called an "accommodator", "facilitator" or "qualified intermediary" -- is a critical element in an exchange.
In a properly structured 1031, it is the middleman who legally sells property A and buys property B on behalf of the client, creating an "exchange" of properties for the client.
The client does all the legwork of identifying what he wants to sell and what he wants to replace it with, but the middleman is the legal vehicle through which the properties are transferred.
Obviously, Hawaii taxpayers would benefit tremendously by performing 1031 exchanges, rather than "selling" property and then later "buying" something else without the benefit of this great tax break. It is better to "relinquish" and then "replace" using the 1031 tax law, as 25 percent is a lot of money to give up!
Land and condo exchange
Here is a simple example: Mary wants to sell her land in Texas to Mr. Smith and use the sale proceeds to buy a more expensive rental condo in Florida from Mrs. Jones. If she simply sold the land to buy the condo, she would pay capital gains tax on the land (which would leave her less money in hand to buy the condo). However, if she does a 1031 exchange, she would defer paying that tax.The 1031 process works like this:
Prior to closing on the land sale, Mary signs an exchange agreement provided by the middleman indicating she intends to do an exchange and the middleman assumes the role of seller on the land.
At the moment she closes on the sale, Mary's land is deeded directly to Mr. Smith. He, in turn, pays money for the land, and the money goes to and is held by the middleman.
From that point onward, Mary has up to 45 days to identify replacement property for her land, and up to 180 days to close on it. Those are the two most important timing rules in an exchange.
In our example, prior to purchasing the replacement rental condo, Mary signs additional documentation specifying that the middleman assumes the role of buyer for the condo.
When the condo closes, Mary gets the condo (via direct deed), and Mrs. Jones is paid the funds the middleman is holding from the sale of Mary's land, plus additional funds from Mary if there is more owing on the more expensive condo.
In summary, Mary exchanged her land for a condo. The proceeds from the sale of land went to pay for the condo without ever touching Mary's hands.
Simply tax-free
The concept of a 1031 exchange is simple.Many people throughout Hawaii have used the exchange as a means for creating wealth. Less tax to pay, means more money kept for reinvestment into more valuable property.
David Hwa is a qualified intermediary with Timcor Financial Corp. Reach him at david.hwa@timcorfinancial.com.
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