Are you satisfied with the growth of your IRA in recent years?

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.

Why buy real estate in retirement accounts?

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 advisor 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.

Examples of transactions:

Here's the first example: Let's say you decide to buy a premium lakefront 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%.

One last example: you transfer $200,000 to a self-directed IRA, then execute a contract to purchase a condo for a purchase price of $175,000. The condo is rented and produces a net cash flow of $1000 per month after taxes and condo fees. This is an annual return of 6.86%--tax-free. In a taxable account, this would amount to a return of 9.8%, assuming the taxpayer is in the 30% bracket. Let's say that other condos in this unit are selling for $225,000. Any gain on the sale of this property will go back into the IRA, so in many cases there is appreciation potential as well as income potential.

Myths and lies about real estate in retirement accounts:

• 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.

Five (5) easy steps to purchasing real estate in retirement accounts:

• 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.
• Select a custodian for your IRA.
• Transfer all or part of your existing IRA to the self-directed custodian.
• We will facilitate all of the above, contact us.

Restrictions on retirement account transactions:

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 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 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.

The highlights of what you can't do: You, your spouse, and certain family members cannot have any personal use of the property in your real estate IRA. The property must be purchased for investment purposes. Your IRA cannot buy a property that you or certain family members already own. There are a few other restrictions but the most important restrictions are the ones noted above. The IRA account also cannot own life insurance or collectibles.