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.
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.
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.
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.
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.