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Real Estate in your Self Directed IRA

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A self directed IRA or “real estate IRA” gives you the freedom to invest in alternative assets such as single-family and multi-unit homes, apartment buildings, condominiums (leveraged or unleveraged), improved or unimproved land, commercial property, and more.

The American IRA team was founded by investors for investors…our top management has been investing in real estate for over 40 years, which means our team is familiar with all aspects of real estate investing. Our IRA real estate custodians speak your investment language.

Limitless Investment Options

  • You can, in fact, borrow money within your real estate IRA to purchase real estate. It has to be non-recourse financing (terms may vary by lender); however, non-recourse financing and unrelated debt income tax (UDIT) may apply.
  • Your property manager collects rental income, pays all expenses , and all the profit goes into your retirement account tax free or tax deferred.
  • You can own real estate within a Roth IRA and collect rental income, tax free.
  • You can sell property within your real estate IRA without having to worry about capital gains taxes.
  • You can use a tax-deferred exchange inside your real estate IRA to defer UDIT tax.
  • You can partner with yourself and others at the time of acquisition of the asset.

Important Rules to Remember

  • Neither you nor any disqualified person is permitted to use the property.
  • Since your IRA is the owner of the property, all legal documents must be vested in the name of your IRA (American IRA, LLC, FBO, Your Name, IRA).
  • Purchasing the property from yourself or disqualified persons is prohibited.
  • You are not permitted to manage, repair nor service the property yourself.
  • All investments made with your IRA must be for the benefit of your retirement account. You nor any disqualified person is permitted to receive ‘current benefit’ from your account. Example: Management fees, Maintenance fees, real estate commissions or provide “sweat equity” to the property by performing work.

Professionals

Working with professionals, including real estate agents, non-recourse lenders, title companies, escrow companies, attorneys, property managers, and our IRA real estate custodians is the key to ensuring that you’re making a sound investment.

Our Experience

At American IRA, we do this every day. We have simplified our process so that you can quickly and easily take care of your real estate transactions. If you would like to open a new account or have questions about opening a new account, please contact our office 1-866-7500-IRA(472) or sean@americanira.com. If you are an American IRA Client and you have questions regarding the investment process, please contact our office 1-866-7500-IRA(472) or transactions@americanira.com.

This is a great opportunity afforded to us by our government; as long as you follow the IRS guidelines, this is a phenomenal tool!

 

Jim on Google+

Real Estate in your Self-Directed IRA

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A Self-Directed IRA or “real estate IRA” gives you the freedom to invest in alternative assets.

Such assets include single-family and multi-unit homes, apartment buildings, condominiums (leveraged or unleveraged), improved or unimproved land, commercial property, and more.

The American IRA team was founded by investors for investors…our top management has been investing in real estate for over 40 years, which means our team is familiar with all aspects of real estate investing. Our IRA real estate custodians speak your investment language.

Limitless Investment Options

  • You can, in fact, borrow money within your real estate IRA to purchase real estate. It has to be non-recourse financing (terms may vary by lender); however, non-recourse financing and unrelated debt income tax (UDIT) may apply.
  • Your property manager collects rental income, pays all expenses , and all the profit goes into your retirement account tax free or tax deferred.
  • You can own real estate within a Roth IRA and collect rental income, tax free.
  • You can sell property within your real estate IRA without having to worry about capital gains taxes.
  • You can use a tax-deferred exchange inside your real estate IRA to defer UDIT tax.
  • You can partner with yourself and others at the time of acquisition of the asset.

Important Rules to Remember

  • Neither you nor any disqualified person is permitted to use the property.
  • Since your IRA is the owner of the property, all legal documents must be vested in the name of your IRA (American IRA, LLC, FBO, Your Name, IRA).
  • Purchasing the property from yourself or disqualified persons is prohibited.
  • You are not permitted to manage, repair nor service the property yourself.
  • All investments made with your IRA must be for the benefit of your retirement account. You nor any disqualified person is permitted to receive ‘current benefit’ from your account. Example: Management fees, Maintenance fees, real estate commissions or provide “sweat equity” to the property by performing work.

Professionals

Working with professionals, including real estate agents, non-recourse lenders, title companies, escrow companies, attorneys, property managers, and our IRA real estate custodians is the key to ensuring that you’re making a sound investment.

Our Experience

At American IRA, we do this every day. We have simplified our process so that you can quickly and easily take care of your real estate transactions. If you would like to open a new account or have questions about opening a new account, please contact our office at 1-866-7500-IRA(472) or sean@americanira.com.

If you are an American IRA Client and you have questions regarding the investment process, please contact our office at 1-866-7500-IRA(472) or transactions@americanira.com.

This is a great opportunity afforded to us by our government; as long as you follow the IRS guidelines, this is a phenomenal tool!

 

Jim on Google+

Real Estate in My IRA

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Real Estate IRA?

Many people are surprised to learn that you can own real estate – not just REIT shares or other stocks, but actual rocks, soil, brick and timber real estate – within your Individual Retirement Arrangement. The IRA vehicle allows you to realize all the advantages of the IRA – tax deductions, no capital gains taxes, deferral of income tax, asset protection, and in some cases, tax-free income – while allowing you to invest in all types of real estate.

Self-Directed IRAs

The key to using their IRA to invest in real estate is a special vehicle called the ‘self-directed IRA,’ sometimes called a “real estate IRA.” With these plans, they take over the role normally played by investment companies, such as brokerage companies, mutual fund houses and insurance companies. Instead, they, or their designated representative, take close control of their IRA.

IRS rules don’t allow them to have possession of the assets directly, however. They can’t have a suitcase of stock certificates next to the pile of oily rags by the furnace in their garage and call that their IRA. Instead, they have to have a third party administrator hold the assets on their behalf. When they select our firm as the administrator of their IRA account, however, they have much more flexibility to invest in what they know than they would with a traditional brokerage or insurance company. If they are a mediocre stock picker but a real estate ace, it makes sense for them to stick to their circle of competence. Our firm lays the administrative foundation, and lets them do what they do best – pick real estate – within their IRA.

Prohibited Transaction Rules

The IRS does place some limits on what they are allowed to do with assets in their IRA:

  • They cannot use the property for their own benefit. This means they cannot stay in a rental property, even for a night. Many people make the mistake of thinking they can use the property for up to two weeks for their own benefit without losing the tax advantages of the IRA. It is true that tax rules for rental properties do allow them to stay in their own property for up to two weeks. However, this is not true for real estate within an IRA.
  • They cannot buy property directly from their IRA, nor sell directly to it. Nor can their designated beneficiary, nor any of ancestors or descendants or any spouse of an ancestor or descendant. For example, their IRA cannot buy or sell directly to their parents, grandparents or children, nor to their spouses. Furthermore, their IRA cannot buy or sell directly to companies or entities they own or control.
  • They cannot have the IRA pay them or their company to manage it, nor provide any product or service to it. They also cannot have their IRA do business directly with companies controlled by them or their family members.
  • Their IRA cannot do business directly with any of the professionals who service the account. For example, their CPA or financial planner cannot also be the person repairing the roof on a property owned by their IRA.
  • They cannot lend money directly to their IRA, nor borrow from it.
  • They cannot borrow money directly from their IRA, nor can they use their IRA to lend to their family members, defined as their children, grandchildren, parents or grandparents and any of their spouses or entities they control. However, siblings, aunts, uncles and cousins may be acceptable.
  • They cannot pledge their IRA as collateral for a loan – all debt in the IRA must be non-recourse debt. They cannot sign a personal guarantee on a loan within the IRA.
  • They cannot commingle personal funds with funds within IRA accounts. They may, however, partner with themselves and others at the time of acquisition of the asset.

But enough of what they can’t do. Here is what they can do, investing in real estate in a self-directed IRA:

  • Contrary to popular belief, they can, in fact, borrow money within their IRA to purchase real estate. It has to be non-recourse financing (terms may vary by lender); however, non-recourse financing and unrelated debt income tax (UDIT) will apply. UDIT is only assessed on the percentage of the profit that relates to borrowed funds. For more information on this topic, see our article on leveraged real estate.
  • They can collect rental income, tax-deferred and all the income goes into their retirement account.
  • They can own real estate within a Roth IRA and collect rental income, tax free.
  • They can sell property within the IRA without having to worry about capital gains taxes.
  • They can buy raw land.
  • They can buy residential or commercial real estate.
  • They can diversify by buying real estate in other countries.
  • They can use a tax-deferred exchange inside their IRA to defer UDIT tax.

If they enjoy real estate, they want the chance to use leverage within their IRA account to fund their retirement, and they are up for acting as a landlord, they should consider using a self-directed IRA to own real estate. For a free consultation, please call us at 1-866-7500-IRA (472).

This is a great opportunity afforded to us by our government; however, they need to be watchful of a few pitfalls. If they are mindful of those pitfalls, this is a phenomenal tool.

Commercial Real Estate – In Your IRA?

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Commercial Real Estate – In Your IRA?

As most of you know by now, IRA rules don’t restrict you to stocks, mutual fund shares, bonds, annuities and CDs. Because of the way the tax code is written, you can use your IRA money to take direct ownership of all kinds of different investments, including real estate.

Thanks to the availability of significant leverage, real estate is one of the most potent assets a skilled investor can place in an IRA. The combination of innate inflation hedging, potential for capital growth, and the expectation of a steady, growing and indefinite stream of rental income makes real estate an ideal investment to enhance a retirement income.

Why Commercial Real Estate?

Commercial real estate has many of the same advantages as residential real estate, listed above. But for some of our clients, commercial real estate has a few other advantages as well: It’s easier to “scale up” commercial space for larger accounts without having to buy many smaller properties. Commercial real estate can also generally be repurposed to suit a tenant more easily than a residential property in a market where residential property is underutilized. If you have a good tenant in mind, you can frequently make the deal happen.

Commercial real estate also involves much longer term leases than residential real estate. Residential properties will lease for a year at a time on a good day; but you can demand multiple years and even decade long leases on some commercial spaces – and tenants are delighted to secure them in exchange for security. These longer leases can go a long way to helping you ensure a steady stream of retirement income, without having to go crazy managing many different properties.

Further, you may find a much more inefficient market in smaller commercial properties. Many times, these little warehouses, storefronts and workshops are too big for the residential specialists to handle, but are still below the radar of institutional investors. When you go looking for property, you may find you’re the only one talking to the owner.

Special IRA Rules

Putting commercial real estate in an IRA for tax-deferred growth can be a tremendous way to leverage your real estate holdings while sheltering your rental income from taxes. And if you convert to a Roth IRA at some point, you turn that stream of rental payments into tax-free income for as long as you live.

But there are certain things to keep in mind when it comes to real estate assets in your IRA.

Watch your cash flows. You can roll money from other retirement accounts into your IRA to satisfy liquidity needs. But you can’t contribute more than $5,000 of new money (or $6,000 if you are over age 50) to an individual retirement arrangement in any one tax year –and then only if you meet some fairly stringent IRS limitations on your income. This means that if you need to make any major investments, repairs or renovations to the property, you will need to finance it from within the IRA, or have your IRA borrow the money from a non-prohibited source. Otherwise, the property must be self-sustaining.

Likewise, you can’t pull cash out of the IRA, except for certain specified hardship conditions, until you reach the age of 59 ½, lest you be held liable for any income taxes due on traditional IRAs, plus a 10 percent penalty.

Don’t Engage in Self-Dealing

You cannot use your IRA for any personal benefit, other than simply growing your IRA. Your IRA cannot do business with you. You can’t act as the paid property manager of the property, nor can you lend money to or borrow from your IRA. You can’t live on the premises, or even stay there overnight – even if you pay the market rent to the IRA. The same applies to your spouse, descendants or ascendants, their spouses, your financial and legal advisors working with you on your IRA and properties in it, and any entities they control.

Watch the Financing

IRS rules prohibit you from pledging your IRA as collateral for a personal or business loan. But your IRA can borrow money for its own use. All borrowed funds – and the goods and services they purchase – must remain in the IRA. You cannot commingle the proceeds with your personal money or any businesses outside of the IRA.

Furthermore, all loans the IRA takes out must be nonrecourse – the lender must have no legal claim on anything outside the IRA. Otherwise, you could “blow up” the whole account, and be forced to pay income taxes and penalties on the whole thing. If there’s any doubt, be sure to talk to a professional experienced in self-directed IRA investing before making any commitments. Not all advisors are familiar with the rules specific to self-directed IRAs

Commercial real estate can open up whole new worlds for the real estate investor, with access to pools of capital and partnership opportunities. And many properties can be had at very reasonable prices in today’s market. Expect to come up with some more significant down payments than residential property investors may be used to – on the order of 35 percent and up. That’s a blessing in disguise, in some ways, though, because unless the IRA has significant liquid reserves, it can be difficult to keep a property maintained, given the limitations on new money contributions to IRAs, unless the property is cash flow positive early on.

As always, be sure to work with an advisory team that is very familiar with the rules specific to real estate in self-directed IRAs, who know the rules, the court case precedents and the IRS revenue rulings governing the practice. Most conventional advisors are not experts in nontraditional investing in IRAs.

For more information, or to explore your options, call American IRA today at 866-7500-IRA(472). We look forward to working with you.

Flipping Houses in an IRA

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Flipping Houses in an IRA

For the purposes of this article, flipping is defined as the purchase of property with the intent to sell at a profit shortly after making significant improvements. If you have particular expertise in buying and selling real estate, and you are looking for ways to expand your real estate investment practice in a tax-advantaged way, flipping real estate in an IRA is an excellent way to do so, and you’re in luck: IRS rules allow you to hold a wide variety of assets in an IRA – including real estate. This means that real estate investors can take advantage of all the tax benefits of using an IRA, SEP-IRA, SIMPLE IRA, or solo 401(k) plan. For now, we’ll talk primarily about IRAs.

Advantages of Real Estate Investing

The many advantages of real estate investing are well-known to market veterans. And the vast majority of these advantages apply to retirement accounts as well. Using a self-directed IRA to invest retirement assets in real estate, including property flipping, allows you to take advantage of these lucrative aspects of real estate investing.

Leverage. Real estate has intrinsic value that is well understood by lenders. It is therefore relatively easy to borrow money to leverage your real estate portfolio. While historic unleveraged capital growth in the real estate market are modest and in line with many other asset classes, the judicious use of leverage has historically put real estate in a class of its own, when looked at on a return on invested capital basis. The IRS allows you to borrow money within your IRA to leverage real estate purchases, as well as handle immediate cash flow needs. Any loans taken out by your IRA need to be non-recourse loans only. The lender can have no claim to any collateral outside the IRA, and you cannot sign a personal guarantee.

Diversification. Real estate has historically provided an important diversification benefit against more traditional retirement investing asset classes such as stocks, bonds and funds.

Inflation Protection. As the purchasing power of the dollar declines, real estate potentially provides an important hedge against the ravages of inflation. A given plot of land, for example, will still yield the same number of bushels of wheat or corn, regardless of whether the dollar collapses or not. And no matter what happens to inflation, people still need to live somewhere. Demand for housing transcends inflation and everything else in the market.

Potential for Growth. Unlike bond income, the income from real estate investments tends to grow over time. This, in turn, supports gradual appreciation in property prices, and leads to eventual capital appreciation. In some cases, economic development or expansion in an area can cause a rapid and substantial increase in property prices – leading to ‘flipping’ opportunities.

Control. When you invest your IRA assets in a mutual fund, for example, you give up control. You have no input as to what happens with your money, and no control over how the fund manager invests it. You won’t even know what they’re doing with it for weeks or months, when the fund publishes its portfolio. By electing to self-direct your retirement investments, and by investing in real estate, you maintain full control over the investment. You can take positive steps to help the property appreciate in value, such as making renovations and improvements that improve the expected selling price of the property.

Advantages of Using an IRA or Other Retirement Account

Your IRA generally allows you to defer taxes on ordinary income or on long or short-term capital gains – though there are certain exceptions, in some cases, for profits attributable to leverage. This means that you can collect an unlimited amount of rental income, tax-deferred, or tax-free, if you use a Roth IRA. Your IRA generally allows you to defer taxes on profits generated by the IRA–unless, of course, it’s a Roth, which is tax free—until you reach age 59½. If you use a Roth IRA, you never pay income or capital gains taxes. However, if you have profits attributed to leverage, that percentage of your profits will be subject to unrelated debt income tax (UDIT) because it is not IRA money.

Likewise, you can buy or sell an unlimited number of investment properties within your IRA, tax deferred. However, you should be aware of unrelated business income tax. If you are determined to be engaged in the business of “flipping properties” – that is, if the IRS determines you to be a dealer in real estate, you will be judged to be operating a business within your IRA, which may generate a UBIT liability. This is a question you should raise with your tax advisor. Qualified tax advice is a must. American IRA does not provide individual tax advice.

If you use a Roth account, rather than a traditional IRA, your income and capital gains can grow within the account tax free. True, you can also get a deferral on capital gains taxes using a 1031 exchange. But you can only do so as long as you are exchanging one real estate investment property for another, and only during a specific time period. By using an IRA, you can move in and out of real estate as often as you like, provided you keep the sales proceeds in the IRA itself. If a transfer is delayed for whatever reason, you don’t have to worry about incurring a current capital gains tax liability within an IRA like you do if you don’t execute a 1031 exchange by the deadline. This may help you be much more selective about the real estate trades you make.

Considerations

There are some things to be aware of when using your IRA for any kind of real estate investing:

  • You cannot use the property for your own personal benefit.
  • You cannot lend to or borrow from your IRA, nor can your ascendants, descendants, their spouses or any entities they control.
  • You cannot do business directly with your IRA. For example, you cannot set up a construction company and have your IRA hire your company to work on the house. The same restriction applies to your ascendants, descendants, their spouses and any entities they control.
  • You cannot stay in properties your IRA owns, even overnight.
  • If you use leverage, the IRS may impose a tax, called “unrelated debt income tax,” on a portion of the IRA’s profits. In some cases, however, this tax does not apply to assets held in self-directed Solo 401(k) plans. Consult your tax advisor for more information on how this tax may affect you.
  • Any money your IRA borrows must be in the form of non-recourse debt. This means that the lender can hold no claim on any assets outside of the IRA whatsoever. The entirety of the loan must be either unsecured or secured by assets within the IRA. You cannot sign a personal guarantee in this debt.
  • Because there is no tax on current income to deduct against, you cannot take deductions for depreciation of rental properties held in a retirement account.
  • Be aware of the restrictions on contributing new money to retirement accounts. Any expenses your IRA incurs over and above the $5,000 annual contribution limit for IRAs ($6,000 if you are over age 50), for example, must be paid for with money in the IRA already, money rolled over from other retirement accounts, or borrowed. You cannot make a massive cash infusion from outside the IRA using a traditional or Roth IRA account. However, you can take advantage of the higher contribution limits of SEP IRAs or Solo 401(k)s to intervene during a cash crunch, if you hold your property within one of these plans. SEP IRA contribution limits can be as high as $49,000 per year – many times that of an IRA.

Where We Come In

American IRA is a third-party administrator with particular expertise in self-directed retirement accounts, including real estate IRAs, 401(k)s, SEP IRAS and SIMPLE IRAs. Although not IRA products, you can also self-direct Coverdells and health savings accounts (HSAs) as well. This is a very specialized area of investment, and not every broker or other advisor has the skills to navigate the various rules and regulations that apply to self-directed retirement accounts. It’s important to partner with a firm that has skills and experience specific to self-direction and real estate within an IRA or other retirement account.

For more information, or to simply explore your options, call American IRA today at 1-866-7500-IRA (472). We look forward to working with you.

What About George?! Like Many of Us – He Dreams Big – Will His Dream Come True?!

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The Dream

George L., a client of American IRA, LLC, wanted to purchase a 56 unit, 1.2 million dollar mobile home park inside his IRA account.

The Details

George was determined to make this dream a reality and worked hard in negotiations with the owner of the mobile home park finally settling on these details:

  • Purchase price $1,200,000
  • Down Payment $200,000 from an old 401(k) plan
  • Owner financing $1,000,000 at 6% interest

A Word of Caution about Loans inside an IRA

The American IRA account specialist informed George that the owner financing needed to be “non-recourse” to qualify for IRA financing.

The account specialist explained further that “non-recourse” means the property is the only collateral; neither George L. nor his IRA can be held liable.

George went back to the table with the owner and was able to negotiate non-recourse terms for the owner financing.

George is Self-Employed – Why Does That Matter?

It is important because George L.’s self-employed status means he qualifies for a Solo 401(k).

Even though a self-directed IRA and a self-directed Solo 401(k) work in a similar fashion, there are some significant differences.

  • UDIT applies to an IRA and does not apply to a Solo 401(k) on purchase money debt.
  • This saves thousands of dollars that will stay in the Solo 401(k) and grow tax free.
  • Purchase money debt is debt that is originated ‘at the time of purchase’.
    • If George L. adds a second mortgage to the Solo 401(k), the second mortgage WILL be subject to UDIT.

 

  • The American IRA account specialist explained the differences to George L. and then asked him to meet with his professionals to determine whether a self-directed Solo 401(k) was the right tool for him.
    • George L. met with his professionals and decided a Solo 401(k) was the right tool for him.

 

Living the Dream!

George L. successfully completed the transaction purchasing the mobile home park. George was now the proud owner of his 1.2 million dollar, 56 unit mobile home park!

Time to Refinance?

In January 2012, George L. told his professional that interest rates are low and that he was thinking of refinancing the mobile home park that was held by the Solo 401(k).

  • George kept in mind that
  • The loan had to be non-recourse
  • He needed to consult with a tax specialist because he would lose the exclusion from UDIT on any refinance of the mobile home park.
  • He needed to determine if the interest savings was worth the UDIT that would now be due on a balance of $850,000.
  • George L. met with his tax specialist and decided not to refinance.

Key Point

The IRS allows an IRA to borrow money, however the borrowed money is not part of the retirement plan so there is a tax assessed call UDIT. UDIT applies only to the borrowed portion of the transaction. (As mentioned earlier purchase money debt inside a 401(k) is exempt from UDIT).

Example: 100,000.00 purchase price 60,000.00 from the Ira and 40,000 from a non-recourse loan. The UDIT income tax is assessed only on the 40,000 that was borrowed after taking all the normal deductions that are available to real estate investors, such as depreciation, interest, maintenance etc.

Now you may be thinking, ‘Why do I want to pay taxes inside my IRA?’ There are three reasons to subject your IRA to UDIT:

  • Leverage is the key to real estate investing.
  • All profit made outside an IRA are taxed at every level.
  • Profits inside the IRA will compound tax deferred or tax free depending on the type of account you have until they are distributed at the age of 59 ½.

Disclaimer

American IRA, LLC does not give investment advice. They do offer guidance as to the rules and regulations related to their self-directed accounts and the benefits of different account types so that their clients can take that information to their professionals to discuss the ramifications of various decisions on their individual situation.

For more information, or to explore your options, call American IRA today at 866-7500-IRA (472). We look forward to working with you.

Tidal Wave Warning: Real Estate Investors know the Real Estate Market is Swelling with Opportunity! Grab those Real Estate Investment Opportunities and Get that Cash Flowing!

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Cash Flow Real Estate in Your IRA? You Betcha!

The folks on TV talk a lot about the importance of funding your IRA – and they’re always on about investing in stocks, bonds and mutual funds. Some of the more conservative pundits also mention annuities and CDs. But what if you’re not thrilled with the prospects for return in any of these assets?

After all, interest rates are still near record lows all along the length of the yield curve, and bonds may well not even keep up with inflation. Stocks, as an asset class, are limited by a slow outlook for growth – and stock dividends are nowhere near what they were a generation ago. Mutual funds? Well, you can’t get blood out of a stone. Fund returns are limited by the opportunities in the asset classes from which they come.

One option that is less well-known is this: Investing in real estate within your IRA. The tax code doesn’t restrict you to stocks, bonds, annuities and CDs in your IRA or any other retirement fund. In fact, with just a few restrictions on investing in life insurance, jewelry, gemstones, collectibles and certain forms of precious metals, you can take advantage of tax deferral in an IRA to invest in almost anything you can imagine.

Benefits of Real Estate

True, it’s not for everyone. Not everyone is cut out to be a landlord. But a good property manager is great for helping you eliminate this aspect of real estate investing. If you are comfortable with investing in real estate – and you have assets in retirement accounts you can put to work without relying on generating a current income – allocating part of your IRA to cash-flow positive real estate investing can make a lot of sense.

First, you can employ leverage – even in an IRA. As we all know, leverage is the key to making real estate investment work. Contrary to what some believe, your IRA can borrow money. It just has to be a non-recourse loan. That means you can’t use anything outside the IRA as collateral. The lender can only come after the IRA’s assets, and can have no claim on anything else.

Second, with a substantial down payment, real estate has a long history of generating substantial positive cash flow. This is important in a retirement account because there are certain restrictions on how much new money you contribute.

The Best Way to Create Cash Flow

The best asset there is for generating free cash flow is free and clear real estate. Investors find that paying cash for real estate inside their IRA can generate significant cash-on-cash returns that are substantially higher than those available in stocks, bonds, CDs or dividends. After all, lifestyle is based on cash flow.

Keys to Cash Flow Real Estate in an IRA

Build Equity Right Away. If you are not able to pay all cash but you can make a significant down payment, you can still create above average cash-on-cash returns using funds available in your IRA. When leveraging, most non-recourse lenders require a 35 percent down payment, plus cash reserves. This means you can leverage up to just under 2:1 on cash invested.

Maintain Adequate Liquidity. To increase safety, prepare for potential maintenance costs, prepare for vacancies, increase the predictability of cash flow and reduce your anxiety levels, it is important to keep available funds in your IRA. This is because retirement plans limit the amount of money you contribute in a given year. Other solutions include having your IRA borrow money or bring in a partner. However, with proper cash flow planning, you can eliminate a cash crunch as a potential issue.

Remember, the IRA is responsible for paying all of its expenses, including taxes, insurance and maintenance. The IRA is also entitled to all income the assets generate. The IRA’s beneficiary may not receive any benefits until they are eligible to take distributions, which is generally age 59½.

Observe Rules Against Self-Dealing. The IRS gives IRAs a substantial tax advantage in deferral of income and capital gains. In return, they expect you to treat the IRA as a long term asset designed to provide for your retirement security. You can use it for no other purpose. This means you can’t do business directly with your retirement account. You cannot hire your own firm to do the windows and the plumbing. You cannot act as a money lender to your IRA, nor can you borrow money from it. You also cannot stay in the property, even overnight, even if you pay the fair market value rental on the property.

Keep Transactions at Arm’s Length. The restrictions above don’t just apply to yourself. They also apply to your parents, grandparents, children, grandchildren, their spouses, and any businesses or other entities they control. However, the law does not specifically include brothers and sisters.

Understand the Tax Law. While your IRA may not be subject to ordinary income taxes, as long as the money is kept within the IRA, you do have to be careful if you employ leverage. In some cases, the IRS may levy a tax on your IRA’s profits attributable to leverage. This tax is called the unrelated debt income tax (UDIT). However, in some cases, self-directed Solo 401(k) plans may not be subject to this tax. Another tax, unrelated business income tax (UBIT) may apply if your IRA owns an interest in a partnership that employs leverage. This aspect of the tax code can get involved. For more information, consult your tax advisor, or call American IRA at 1-866-7500-IRA (472).

American IRA, LLC’s CEO, Jim Hitt, Addresses A Question His Self-directed IRA Clients Often Ask About Commercial Real Estate Investing

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American IRA, LLC’s CEO, Jim Hitt, addresses a question his self-directed IRA clients often ask about commercial real estate investing. An in depth look at the ‘due diligence’ needed to safeguard your investment.

Jim Hitt has been a successful investor for over 39 years and has a unique expertise in investing with and without a self-directed IRA.

Jim Hitt shares, “When investing with self-directed IRAs, it is the responsibility of the client to do their ‘due diligence’. Recently we have had a wealth of clients asking for a detailed list of ‘due diligence’ items. Many clients know what ‘due diligence’ means but they don’t know the overview. At American IRA, LLC we provide a wealth of information so they are able to do their ‘due diligence’. Readers should keep in mind that while this list is extensive, it is not the end. A professional team is always required when purchasing any type of business.”

Market Analysis: Demographics:

*The offering will say to the effect “gross potential” a.k.a. “pro forma”

  • REO, foreclosures, and distressed sales will need to be evaluated on a case by case basis. These fundamentals will still apply however;
    • Get the real numbers NOT “pro forma” based on the future plan to operate the property
    • Obtain the properties tax return
  • Existing loans
    • Can loan be assumed?
    • Is there a prepayment?
    • Is an extension available?
    • What is currently owned and what are the terms?
  • Verify income

Leases are the most important of all the documents. When reviewing a lease investors should look to see if there are any special arrangements such as: the tenant agreeing to do something each year (ex. New paint, carpet, etc.) and/or the tenant having the first right of refusal on purchase or additional space. Investors should also compare the rent roll to the income documentation and make sure that both report the same income. It is important to see who owns the lease hold improvements. Of equal importance, the investors should carefully read every lease, line by line and they should make notes of anything that stands out to them.

For anyone not familiar with ‘rent rolls’ they include the list of current tenants as well as their name, amount of rent they pay and their contact information. These rolls are important as a high turnover rate in tenants can indicate that there is a problem.

A careful review of expenses is also very important. Bills that should be reviewed include but are not limited to: utilities, taxes, insurance, lawn maintenance, bookkeeping/accounting, and pest control.

Investors should go over every expense and income and be sure they are accurate. Investors are buying ‘income’ and if it does not match up to the proposed price, the price should come down or the investor should exit the deal.

Jim Hitt says, “There is so much more to consider, too much to include in this press release. Some of the additional items of consideration are: surveys, easements, encroachments, and title issues. There are also third party reports that should be ordered: appraisals, environmental, zoning compliance, building, engineering, and ADA compliant. Finally, there are documents that you need to prepare to protect your interest: Tenant and Mortgage Estoppel letters and signed list of personal property included. Investing done correctly can be a winning situation!”

About:

American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self-directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

As a self-directed IRA administrator they are a neutral third party. They do not make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms ). They are not responsible for and are not bound by any statements, representations, warranties or agreements made by any such person or entity and do not provide any recommendation on the quality profitability or reputability of any investment, individual or company. The term “they” refers to American IRA, located in Asheville, NC.

Investor Legal Update & Finding Your Real Estate Niche: American IRA Announces this February 16th Event Hosted by Metrolina REIA

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Investor Legal Update & Finding Your Real Estate Niche: American IRA, a national provider of self-directed IRAs announces this February 16th event hosted by Metrolina REIA. In the wake of the economic storm that has swept the country in recent years, new legislation has surfaced that affects the way in which we do business.

Sean McKay, Vice President of Business Development at American IRA, will have a booth at this event and will speak briefly to the attendees.

In the wake of the economic storm that has swept the country in recent years, new legislation has surfaced that affects the way in which people do business. With many of these new laws, ignorance, contrary to popular superstition; is not bliss. Understanding the new laws can help to avoid disasters like: Putting a Lease-Option tenant in a property, having them quit paying, and finding out that because there is a compliance issue with the minutia of the new regulations affecting Lease-Options (such as using the wrong font size), that rather than 45 days and a few hundred bucks to evict, the property owner is looking at a judicial foreclosure to get their property back, to the tune of 6 months and thousands of dollars in legal fees.

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James Hitt Offers An Expert Opinion On Owning A Business Within Your Self-Directed IRA

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James Hitt, CEO of American IRA, a national provider of Self Directed IRAs, offers an expert opinion on owning a business within self-directed IRAs. With the latest National Association of Realtors housing statistics showing a monthly increase in home sales of 4% and an overall yearly increase in home sales of 12.2%. It is not surprising that investors are forming businesses and purchasing real estate within those businesses.

Mr. Hitt reports “You can run a small business within your self directed IRA without having to worry about taking a chunk of your profits out of it every year to pay income taxes. Further you can buy and sell property as much as you want, within your small business, and you won’t have to worry about capital gains taxes.”

How It Works

While most people don’t realize that IRAs aren’t just restricted to stocks, bonds, annuities, CDs and mutual funds, when they think about the mechanics of it, it’s obvious that they can own a business in their IRA. After all, what is stock ownership but ownership of a fractional interest in a business? Owning a whole business in an IRA, then, is no different than owning all the stock of the business in the IRA. In fact, they can invest their IRA assets in nearly anything they can conceive, as long as it is not expressly prohibited by law. As of 2011, the list of prohibited investments is fairly narrow: They cannot invest directly in collectibles, art, rugs, antiques, metals other than gold, silver and palladium bullion, gems, stamps, coins (except certain U.S.-minted coins), alcoholic beverages, and a few other tangible items related to personal property.

They can also use a Roth IRA to own a business. This means that provided they abide by certain rules, they can operate their business income and capital gains tax free for as long as they live!

That said, if they want to use their IRA assets to start or acquire a business they plan to operate themselves– including a small business that engages in buying and selling any of the above items, there are a couple of things they need to do differently.

Mr. Hitt, interjects, “It is important that you abide by prohibited transaction rules.
When you own a business in a retirement account, you can’t treat it the same way as you do the other entities they control. For example, you can’t have the company in your IRA hire your company to clean the air ducts, even if you pay market rates. Nor can you hire your wife or her company to manage the property. In fact, your IRA cannot buy from, sell to, lend money to or borrow from any of your ascendants, descendants, nor their spouses, nor any entities they control. The same applies to your financial experts and attorneys and their businesses. IRS rules require you to keep a strict arms-length relationship between your, your family, and any businesses or entities you control.”

Watch Their Cash Flows

Remember that they can only contribute a maximum of $5,000 to an IRA in any given year. That limit is increased to $6,000 for those over age 50, but that is still a very narrow window for the infusion of new capital. If their business needs additional capital, they will have to fund everything above that number from existing IRA assets. They may be able to roll over contributions to that particular IRA account from other IRA or 401(k) assets. However, they cannot contribute more than $5,000 in new money, plus allowable catch-up contributions, in any given year.

Additionally, they cannot take money out of the business for their own use until they reach the age of 59½. If they do, their distributions will be subject to income taxes and penalties as they would be for any other IRA account. They must reinvest any earnings back into the IRA until they reach age 59½.

Don’t Pledge the IRA as Collateral for a Loan

This can be a problem for IRA owners whose IRA businesses need to raise capital, for whatever reason. Once the available rollover options and new money contributions are exhausted, then the IRA will have to borrow the money from some other source. However, the only loans IRAs are allowed are non-recourse loans: The bank or lender can have no claim on any assets, in the event of default, that are outside of the IRA.

Don’t Make Personal Use of IRA-Owned Property

They cannot use their IRA or property within it for their own personal enjoyment. For example, if their IRA has a real estate investment company inside it, and it owns a vacation property, they cannot stay in that property themselves, even for a night, and even if they pay fair market rates to the IRA for the use of the property.

Mr. Hitt provides further insight, “It is important that you build a team of experts to assist you in the areas that you are not familiar with. The rules governing self-directed IRAs are complex. Not every administrator understands the ins and outs of this very specialized area of financial planning. It is critical to get advice from a qualified expert who has experience specifically with self-directed IRAs, and who understands and follows the various court precedents, revenue rulings and other factors unique to this kind of investing.”

About: American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

To learn more about American IRA, LLC and self-directed IRAs/self-directed Solo 401(k)s, please contact our office at 1-866-7500-IRA(472).