Invest in Real Estate Using Your Qualified Plans

How would you like to invest in real estate and not
have to pay taxes on rental income or capital gains
when you sell it? This is entirely possible with a real
estate IRA.

It's a good idea to analyze the return you're currently
getting in your IRA account. You may be surprised.
Many investors tend to put their account statements
in a 'pile' to review later, and never get around to it.
Here's the bottom line: $50,000 earning 10% per year becomes $129,687 in ten years, but the same amount
earning 3% per year becomes only $67,196. Which
would you rather have?

The point is that it's beneficial to be aware of every
available investment option in your retirement account because some options may grow wealth faster than
others. Haven't we all seen that piece of real estate
that we could have bought years ago for a fraction
of its current cost, and now we can't afford it (or we
think it's too expensive)? For the most part, this is
a cycle that keeps repeating itself.

There are reasons to buy real estate with your IRA.
Unlike a stock, a piece of land will probably never
totally lose its value. It will not simply cease to exist
like some dot-com companies did a few years ago.
Of course, values will rise and fall in real estate,
but they tend to do so at a slower pace when compared
with the stock market ( the correlation between the
stock market and real estate is comparatively low,
a mere 0.22). Real estate also has a practical use.
If you use your IRA to buy a  vacation or retirement
home, your house will be waiting for you when you
retire. In the meantime, the property will generate
significant, tax-deferred income. By renting out your property, you'll receive a constant stream of rent
that will build your retirement wealth or even pay
off a mortgage. Then at retirement, when you want
to live in your dream home, you only pay the taxes
you would otherwise pay on the growth of your IRA investment. As any financial consultant will tell you,
that tax bill will most likely be at a much reduced
level. However and even better, if your dream home
is held in your Roth IRA account, then you'll incur
no taxes.

Another reason to buy real estate in an IRA is to take advantage of the historical  appreciation in real estate. Certainly not all real estate markets boom at the same
time, but many are - and that's where we come in. We
will individually guide you to the most appropriate real
estate investments for your ownership strategy. By purchasing now rather than later, you will have the opportunity to lock in future gains.

Here is the first example:

Let's say you decide to buy a premium lake front lot
in your IRA. Perhaps you'll invest $200,000 in this lot.
The only expenses to come out of the account will
probably be for taxes. Maybe you'll decide to sell it a
year or two from now if you could get $260,000, a 30%
return in a year.

When you do that, you incur no current capital gains
tax because the property is in your IRA. With the
proceeds of this sale, you purchase another prime
piece of real estate.

Here's another example:

Maybe you transfer $100,000 to a self-directed IRA
with the intention of purchasing real estate. You might execute a contract to purchase a pre-construction condominium for $450,000. The IRA put down 20%,
or a total of $90,000. You find a buyer for the
condominium before completion at a sale price of
$490,000. The IRA sells the contract to the third party,
and the money from the sale was deposited back in the
IRA for a gain of $40,000. However, the percentage
gain on the actual money invested was 44%.

• myth: it's illegal to own real estate in a retirement account
• lie: the fees are too high and it's just too expensive (actually, it's often significantly less expensive than owning other investments!)
• myth: it's too cumbersome or high maintenance
• lie: mandatory distributions after age 70 ½ just aren't feasible with this concept
• lie: it's difficult to transfer assets from where your current account is held
• myth: there are too many troublesome tax implications

These 'myths' are entirely inaccurate. The truth is that owning real estate could very well boost your retirement goals, however it must be done right, with the right investment that meets your needs, and the right custodian. Real estate certainly belongs as part of a diversified IRA portfolio.

• Define where to invest. You should choose your investment property as you would choose a stock Granted, it may not be next door, but the investment opportunities may be greater in some places than others
• Select a property to purchase
• Determine whether the purchase will be inside or outside of your IRA
• Select an appropriate custodian for your IRA
• Transfer all or part of your existing IRA to the self-directed or safe-harbor custodian
• We will facilitate all of the above, contact us

There are rules regarding what you can and cannot do with your real estate IRA. The IRS allows you to invest your
IRA funds-and sometimes employer-sponsored qualified plans such as a profit-sharing or 401(k) plan-in quite a
variety of nontraditional investments. These funds can
be invested in raw land, acreage, farms, houses, condos, commercial properties, apartments, and large development projects. This can be done without cashing in your IRA account, and can be done penalty-free, tax-deferred, and sometimes even tax-free. The process is simple. As a
general rule, just stay away from self-dealing and
transacting with ascending and descending relatives.
If you simply remember that the real estate investment
is to benefit the IRA solely (no-one else), you will be
able to steer clear of most of the restrictions.

It is the real estate IRA that buys, owns, and sells the property, just as in a regular IRA that buys stocks and
bonds. All expenses for the property must come out
of the IRA and all income (for instance, rent on an
income property) must come back into the IRA. You
must be sure you have enough available funds in the
IRA to pay for any expenses incurred. Of course, you
can contribute annually to your IRA which can be
used to offset expenses. While there is a limit to how
much you can contribute annually there is no limit to
how much an IRA can earn.

The highlights of what you can do:

The types of property in which you can invest your
IRA are virtually unlimited! You can purchase nearly anything, as long as you don't use the property as a
personal residence or as your place of business. It is
possible to finance an IRA investment property with
a non-recourse loan. However, many investors don't
do this, partly because they want to avoid Unrelated
Business Income Tax (UBIT) based on Unrelated Debt Financed Income (UDFI) [ref: IRS Publication 598]. Acquiring property without a mortgage (since the
IRA is a tax-deferred and sometimes tax-free account) affords the investor the opportunity to maximize the investment results by avoiding UBIT.

Your IRA can also own part of a property by co-investing with other parties. For example, you could buy part of a property with your savings and part of it with your IRA.
Or a husband and wife (or any two parties) could utilize
both of their IRAs for purchasing a property. For example, five doctors or dentists can  purchase a medical arts
building using their IRA (through an LLC) however
they cannot have their practices located within the building.

If you qualify to purchase property outside of the IRA
using the IRA as the funding source, then you will be
able to occupy, expense and depreciate the property...contact us to determine if you qualify.