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Real Estate Self-Directed IRA Investing in Hawaii

Hawaii’s mild year-round climate and unparalleled natural beauty make it a potentially attractive place for Real Estate Self-Directed IRA investing. Land is scarce and in high demand – and the demand is increasing as Hawaii’s population continues to grow. This creates a natural support for real estate prices. Even as the nationwide market cools off, Hawaiian luxury real estate properties continued impressive double-digit gains in 2017: 33 percent on Maui, 25 percent for Kauai and 24.8 percent for the ‘big island’ of Hawaii.

But there are some very important factors specific to Hawaii that any Real Estate Self-Directed IRA investor should understand before getting involved.

Leasehold vs. ‘fee-simple’ land

Land and politics in Hawaii are closely intermixed. When the Hawaiian monarchy was overthrown in 1898, hundreds of thousands of acres of developable land belonging to the Hawaiian Royal Family were eventually transferred to the Bishop estate and are managed for the benefit of the Hawaiian people.

Many homes in Hawaii are on Bishop Estate land, and Real Estate Self-Directed IRA homeowners do not retain permanent title to the land, but instead enter long-term leases, or take over leases from existing homeowners. Leases are typically decades long, though lease rents are usually reevaluated periodically – every 10 to 15 years. Eventually the lease expires, and the land undergoes ‘reversion’ back to the control of the landlord – at which time the lease is renegotiated, or the landlord decides to go with another tenant.

The term ‘fee simple,’ on the other hand, indicates that ownership of the land is permanent – the Real Estate Self-Directed IRA investor is purchasing the land outright, along with the house.

Real Estate Self-Directed IRA investors should be keenly aware of whether the property they are buying is leasehold or fee simple land.

If you see a listing for ‘fee available’ property, this indicates that the landlord is willing to sell the land outright – at the right price.

Fee simple land is typically more expensive than an equivalent plot of leasehold ground. The remaining number of years on the lease may also be an important factor in obtaining financing or finding a buyer. Financing is nearly impossible to obtain as the remaining lease term gets under 10 years, so the Real Estate Self-Directed IRA buyer may have to find a cash buyer.

Hawaii also has a state income tax, so if you become a Hawaii resident, or you are generating rental income from a property in Hawaii, be prepared to take an income tax haircut of up to 8.25 percent on income over $48,000 per year (single filers) or $96,000 (for married couples filing jointly.)

Property taxes can also be significant – $4.50 per $1,000 of appraised value in Honolulu up to $ million in value, and $9.00 per $1,000 of appraised value in excess of $1 million. So, property taxes on residential real estate are more significant for higher-priced homes. And with median home prices on the island of Oahu now nearing $800,000, it is very easy to find yourself with a home value of more than $1 million, and an increased tax liability, which you will need to pay from within your Real Estate Self-Directed IRA until you are at least age 59½ years old

Real Estate Self-Directed IRA investors should be very aware that they will need to adjust for property taxes and state income tax on income from Real Estate Self-Directed IRA investment properties.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Partnering with your Real Estate Self-Directed IRA

When you have a Real Estate Self-Directed IRA, you may want to take advantage of the benefits which can come when investing with a partner. These can include access to more capital, which allows one to make larger investments with greater profit potential. Despite this, there are also disadvantages to a partnership such as making sure to select the right partner, changes in your future goals and any of the myriad problems that can come when investing with other people.

In order to avoid these potential difficulties with fellow investors, you can consider partnering your Real Estate Self-Directed IRA with family members such as parents, spouses or children who might otherwise be prohibited from doing business with your Self-Directed IRA.  Although they may partner with your Real Estate Self-Directed IRA, after the initial purchase has been made the prohibited individuals can no longer do any business with your IRA. Essentially, they become prohibited people again. This means you cannot change the ownership percentages of these assets once the partnership has been formed.

In addition to these family members, since your Real Estate Self-Directed IRA is a separate legal entity, the perfect, completely trustworthy partner who is guaranteed to have compatible goals is always available – yourself.

Benefits of Partnering with your Self-Directed Real Estate IRA

In addition to greater access to capital from partnering with your Real Estate Self-Directed IRA, there are other advantages. Not only can you purchase more real estate with the larger pool of money, there is also the chance of further enhancing your ability to purchase by possibly qualifying for more leverage.

As well as giving your retirement account the opportunity to make more money, by partnering with your Real Estate Self-Directed IRA yourself you can make additional (although, unfortunately not tax-advantaged) money. The portion of the money which comes from your Real Estate Self-Directed IRA still derives the same tax advantages on its gains as any other investment it makes.

If you partner with family members, more income is made by your loved ones. Even better, if you partner with your family members Real Estate Self-Directed IRA, their income will be tax-advantaged.

Regulations when Partnering with your Real Estate Self-Directed IRA

The are a number of rules when it comes to the operation of your Real Estate Self-Directed IRA. The title for the real estate transaction must state what percentage each of the partners controls. All income and expenses are allocated by the same percentage. All income derived from ownership of the property and its sale must flow in and out of your Real Estate Self-Directed IRA and not your personal funds – unless you are a partner, in which case the percentage you own yourself is directed to your own accounts.

In addition to following the above financial guidelines, there are a number of other rules which apply, even if your Self-Directed IRA owns only a miniscule percentage of the property. Some of them include:

  • Neither you nor any other disqualified person may use the property for your own personal benefit. That can mean only staying there for one night.
  • You cannot rent the house to yourself or any disqualified person.
  • Your Self-Directed IRA cannot contract for goods and services with you, nor with any disqualified persons. For example, you cannot buy a property in the Real Estate Self-Directed IRA and then hire yourself or any other disqualified person to do the landscaping, make repairs or manage the property.

You must always obey the rules which ensure individuals who might be considered prohibited from doing business with your Real Estate Self-Directed IRA remain eligible and avoid significant tax penalties.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.