Buying an IRA Real Estate

Buying real estate with your IRA (or any other retirement account) is possible but it’s not going to be easy without guidance from experts in law and investments. Ideally, a person who wishes to use his or her IRA in purchasing real estate must scout for a plan administrator who will let him do so. This administrator will follow many strict rules, so you would have to do a lot of convincing to get him or her to believe that the property you want is a good investment for your IRA.

Experts advise against administrators who could be working on a commission under financial planners, who could have premeditated designs in selling their very own investments. As much as possible, look for one who would be committed to administering accounts and nothing much else. After doing so, you may then roll retirement funds onto the new retirement account.

If there’s enough cash on the new retirement account, you will be able to buy a self-supporting property. In this program, you will be getting a property that would appreciate in value over the next couple of years. Moreover, this property can generate enough gains to cover its own cost over the years. This means that you would no longer need to shell out money from other resources to pay for it.

Some Important Reminders About USC Section 1031

Businesses rely on investments and assets in order to survive, although there are times when some of these go so bad that it’s time to have them removed. However, rather than go through the trouble of liquidating them and buying a new one, savvy businessmen can simply swap their old assets with new ones, and pay little for the transaction. This is known as real estate exchange.

Section 1031 of the Internal Revenue Code deals with the “exchange of property held for productive use or investment”. While this description sounds pretty straightforward, this does give some limits to 1031; it can’t be invoked to swap one residential property for another, unless it’ll be used for investment (rather than living) purposes. The term “property”, however, is very broad and can include even small things like cars and paintings.

According to the Internal Revenue Service (IRS), up to three of these properties can be designated as replacement properties, provided that the buyer makes a transaction on at least one of them. In addition to that, taxes can still apply on exchanges that involve properties with existing debts and mortgages, like office spaces. This is especially true if, say, the old property has a greater mortgage than the new one because this will mean that the buyer only has to pay off a smaller mortgage after the exchange, which is considered by the IRS as “income”.

Pulling off a Delayed 1031 Exchange

Delayed exchanges under Section 1031 are highly popular among investors. As the name implies, there’s a time delay between the investor relinquishing their property and buying a second one. If you are considering a delayed 1031 exchange but don’t really know how to crack it, here are the steps.

The property owner seeking an exchange on his asset should first acquire a Qualified Intermediary. The party will facilitate the sale by drafting up an exchange agreement and tasking the closing agent to complete procedures on their end. The property will be directly-deeded to the buyer, but the proceeds will be temporarily held up until the owner of the now-relinquished property finds a replacement property no later than 45 days after the close.

For the identification, the exchanger will need to abide by certain rules. The Three-Property Rule allows them to pick three open properties regardless of fair market value. The 200 Percent Rule takes into account any number of properties whose aggregate fair market value shouldn’t be equal to twice their fair market value. The 95 Percent Rule applies to any number of properties regardless of fair market value as long as the person acquires 95% of the properties’ value. The replacement property itself should be secured within 180 days.

What Qualifies as “Like-Kind?”

Section 1031 of the Internal Revenue Code defers taxes on like-kind exchange of properties, but what exactly qualifies as “like-kind?” By legal definition, “like-kind” means that two properties or assets involved in the exchange are of the same nature. If you don’t want your gains to be subject to capital gains tax, you need to exchange the property for another property. Don’t worry about the quality; as long as they are both properties, you’re good.

Aside from exchange, there’s also another way to benefit from a 1031. If you reinvest the gains in the sale of your property on another property, you also qualify for tax deferral on capital gains. However, it still has to be like-kind, so you can’t reinvest the gains in the sale of your property to a car and vice-versa. In addition, keep in mind that the deferral only lasts for the whole tax year, so you need to keep on reinvesting on like-kind property if you want the deferral to last longer.

Even if the properties are like-kind, Section 1031 only caters to properties and assets for productive use in trade or business. Residential homeowners, however, qualify for a 1031 as long as they turn their home into a business (e.g. rental). With this, properties and assets bought for personal use don’t qualify for a 1031.

Self-Directed IRA: The Basics

When you put “real estate” and “IRA” in a single topic, the self-directed IRA usually comes to view. An alternative to the venerable 401(k), a self-directed IRA entitles the holder to any investment tax-free until retirement. Although it’s unclear how many Americans use this special kind of IRA, the Securities and Exchange Commission last year estimated two percent of all IRAs. The fact that companies have reported growth over the years from these IRAs means the number is steadily rising. 

While it may sound like a promising deal, it usually is if you take note of the restrictions behind it. Under the Employee Retirement Income Securities Act of 1974, a self-directed IRA cannot be applicable to certain situations such as paying for a relative’s down payment. More importantly, if you or your family benefits from the real estate you bought with a self-directed IRA financially, there’s a ten-percent tax penalty waiting for you. In addition, any repair job must be funded using the IRA. 

Any deal isn’t without its ups and downs, but many have benefited from self-directed IRAs. Some who moved from other types of IRAs such as Roth IRA claimed that they’ve earned double digits since the switch. Nevertheless, being new to a self-directed IRA is like being new to work or school; without any awareness of the rules, it will be difficult to fit in. A self-directed IRA, when used properly, can be a great help in the long run.

3 Must-Knows about 1031 Exchanges

Making sense of figures in a tax form can be confusing if one’s mind is not adept at number-crunching. For tax whizzes who handle such things that involve much more analysis like investments and properties, it will add up sometime. A tax expert can explain how a 1031 exchange works, for example, in a simple language: it is a method of disposal of property and acquisition of another one without the burden of a capital gains tax. 

Here are three other things a financial genius will tell you about 1031 exchanges. First, it deals with like-kind exchanges. This means, a personal property cannot be sold to buy business assets. Examples of qualified trades include, among others, land for an industrial building, or an office in exchange for a shopping center. 

Second, the barter of properties can be delayed. It is not frequent that a prospective investor will be able to find a land or structure he likes at first scouting. When this happens, a person should be hired to virtually hold the proceeds from the first purchase, and later on use the money to pay for a replacement asset preferred by the first party. 

Third, prospective replacement properties under 1031 exchanges can be multiple. The Internal Revenue Service says it can be as much as three, so long as one is closed within the prescribed period.

Swapping Properties Through 1031 Exchange

After years of managing a residential real estate, landlords may find themselves exhausted with the whole process. Dealing with tenants, settling conflicts, preserving the grandeur of the structure – all of these can cause a lot of stress to entrepreneurs, especially to those who have seen better days. If you are one of the businessmen who would just like to take things easy, then swapping your properties with hassle-free ones can be the solution to your problems.

Entrepreneurs who have grown tired of their properties can do a 1031 exchange, which is a tax-deferred exchange that allows taxpayers to sell business property, income, or even investment, and replace it with a like-kind property. For instance, if you are a proprietor of an apartment building, you can choose to swap it with an industrial building if you feel like treading on a new business path or if you think it will be easier for you to handle.

Aside from allowing you to don a new hat as a corporate leader, a 1031 exchange is a wise tax and investment strategy that will help you save money to fund your other businesses or for safekeeping. However, there is a catch – the capital gains on the sale of the property will only be deferred or postponed if you follow IRS rules to the letter. As long as you are doing your job as a responsible taxpayer, then the odds will stay in your favor.

The Real-Life Monopoly of Property Owners

When it comes to the real world, buying and owning properties is far harder than a board game might show you. Here are three considerations property owners should always keep in mind.

 Reasons for Buying 

Buying a property for business is different from personal use. For one thing, personal properties are not likely to give you much income, if any at all. Think twice before buying when you do not have a concrete plan of action to follow, because it’s usually not cheap being a property owner. 

Smart Use of Assets 

If you’re thinking of buying a business, you should have already thought of many different factors to determine whether or not your idea is a profitable one. Location, for example, affects how many customers you get and how hard it is for you to get supplies. You have to know the basics if you want to make good use of your property. 

Tax Laws 

Things get even more complicated when tax is taken into account. In buying and selling properties, for example, you can actually make a like kind exchange instead, in order to avoid paying certain taxes and to keep your money out at a minimum. Simply put, it’s an advantage to know your tax laws. 

Bankruptcy in real life means more than just a bruised ego, and there are definitely no “Get Out of Jail, Free ” cards for you to use, so if you want to be a property owner, it pays to be smart.