Become a First-Time Homeowner, Thanks to Your IRA (Even if You’ve Owned a Home Before)

Patricia McCrystal

July 10th, 2015

There’s no time like this summer to buy your first home. The market is booming, and you’re ready to stop shelling out cash to your landlord and invest in a long-term asset that will belong to you. Plus, you’ll finally be able to paint the walls!

If you have a Traditional IRA account, you may be able to use your retirement funds to finance the down payment of your first home. The distribution age of your Traditional IRA account normally isn’t until you reach 59.5 years of age; withdrawing assets or capital gains before that age can result in taxation and a substantial penalty.

However, IRA account owners are permitted to withdraw money before distribution age, penalty-free, in certain circumstances – in this case, IRA owners can withdraw up to $10,000 for qualified acquisition costs on a home, without paying the 10 percent penalty for early distribution. Qualified acquisition costs generally cover buying, building, or rebuilding your first home, as well as funding most settlement, financing and closing costs.

Since all contributions into your Traditional IRA account are deposited “pre-tax”, you will have to pay ordinary income taxes on the money you take as a distribution. This could potentially bump you up into a higher tax bracket. Additionally, you will no longer benefit from the compounding interest on your account’s lump sum.

Despite these caveats, there are more perks involved with this exemption: you can take distributions from your IRA account for home buyers other than yourself, including persons who are otherwise disqualified to interact with or benefit from your Traditional IRA in any way. Your distributions can be used to cover home buying/building expenses for your children, grandchildren, spouse, parents, mother in law, etc.

Additionally, you can qualify as a first-time home buyer even if you’ve owned a home before. As long as you haven’t owned a home dating back two years prior to (what will be) the closing date of your new home, according to the IRS you’re technically a first-time home buyer.

Using your Traditional IRA account to finance your first home (or in some cases, your second) can be a fabulous perk to regularly and sensibly investing in your IRA. Consult with your trusted financial adviser to weigh the costs and benefits of taking an early distribution to fund your first home. And as always, happy investing!

Titling Your IRA Real Estate Investment: Avoid Missteps to Save Time & Money

To Enjoy IRA Real Estate Tax Benefits, be Mindful of Costly Titling Mistakes.

Patricia McCrystal

June 25, 2015

That modest country cabin nestled down by the lake at your favorite vacation spot has finally been put on the market. It’s a regular fixer-upper, but you know a little love and hard work could transform the property into a beautiful modern getaway for renters year-round.

You plan to use your self-directed IRA to fund the investment so you can enjoy future gains on a tax-deferred basis. You understand this means you (and your family members who count as disqualified persons) will not be able to stay in the lake house; at least not unless you decide to keep the property after you reach the distribution age of your IRA account (for a Traditional and Roth IRA, that’s age 59.5), in addition to paying taxes on the property at distribution.

You contact your self-directed IRA administrator, New Direction IRA, to inform your client representative about your exciting investment opportunity, and to learn more about IRA real estate tax benefits. Although no disqualified people are allowed to be directly involved in the renovation process of the property, you have a friend from college who owns and operates a construction company who you think will be a perfect fit for the job.

In this fast paced market, you need to act soon before you’re outbid. But before you start signing papers, there are specific investment-titling rules that all real estate investors should keep at the forefront of their minds before initiating any transactions. Remaining conscious of the following guidelines will help you avoid common missteps and save yourself a lot of time and money when using your self-directed IRA to invest in real estate.

To start off, your self-directed IRA account must be opened and funded before a transaction can be initiated. You can fund the account with either a transfer, rollover, and/or a contribution. 

Always remember:  you and your IRA are NOT the same thing. Your IRA is a completely separate legal entity from you and your personal finances. By extension, you cannot pay any of the IRA’s expenses, and you cannot sign on behalf of your IRA.

When investing with retirement funds, all paperwork for that investment must reference the IRA as the buyer, not the IRA holder (you) as the buyer. If a form needs a signature, you should write “Read & Approved” in the margins, and then sign next to or beneath this note (also in the margins). You will then upload/email/fax the form to New Direction IRA, who will sign as the buyer or investor of the property. NDIRA also accepts e-signatures from companies like DocuSign and Adobe.

New Direction cannot fund your investment if these guidelines are not followed, and the investment ends up being titled under your personal name and/or social security number. You are a disqualified person, therefore trying to transfer the title of a contract from you to your IRA is a prohibited transaction. Once this mistake occurs, there is no way to change the titling from your name to your IRA, so be diligent in following the proper procedures for IRA investment-titling.

The IRA may partner with another person, entity, or IRA. In partnering, your IRA would own a percentage of the property, and the remaining portion would be owned by someone else. You may partner your IRA with personal funds and/or disqualified persons, but restrictions apply. See NDIRA's website for more details.

When partnering with disqualified persons, the ownership percentage must be kept constant throughout the life of the investment. All expenses and income must be split according to that ownership ratio, and each bill must be paid according to that ratio as well.

Unrelated Business Income Tax (UBIT) applies to profits made as a result of using leverage (loans) to invest in your property. It is your responsibility to calculate, report and pay this tax. However, your CPA or tax preparer may be able to help with the calculation. (Our sister company, IRA Tax Services, can assist as well. Visit www.irataxservices.com for more information on UBIT.)

There are no restrictions on the types of real estate you invest in, where the property is located, or the price and/or market value of the property. In order to have sufficient time for required compliance review and processing, New Direction IRA needs to have all completed paperwork 3 full business days prior to funding.

Although these guidelines are a great introduction into the procedures every investor must follow when investing in real estate with their self-directed IRA, they are far from exhaustive. A complete comprehensive guide to these policies and more details about IRA real estate tax benefits can be found on New Direction IRA’s website. Happy investing!

Real Estate and Investments for Retirement – Your Options

Real estate investing for retirement is becoming more and more popular as housing markets continue to stabilize. But, as with everything involving real estate and investments, you have to do your homework. Not only do you need to do your due diligence in buying and selling properties, but you also need to understand your tax and retirement responsibilities when using real estate investing for retirement.

Holding Your Real Estate Portfolio

Anyone can begin buying and selling real estate and plan on using the money for their retirement. However, without proper tax planning, you can get stuck with large tax bills that eat into your profits. Even if you are only paying the lower capital gains tax rate, you could be growing your real estate investments more tax efficiently in your Traditional or Roth IRA.  Contrary to popular belief, your IRA can invest in almost anything with the exceptions of life insurance and collectables.  Many people utilize real estate as a retirement asset because they know and understand real estate better than they understand the stock or bond market.  However, for someone looking for current income, it may not make sense in all situations to utilize the IRA.  Speak with your financial and tax professionals to determine what is best for your situation and particular asset.

Types of Real Estate Investments

While there are many ways to invest in real estate, the two most common real estate investments for retirement are buying rental properties that produce income and flipping properties in hopes of appreciation. Each type of real estate investment has a legitimate place. It may take a lot more skill and risk tolerance to successfully flip real estate, especially if you are using all of your assets. The amount of risk an investor takes with real estate and investments typically depends on how far away they are from retirement, their experience with real estate and their current mix of retirement asset types. 

Conclusion

If you are just starting out with real estate investing for retirement it can potentially make sense to begin conservatively. Beginning with a rental property that slowly that can produce income and could appreciate in value over time can be a better approach to real estate investing over short-term or speculative real estate transactions. The key to real estate investments is to steadily build wealth while maximizing income potential and taking advantage of tax breaks where you can.  Keep in mind that if you try to get rich overnight you are just as likely to lose everything.  Lastly, remember to perform your due diligence with all investments and to consult your financial and tax professionals.

If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for a free consultation and links to great learning resources. 

Rental Real Estate Investment Education for IRA Investors

Is a rental real estate investment the best option for your self-directed IRA? The answer depends on each IRA investor’s unique circumstance. While some rental real estate investors appreciate they can “touch” their investment, others are stressed by the amount of responsibility that comes with being a landlord. Rental real estate investment education begins with understanding some of the finer points of the transaction before jumping in with both feet. Asking yourself some of the following questions can help you to gain a better understanding of whether or not rental real estate investing within a self-directed IRA is right for you.

·         What is my investment time horizon? Rental real estate is usually considered a long-term investment.  Unlike traditional stocks and bonds, rental real estate as an investment comes with maintenance expenses, taxes, and operating costs that can erode short-term returns.  

·         Does my IRA contain enough liquidity after I make my rental real estate investment? While real estate has the potential to increase in value over time and provide a steady income, certain economic times can make it difficult to rent or sell. Proper rental real estate education encourages investors to look beyond the initial property purchase price and take into account post-closing expenses when calculating necessary self-directed IRA account liquidity, especially if you are nearing the age when Required Minimum Distributions would be necessary.  As all expenses need to be paid directly by the IRA, cash shortfalls should be avoided.

·         Do I fully understand the local rental real estate market I intend to purchase from? Local rental real estate values often fluctuate. Rental real estate investment education for IRA investors often depends on local economic indicators of the specific region an intended investment is located. 

·         Am I prepared to become a more ‘hands off’ landlord?  Many rental real estate investors like the idea and/or the cost saving aspects of performing their own property maintenance and management.  When buying a property inside an IRA you are limited in the kind of services you can provide.  While you can still make managerial decisions (who to rent to, what color to paint the walls), you cannot provide any goods or services to the property which means no ‘sweat equity.’  

If you are considering rental real estate investments within your self-directed IRA, there is no right or wrong answer because it depends on your unique situation. Making time for real estate investment education can help you get started as a real estate investor or help you decide that type of investment isn’t suitable for you. It is always prudent to consult with your trusted tax, legal, and financial advisors to discuss all of your investment options before making a decision. If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for free consultation and links to great learning resources. 

The Real Estate Developer Guide to Creative Real Estate IRA Investing

While many people want to use the power of a self-directed IRA for real estate investing, they often feel they can’t get started because they don’t have enough money in their plan. Thankfully, there are several creative ways to bring your real estate transaction to fruition even when your situation is less than perfect. Even if you are low on funds in your self-directed IRA you can still become a real estate investor. You just need to use some creative real estate investing techniques. While the IRS does have strict rules for self-directed IRA’s, it still allows for considerable flexibility in growing the plan’s assets.

Partner Up Instead of Going Alone

There is nothing to stop you from partnering with someone else when making self-directed IRA real estate investments. While you on your own may not be ready to become a real estate developer, there are many opportunities waiting for your investment. You can go in jointly with other IRA plans, investors, or even invest with companies that in turn invest in real estate. You can even partner with disqualified persons that you otherwise could not perform transactions with. Together you can jointly own property. Creative real estate tactics like partnering with others also gives you the chance to learn from more experienced investors. The rules governing IRAs require that you only pay fees and costs of the investment in proportion with the plan’s percentage of ownership in the property and receive the same percentage of the profits. If you are a 10% owner, your self-directed IRA must pay 10% of the fees and costs and receive only 10% of the profits.

Leveraging the Property

If you find yourself with a cash shortfall and no partners, you IRA could potentially take out a mortgage to increase purchasing power.  The IRS does allow you to leverage plan assets so long as it is not for personal use and the money is used to acquire further investments for your self-directed IRA. The best practice is to get a non-recourse loan, one that uses the property as collateral and keeps the lender from coming after you, your other assets, or the assets of the IRA in case of default. While these loans are more difficult to locate and acquire, for the creative real estate investor, they are still available.  It is important to note additional taxes may apply on the portion of profits derived from using leverage. 

Conclusion

Don’t let the idea that you don’t have enough money in your self-directed IRA keep you from starting your path as a real estate developer; you have options. Creative real estate investors can even transfer money from old 401(k) plans as well as employ other strategies such as investing in real estate related notes to grow their portfolios.  Start getting creative! If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for a free consultation and links to great learning resources.

Make Money in Real Estate Using a Self-Directed Real Estate IRA

Have you ever wondered how people make money in real estate? While late night TV is filled with dozens of “get rich quick” real estate schemes, each one of these “new real estate secrets” are actually variations on the two most common strategies professional real estate investors use to make their money. Savvy investors know how to produce returns but they also know how to protect their investments. Because of the powerful tax benefits, holding real estate investments within a self-directed IRA account has the potential to produce above market returns. 

Strategy One: Rental Income

The first way many investors make money in real estate is to own property and have others pay them for using it. This could be residential property like a rental home or an apartment building. This could be a commercial building like a strip mall or office building. Even undeveloped land can be “leased” in the sense that others pay to exploit certain rights like water or mineral rights.  Erecting a mobile phone tower on vacant land is another way to get income from property. The key is to make more money in rent that you have to pay out in costs like property taxes and mortgage payments. Self-directed IRA’s can hold property that is rented to others. This allows the money to grow on a tax-deferred basis.

Strategy Two: Appreciation

The second strategy to making money in real estate is appreciation. This is the oldest way to make money at anything, buy low and sell high. Of course, real estate doesn’t always keep growing in value. You need skill to spot bargains and possess the wisdom to see future trends. Once again, a self-directed IRA is an excellent way of allowing your investments to grow instead of getting slowly eaten away by taxes. You can buy and hold properties in your self-directed IRA and if you want or need to sell a property, you can defer the income taxes on the sale. Generally speaking, taxes are only paid when a distribution is taken from the IRA; although certain taxable situations may apply when real estate assets are leveraged. Feel free to call our office if you’d like to learn more about this unique situations. 

Conclusion

Many successful retirees have used a combination of both methods to make money in real estate through self-directed IRA’s. They have bought rental properties that paid for themselves. The IRA held the property while it gradually appreciated and the wise investors eventually sold the property for a big cash payout, all while the profits grew in a tax deferred self-directed IRA.  Find the strategy or combination of strategies that works best for you and start taking control of your retirement. If you’d like to learn more about real estate IRA investing, please contact the New Direction IRA business development team at 303-546-7930 x155 for a free consultation and links to great learning resources.

Using a Real Estate Self Directed IRA to Make Real Estate Income

Creating real estate income is something many investors have come to view as a basic portfolio ingredient. Whether you are in the accumulation phase or retirement phase of your life, betting on the paltry bond market for income has become frustrating at best. Many investors do not want to expose their portfolios to the risk of a volatile stock market either, though. Thus, many turn to real estate as a source of retirement income and historical capital appreciation. What many investors do not understand is that by holding real estate in a self-directed IRA, investment returns can be sheltered under the tax-advantaged umbrella associated with retirement plans. A self directed IRA removes one major real estate profit loss – taxes on capital gains. 

However it also shelters rental income by allowing you to distribute funds on a more precise basis from year to year. Until the age of 70.5, you determine when and how much is distributed from your IRA. Here are a few questions to consider before purchasing rental property outright:

·         Am I able to manage the property myself and be “landlord”? It’s perfectly acceptable for an IRA holder to manage their own rental property however there are certain limitations that apply. You may act as “landlord” but only from a decision making capacity. Any repairs or improvements made to the property must be contracted to non-disqualified parties and paid for by the IRA in proportion to ownership. 

·         Does my IRA have a large pool of available liquidity? Many investors gravitate toward their IRAs as a way to tap a large amount of cash, which lends itself easily to cash purchases of real estate.  If your IRA is highly illiquid, or if the liquid portion isn’t sufficient to purchase property outright, you may need to consider other strategies such as financing through a non-recourse loan or partnering your IRA funds with another entity. 

·         Is my plan to rent or lease my real estate to the general public? If you intend to live in a rental property and directly benefit from the space or lease out your real estate to a close relative, the transaction is considered prohibited and cannot be executed in an IRA. Any real estate income received under the qualified umbrella of an IRA must be from a disinterested third party. 

Holding real estate in a self-directed IRA gives investors the ability to own all types of real estate. If all goes as planned, your ability to generate regular, long-term real estate income during retirement will be greatly enhanced by the substantial unrealized gains achieved through years of tax-deferred growth. 

Not all IRA providers are created equal and the vast majority have no experience whatsoever with self-directed IRA real estate transactions. New Direction IRA encourages any investor considering a self-directed IRA to increase real estate income during retirement to weigh all options carefully. Our team of IRA specialists are here to help and answer any questions you have.

Real Estate IRA Key Strategies

Many self directed IRA investors have purchased real estate and for good reasons. Real estate is a tangible asset that most people have had experience with, either through purchasing their own home or working as a real estate professional. Real estate is also an asset which rarely loses its entire value, unlike some investments which have that potential downside.  While real estate is a very accessible asset, investors do need to be mindful of the various strategies when it comes to investing with their retirement funds. Knowing these strategies can help you achieve your retirement goals.

IRAs can invest in many types of real estate, from commercial office buildings to single-family residences to farm land. Deciding what type of real estate you want to invest in is the first step to forming your real estate strategy. Your personal expertise, along with your ultimate goal for your IRA-owned real estate can help you make this determination. For example, an account holder with experience in owning rental property wants to retire in Hawaii. This investor may decide to use their IRA to purchase and rent out a single-family home in Hawaii with the goal of taking the property as a distribution upon reaching retirement age. 

After deciding what type of real estate to purchase, the account holder will need to decide how to fund the purchase. The most straightforward method of purchasing property is for the IRA to pay for the property outright, however if the account does not have the full purchase price there are options. The IRA can decide to partner with another IRA, with the IRA holder personally, with another person, or with an entity such as an LLC. If a partnership is not an attractive strategy for you, your IRA can apply for a non-recourse loan to fund the purchase. These loans are not personally guaranteed and, as such, often have higher interest rates and require a larger down payment than loans that have a personal guarantee. A real estate purchase can also be made through investing in an entity. This strategy usually sees multiple IRAs and/or other investors buying into an entity which then purchases a property.

Another strategy involves how the property will generate returns for the IRA. The real estate may be rented out with the IRA collecting monthly rental income, or the property may simply be left to appreciate in value. While the real estate is in the account, the IRA holder and their disqualified persons cannot personally use or perform any improvements on the property.

Once you reach age 59.5, you are able to take distributions from your IRA without the 10% penalty. This milestone presents the opportunity to strategize how the real estate will be distributed from your account. One option allows the account holder to distribute the entire property in-kind by retitling the deed from the IRA to the account holder personally. At this point, you are free to use the real estate as a primary residence or vacation home, or you can choose instead to continue renting the property and personally collect the rental income. If the property was purchased with a Roth IRA, you will be able to make a qualified distribution of the property without having to pay taxes on that distribution.

You may elect instead to take cash distributions out of the IRA. If the property is rented it can be left in the IRA and the account holder may instead distribute the rental income as needed. Another option is to sell the property and take the cash proceeds of the sale as a distribution.

Self directed IRA real estate investing is becoming more and more popular. While real estate is an asset that many account holders are familiar with, knowing and understanding the many strategies associated with this investment can help you make the most of your retirement.