Investing in Real Estate with Retirement Monies

February 2, 2007 1 comment

  Did you know that you can make real estate investments with monies from your IRA or 401K retirement plan? This is an often overlooked way to get into investment real estate without having to use your otherwise available cash. Yes, there are rules and you must be extremely careful to make sure that you retain the integrity of the retirement account. First, you need to select a custodian (plan administrator) of the account. This is not just anybody. There are companies out there that do this for a living. There are lists of these custodians. Then you will have your current retirement plan monies transferred to your new self-directed IRA account. Your custodian will take care of the details for you. Since these accounts are self-directed, you get to select the investment property for which your funds will be invested. The monies can purchase single family homes, improved and unimproved land, apartment buildings and multi-unit homes, commercial property, and you can even invest in tax lien certificates and mortgage notes or deeds or trust. Once you know what property or instrument in which you wish to invest, you provide the details to your custodian and they will proceed with purchasing the asset from the fund you have established. When you complete the purchase, your IRA will have title – not you personally. The easy way to make these sorts of investments is to pay cash without leverage because the IRA will be taxed on the income or capital gains attributable to the leveraged portion. The IRA can purchase the property with other investors, all of whom pay cash, and there will be no issues with tax related to leveraged debt. 2. There are also some limitations that you should be aware of. First, you cannot buy from or allow usage by yourself, your spouse, your descendants (son/daughter), ascendants (mother/father), the trustee or custodian, or spouse of a descendant – all considered disqualified persons. But, you can later sell the property to a disqualified person so long as the economics are considered to be market.   

   I want to make clear that you cannot buy a vacation property that you intend to use part of the time and rent out most of the time. You also can’t buy a home that your grown children (or any other of the disqualified persons) will live. The property your IRA purchases in truly intended to be investment property.    Remember, it is important to fully understand what is considered to be a prohibited transaction. A prohibited transaction can bring into question the tax-deferred status of your account, potentially disqualifying your IRA which would have severe tax consequences. The general rules established by the IRS define a prohibited transaction as any improper use of your IRA account or annuity by you, your beneficiary, or any disqualified person. If you want a more in-depth discussion on this matter, you can refer to IRS Publication 590.   

   Getting back to the investment itself, if people had invested their retirement monies over the last few years in real estate instead of in the stock market, CD’s, bonds, or money market accounts, they would fared very well in light of the high appreciation that took place in real estate over the past few years. However, there is no certainty that this will continue. So, look carefully at what is going on in the market before you lunge into this sort of investing. Also, consider that the IRA investing in real estate cannot utilize tax depreciation. Depreciation can be taken by you as individuals. However, in an IRA, the income derived from renting and selling at a profit is not taxable until you pull the monies out of the IRA – not when you sell the property – and may be further subject to penalties if you withdraw the funds prior to the age of 59½. Some will argue that the tax-deferred nature of the cash flow and appreciation benefits outweighs the depreciation benefits. You will have to do your own analysis on that. This article is not intended to compare investing in real estate from a self-directed IRA versus buying real estate with personal funds and then selling and buying again utilizing the 1031 exchange feature. As for the IRA real estate investment, you will have to jump through some hoops to get this project going. First, as I’ve said, you need to get your retirement monies from you current retirement custodian to an independent custodian that specializes in real estate investments with retirement funds. Let the real estate custodian guide you here. Talk to several such custodians before making your decision. Then you sign a direction letter to your custodian to purchase the property. Your custodian will provide you with the technicalities of how to go about making an offer on real estate that you identify for the IRA investment. Once the property is purchased by the IRA, the rental proceeds go into the account and the expenses of the property (property taxes, HOA dues, other assessments, maintenance etc) are paid out of the account.   

   Buying real estate from your retirement funds may provide you with some diversification of rish especially if you are able to have enough funds to continue to invest in stocks and other instruments as well as investing in real estate. I should also mention that IRA accounts are generally exempt from the claims of creditors and they can give you a way to pass assets to beneficiaries outside of probate.   

   So, as you can see, there may be some benefits to buying real estate with your retirement funds. 

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California Proposition 60 – Transfer of Property Tax Base – People 55+ yrs of age

January 31, 2007 1 comment

   Have you been thinking that this may be the perfect time to sell your current home that you’ve owned for years and “buy down” in price?  Your “kids” may be grown and out of the house and you would like a smaller home with less maintenance or, perhaps, you would love to put some of that equity that you’ve built up to work in other ways?  However, you can’t bear the thought of paying higher property taxes for the replacement property based on current market prices.  Did you know that certain people can “buy down” while retaining their basis of the original property for property tax purposes? Here’s some of the important requirements toward achieving this: 1) You or your spouse must be 55 years of age or older when you sell your residence; 2) Your replacement property must be located in the same county in California as the original residence (see exceptions below); 3) The replacement residence must be equal to or lesser in market value than the property you are selling; 4) The replacement residence must have been, (a) receiving or eligible for a Homeowner’s Exemption, or (b) have been receiving a Disabled Veteran’s Exemption on the selling and replacement residences; 5) This benefit is only available once in a lifetime.  There are some counties that will accept the property tax base of the selling property that is outside of that county so long as the selling property is within the State of California.  Those counties are: Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara and Ventura Counties.  Other counties will only allow replacements to take place within its own county.  Propostions 60 was originally passed in November 1986 by California voters.

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