Sunny Doe has been working as an Engineer in the Bay Area for more than 15 years. Over the years, he contributed to his company's 401K plan and has accumulated over $350K in his IRA rollover account. While it is very convenient to invest in stocks market, he noticed that the returns on the mutual funds in his IRA account are underperforming. As he grows older, Sunny faces the reality that his gray hair is not his asset but rather his liability in the high-tech field. He is also concerned about the volatility of the stock market. On a day the market is doing well, Sunny enjoys checking the balance of his account several times. On a bad day, he convinces himself that tomorrow will be a better day. The recent scandals about backdating stock options, restating financial results and Enron also shook his confidence in public corporations.
After learning that he can use money from a self-directed IRA to invest in real estate, he is motivated as he has been successful in real estate investment where he has more comfort and control. Learning that 44% of net worth per capita in the US is in real estate, he knows he is in the right direction. As he researches more, he learns he can use money from a self-directed IRA account as a down payment. But the IRS precludes any personal guarantee for the loan. This guarantee is a major restriction because all residential lenders require it. Non-recourse commercial loans in which the property itself is the only collateral do not require this personal guarantee. However, the lenders require borrowers to sign carve-outs guarantee to cover losses due to fraud or environmental contamination.
This carve-outs guarantee is a gray area as no one knows for sure if the IRS considers it a kind of personal guarantee. So it is best to avoid signing this "carve-outs" guarantee if possible. In addition, most non-recourse commercial lenders are not familiar with loaning money to a self-directed IRA account with no social security number or federal tax ID as the borrowing entity. So they are somewhat hesitant in lending money especially when the self-directed IRA account is the only borrowing entity of the property. The so-called self-directed IRA and hard-money lenders that do not require the personal and carve-outs guarantees literally charge an arm and a leg, e.g. 8% to 12% interest for the loan. So, getting financing at a low rate seems to be the trickiest part. Having lived in the US of A for a long time, he knows: if there is a demand, then there must be a supply somewhere.
What is a self-directed IRA?
In 1974, Congress enacted The Employee Retirement Income Security Act (ERISA) which established IRA's to give us the freedom to make our own Individual Retirement Arrangement or IRA. ERISA allows you to open an IRA account and control the investment of your money. It did not state that you have to invest in stocks, bonds, or mutual funds. Most IRA companies choose to focus on stocks and mutual funds because it makes good business sense for them. It's kind of like if you go to McDonald's, you won't be able to get Sushi. So if you want to have more investment choices besides stocks and mutual funds, you have to use a service of a self-directed IRA company. Once you open a self-directed IRA account, you can use the money to invest in stocks, bonds, mutual funds, real estate, mortgage notes, businesses, precious metals and other assets.
Self-directed IRA Companies:
Below are some of the companies that offer self-directed IRA accounts. They are listed in alphabetical order. The authors do not endorse any companies.
1. Equity Trust Company, (440) 323-5491, trustetc.com.
2. IRA Services, (650) 593-2221, iraservices.com.
3. Pensco Trust, (866) 818-4472, penscotrust.com.
When you contact these companies for information about their fees, they normally provide a service menu and associated fees. Some are based on the size of the assets, some are based on the services you need.
There are 3 kinds of self-directed IRA companies. You need to know this to understand how they operate.
1. Custodian: this company holds the assets on your behalf and executes your instructions. It is normally a bank or entity approved by the IRS to hold the self-directed IRA assets.
2. Trustee: this company just holds the self-directed IRA assets. It's normally a bank.
3. Administrator: this company just does the paper work. It normally works with a trustee or a division of a bank.
What are some prohibited transactions or restrictions of a self-directed IRA?
1. You are not permitted to buy or sell a property between your IRA account and yourself, or your spouse, or your direct ascendants or descendant.
2. An IRA owner is not permitted to commingle self-directed IRA funds with his personal funds.
Financing for Properties with self-directed IRA Funds. Sunny has several financing options:
1. Buy in cash: this is the easiest and most straight-forward way to invest with fund from a self-directed IRA. However, this puts a major restriction on size of his investment properties. Besides, Sunny loves the idea of using someone else's money to make money.
2. Get seller to finance: this may work out. However, most sellers prefer to get cash for their properties. The seller who agree to provide financing probably had a problem selling the property. And if so, there may be something wrong with the property.
3. Borrow money from a "self-directed IRA" or hard-money lender: these lenders charge very high interest rates, 8% to 12%. Sunny has a major problem with this kind of interest rate. The banks will end up keeping all of the profits!
4. Invest in syndicated properties: Sunny buys a commercial retail property together with other investors. All the co-owners apply for one non-recourse loan. As long as he owns less than 20-30% of the property (this limit is set by individual lender), the lender does not require him to sign any guarantee. This will satisfy the IRS restriction on personal guarantees. Sunny pays the lowest interest rate and can maximize leverage in the best properties. This is the best option for self-directed IRA investors as they co-own a better property at the lowest interest rate. Please refer to the article "What Investors Should Know about Real Estate Syndication" published by the same authors.
Income Tax: Assuming Sunny deposits 25% and borrows 75% of the money to buy the property then 25% of the income will be taxed deferred. This cash flow will go back to his self-directed IRA account. The other 75% of the income attributable to the debt is subject to income tax called Unrelated Business Income Tax or UBIT tax at the trust rate. All of the rental expenses and depreciation are deductible from income. In addition, the first $1,000 of income is exempt from UBIT tax. When the property is sold, the IRA may avoid UBIT and capital gains tax if the debt had been paid off by principal payment at least one year before the sale.
Title to the property: His self-directed IRA account, not Sunny Doe, must be on title to the property. For example if he has a self-directed IRA account with Pensco Trust, he must take title as "Pensco Trust FBO (For the Benefit Of) Sunny Doe's IRA".
The Happy Ending: The syndicator suggests Sunny to consider investing with 4 other non-IRA investors in a $7.9M, 2-year old, 30,900 SF, 12-tenant, and 100% NNN leased upscale shopping center in Lawrenceville, which is a fast growing and prosperous city in the suburb of Atlanta, Georgia. The property is located in front of a Walmart Supercenter; so, he knows it's in a prime location. He also knows this shopping center is an ideal and safe property for his self-directed IRA due to its strong positive cash flow and long term leases compared to single-family residence. The property has a $6M non-recourse loan at a below market rate of 5.6% through 2016. So while the cap rate is respectable at 7.25%, the cash on cash return is over 9% because the interest rate is so low. After reviewing the brochure and financial information of the property, he signs the subscription agreement to move forward with the investment. Since Sunny owns less than 20% of the property, he does not have to sign any guarantees. And this satisfies the requirement from the IRS.
David V. Tran is the President and Chief Investment Advisor at Transmercial (formerly eFunding, Inc.), a commercial real estate & loan brokerage company in San Jose, CA. His website is http://www.transmercial.com He may be contacted at (408) 288-5500. Transmercial does business in all 50 states. He is the #1 US commercial real estate expert author. David currently offers 3 FREE real estate investment seminars:
How to invest in commercial real estate for early retirement income.
How to maximize cash flow with 1031 tax-deferred exchange.
TIC: Fractional ownership in high-value commercial properties.
David's blog features a daily list of Best Commercial Properties in the US to invest for early retirement income.
You are welcome to share this report, unedited and in its entirety, with anyone you like. You may not remove this text. © 2007-2009 Transmercial.
Friday, June 5, 2009
Considering an IRA This Year? Which One Is Right For You? (by Sarah M. Place)
Well, it’s that time again - April 15th is fast approaching - have you funded your IRA yet? Every year the IRS gives us three and a half extra months to make contributions for the previous year and potentially save money on our taxes. Yet every year the dreaded panic starts and the worry begins. Some people like to put off filing their taxes until the last minute just to avoid the pain of handing hard-earned dollars to their favorite Uncle. There are also people holding out simply because they are trying to figure out whether they should be considering a Traditional IRA or a Roth IRA. If you are in this latter group, here are some things to consider:
The Traditional IRA
The actual IRS definition of a traditional IRA is as follows – A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible – either in whole or in part. Also, the earnings on the amounts in your IRA are not taxed until they are distributed. The portion of the contributions that was tax deductible also does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms.
While I do not want to scare you by detailing all of the deductibility rules, this definition may need a little help. So, let’s break this down. A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Therefore a Traditional IRA is any IRA that is not a Roth, SEP, SIMPLE, or Qualified Plan, or a Coverdell ESA.
In addition to potentially benefiting from a tax reduction in the year that you make your contribution, your investments also grow free of federal income taxes until money is withdrawn. Prior to age 70 ½ you may set up and fund an IRA if you or your spouse (assuming you file a joint return) has received taxable compensation during the year. This holds true whether or not you are covered by an additional retirement plan - with one caveat: you may not be able to deduct all of your contributions if you or your spouse are covered by an employer’s retirement plan.
Another reason that IRAs are popular is the fact that they may be used as a “channel” for distributions from a qualified plan such as a 401(k). This is more commonly referred to as a Rollover IRA.
Traditional IRA contribution limits for 2005 and 2006 are $4,000. If you happen to be age fifty or over by the end of the taxable year you may be eligible to make “catch-up” contributions. These catch-up contributions allow you to make an extra $500 contribution to your IRA in 2005. This amount increases to $1000 in 2006.
A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms. There is no limit to the number of IRAs that you can have (however you may want to consider consolidating if your bank, insurance or brokerage firm is charging you fees which take away from your overall return). You may also invest in a variety of different investments inside of your IRA. Many people are led to believe that you may only have CDs inside your IRA. In fact you may own many different types of investments, including stocks, bonds and even real estate (although that is another very tricky topic for another day). Just be careful with what you put inside of your IRA as you want to get the most out of your tax deferral. Many an investor has been led to put an annuity inside of their IRA, which is unnecessary as it is the equivalent of putting a tax deferred investment inside of a tax deferred account.
The Roth IRA
According to the IRS a Roth IRA is also a personal savings plan that operates somewhat in reverse compared to a traditional IRA. For instance, contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income. For both IRA types – traditional and Roth – earnings that remain in the account are not taxed. A Roth IRA can be established at the same types of financial institutions as a traditional IRA.
Simply put, anyone with earned income, subject to limitations, may contribute to a Roth IRA. The participation requirements are similar to those of a traditional IRA except for the fact that a participant may continue to contribute to a Roth IRA after attaining the age of 70 ½ so long as he or she has earned income. An individual may contribute to both a traditional and a Roth IRA for a given year, but the total amount of contributions to both accounts may not exceed $4,000 for a tax years 2005 and 2006. Once contributions are made, the earnings grow tax free and the qualified distributions - also known as withdrawals - are tax and penalty free. The contributions may also be recovered without paying taxes and penalties.
People often overlook Roth IRAs as a retirement vehicle because they do not offer the benefit of tax reduction in the tax year that a contribution is made. However, they do offer other benefits. While traditional IRAs require that distributions be taxed, Roth IRAs do not. This is particularly important because it is likely you will have no idea what tax bracket you’ll be in when your distributions will be made. You may be in the 27% tax bracket today, but you may be in the 36% or higher bracket when you retire. Do the math on that. If your retirement account grows to $1,000,000 for example, you may be paying a significantly larger amount in taxes at distribution time than you may have ever anticipated.
Although Roth IRA contribution limits are identical to those for the traditional IRA, they differ from traditional IRAs in the ability of a participant to contribute. The Roth participant may be limited by his adjusted gross income. The maximum amount of regular contributions that can be contributed to a Roth IRA is the lesser of 100% of a participant’s compensation or $4,000 (plus potential catch-up contributions). The $4,000 maximum contribution limit is phased out depending upon the participant’s modified gross income and filing status.
More detailed information may be found on all of these subjects at http://www.placetrade.com/iras.htm or at www.irs.gov.
The information in this article is for discussion and information purposes only. Nothing contained herein should be considered as an offer to buy or sell any security or securities product. Place Trade Financial, Inc. does not provide legal or tax advice. Please consult your own tax and/or legal advisor prior to investing. This article contains links to other web sites. Place Trade Financial is not responsible for the privacy practices or the content of such web sites. Place Trade Financial is a registered broker dealer, but is not registered in all states. Please contact Place Trade Financial at 1-800-50-PLACE for further information. Member NASD, SIPC.
About Place Trade Financial, Inc.
Place Trade Financial, Inc. (Member NASD, SIPC) is a full service, discount brokerage firm based in Lillington, North Carolina, with a branch office in Raleigh, NC as well. Place Trade appeals to clients with various investment needs, by offering a range of products and services – including stocks, options, mutual funds, extensive fixed income securities, online trading, and no-fee IRAs. Additional services include Wealth Management, college and retirement planning, 401(k) rollovers and business retirement plans. Place Trade Financial, Inc. is also an active member of the Securities Industry Association (SIA). Web address: www.placetrade.com
If you have enjoyed this article, please be sure to forward it to a friend!
About Sarah M. Place:
Sarah M. Place, MBA, President & CEO of Place Trade Financial, Inc., (Member NASD, SIPC), has over seventeen years experience in the financial services industry. She is active in The Greater Raleigh Chamber of Commerce, including Leadership Raleigh (LR21), a member of the National Association of Women Business Owners (NAWBO), a member of the Capital City Club’s Trendsetter’s Board as well as being a board member for the 5th Annual Big Bad Ball. She is a member of the Louisa St. Clair Chapter of the National Society Daughters of the American Revolution and has been involved in several other charities and local activities. Sarah has been a sought-after speaker for well over a decade. She has presented topics including economic issues, investments and retirement planning to numerous groups over the years including the Tufts University Alumni Association and the Cary Jaycees. She is a contributing writer for several publications including the Carolina Newswire, the NC Journal for Women and NC Career Networking magazine.
The Traditional IRA
The actual IRS definition of a traditional IRA is as follows – A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible – either in whole or in part. Also, the earnings on the amounts in your IRA are not taxed until they are distributed. The portion of the contributions that was tax deductible also does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms.
While I do not want to scare you by detailing all of the deductibility rules, this definition may need a little help. So, let’s break this down. A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Therefore a Traditional IRA is any IRA that is not a Roth, SEP, SIMPLE, or Qualified Plan, or a Coverdell ESA.
In addition to potentially benefiting from a tax reduction in the year that you make your contribution, your investments also grow free of federal income taxes until money is withdrawn. Prior to age 70 ½ you may set up and fund an IRA if you or your spouse (assuming you file a joint return) has received taxable compensation during the year. This holds true whether or not you are covered by an additional retirement plan - with one caveat: you may not be able to deduct all of your contributions if you or your spouse are covered by an employer’s retirement plan.
Another reason that IRAs are popular is the fact that they may be used as a “channel” for distributions from a qualified plan such as a 401(k). This is more commonly referred to as a Rollover IRA.
Traditional IRA contribution limits for 2005 and 2006 are $4,000. If you happen to be age fifty or over by the end of the taxable year you may be eligible to make “catch-up” contributions. These catch-up contributions allow you to make an extra $500 contribution to your IRA in 2005. This amount increases to $1000 in 2006.
A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms. There is no limit to the number of IRAs that you can have (however you may want to consider consolidating if your bank, insurance or brokerage firm is charging you fees which take away from your overall return). You may also invest in a variety of different investments inside of your IRA. Many people are led to believe that you may only have CDs inside your IRA. In fact you may own many different types of investments, including stocks, bonds and even real estate (although that is another very tricky topic for another day). Just be careful with what you put inside of your IRA as you want to get the most out of your tax deferral. Many an investor has been led to put an annuity inside of their IRA, which is unnecessary as it is the equivalent of putting a tax deferred investment inside of a tax deferred account.
The Roth IRA
According to the IRS a Roth IRA is also a personal savings plan that operates somewhat in reverse compared to a traditional IRA. For instance, contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income. For both IRA types – traditional and Roth – earnings that remain in the account are not taxed. A Roth IRA can be established at the same types of financial institutions as a traditional IRA.
Simply put, anyone with earned income, subject to limitations, may contribute to a Roth IRA. The participation requirements are similar to those of a traditional IRA except for the fact that a participant may continue to contribute to a Roth IRA after attaining the age of 70 ½ so long as he or she has earned income. An individual may contribute to both a traditional and a Roth IRA for a given year, but the total amount of contributions to both accounts may not exceed $4,000 for a tax years 2005 and 2006. Once contributions are made, the earnings grow tax free and the qualified distributions - also known as withdrawals - are tax and penalty free. The contributions may also be recovered without paying taxes and penalties.
People often overlook Roth IRAs as a retirement vehicle because they do not offer the benefit of tax reduction in the tax year that a contribution is made. However, they do offer other benefits. While traditional IRAs require that distributions be taxed, Roth IRAs do not. This is particularly important because it is likely you will have no idea what tax bracket you’ll be in when your distributions will be made. You may be in the 27% tax bracket today, but you may be in the 36% or higher bracket when you retire. Do the math on that. If your retirement account grows to $1,000,000 for example, you may be paying a significantly larger amount in taxes at distribution time than you may have ever anticipated.
Although Roth IRA contribution limits are identical to those for the traditional IRA, they differ from traditional IRAs in the ability of a participant to contribute. The Roth participant may be limited by his adjusted gross income. The maximum amount of regular contributions that can be contributed to a Roth IRA is the lesser of 100% of a participant’s compensation or $4,000 (plus potential catch-up contributions). The $4,000 maximum contribution limit is phased out depending upon the participant’s modified gross income and filing status.
More detailed information may be found on all of these subjects at http://www.placetrade.com/iras.htm or at www.irs.gov.
The information in this article is for discussion and information purposes only. Nothing contained herein should be considered as an offer to buy or sell any security or securities product. Place Trade Financial, Inc. does not provide legal or tax advice. Please consult your own tax and/or legal advisor prior to investing. This article contains links to other web sites. Place Trade Financial is not responsible for the privacy practices or the content of such web sites. Place Trade Financial is a registered broker dealer, but is not registered in all states. Please contact Place Trade Financial at 1-800-50-PLACE for further information. Member NASD, SIPC.
About Place Trade Financial, Inc.
Place Trade Financial, Inc. (Member NASD, SIPC) is a full service, discount brokerage firm based in Lillington, North Carolina, with a branch office in Raleigh, NC as well. Place Trade appeals to clients with various investment needs, by offering a range of products and services – including stocks, options, mutual funds, extensive fixed income securities, online trading, and no-fee IRAs. Additional services include Wealth Management, college and retirement planning, 401(k) rollovers and business retirement plans. Place Trade Financial, Inc. is also an active member of the Securities Industry Association (SIA). Web address: www.placetrade.com
If you have enjoyed this article, please be sure to forward it to a friend!
About Sarah M. Place:
Sarah M. Place, MBA, President & CEO of Place Trade Financial, Inc., (Member NASD, SIPC), has over seventeen years experience in the financial services industry. She is active in The Greater Raleigh Chamber of Commerce, including Leadership Raleigh (LR21), a member of the National Association of Women Business Owners (NAWBO), a member of the Capital City Club’s Trendsetter’s Board as well as being a board member for the 5th Annual Big Bad Ball. She is a member of the Louisa St. Clair Chapter of the National Society Daughters of the American Revolution and has been involved in several other charities and local activities. Sarah has been a sought-after speaker for well over a decade. She has presented topics including economic issues, investments and retirement planning to numerous groups over the years including the Tufts University Alumni Association and the Cary Jaycees. She is a contributing writer for several publications including the Carolina Newswire, the NC Journal for Women and NC Career Networking magazine.
Self-Directed Real Estate IRAs (by Jo Ann Joy)
If an IRA owner wants to set up a self-directed IRA, certain steps must be followed. In order to set up a self-directed IRA, an LLC should be formed to act as holding company for the IRA property. The LLC should be incorporated where the IRA real estate is located. The LLC should have a tax ID number and a separate checking account. The IRA owner can be the member-manager. The members of the LLC can be the IRA Custodian acting on behalf of the IRA owner and the IRA owner. The LLC will be the purchaser and the mortgagor of the real estate purchased with IRA funds.
The self-directed IRA must be set up with an IRS-qualified custodian, and the IRA will have a custodian account funded with IRA funds only. The IRA owner must comply with all custodian requirements in timely manner. The IRA owner must report all transactions, income, and expenses to custodian, in most cases before the transaction occurs. The custodian will keep records of all investments, transactions, contributions, and distributions and file required reports with I.R.S.
The IRA owner must send contract, title, closing, appraisal, and other documents to custodian for approval and with wiring instructions to fund transaction. IRA funds from the LLC bank account must pay closing costs, maintenance, mortgage payments, and other expenses
A third-party property manager can be hired and paid by with IRA funds. The IRA owner cannot be compensated for property management, commission, accounting, or other duties performed. Property-related expenses must be paid from LLC checking account with IRA funds. No “self-dealing” is permitted, and IRA funds cannot be co-mingled with personal or other funds. Property-related income must be deposited into the LLC checking account and becomes IRA-owned funds. The IRA owner can continue to make IRA contributions to the custodian account in the full amount allowed by I.R.S. The IRA contribution limits still apply, and the custodian keeps track of contributions and report them to IRS.
According to the IRS, a “disqualified person” cannot directly or indirectly buy, sell, or use the IRA real estate. A disqualified person would be the IRA owner, the IRA owner’s spouse, children, parents, and children’s spouses. A disqualified person would also be fiduciary of the IRA owner, an entity owned 50% by the above-stated relatives of the IRA owner, or a 10% owner, officer, director, or highly compensated employee of such entity. The tax laws prevent “self-dealing” between the IRA, the IRA owner, and disqualified persons.
IRA real estate mortgages are usually 70% loan-to-value. The IRA loan must be non-recourse. It is recommended that the IRA real estate be appraised yearly to determine the actual value of the IRA investment. The IRA property can be sold, and the proceeds from the sale must be held in a separate account until they are reinvested. Net income or gain from the non-leveraged portion of real estate is part of the IRA and is not taxed. Net gains from sale of the leveraged portion of the IRA real estate are taxable as capital gains.
Before setting up a self-directed IRA, you should consult a tax professional who is familiar with IRS laws relating to IRAs. Many accountants are opposed to self-directed IRAs, because they are concerned about the lack of IRS guidance on the subject. They are also concerned that the IRS may eventually consider self-directed IRA investments to be taxable IRA distributions.
The foregoing is a general discussion only and should not be relied upon as an opinion or advice on legal, tax, investment, or other aspects of IRAs or self-directed IRAs.
Jo Ann Joy, Esq., MBA, CEO
Copyright 2006 Indigo Business Solutions. All rights reserved.
You may contact Jo Ann by phone at (602) 663-7007, by fax at (602) 324-7582, by email at joannjoy@Indigo Business Solutions.net, and by mail at 2313 East Ocotillo Rd., Phoenix, AZ 85016
For more information about these and other important business topics and for legal consultation, please visit our website at http://www.IndigoBusinessSolutions.net
The future of your business starts here.
About the author
Jo Ann Joy is the CEO and owner of Indigo Business Solutions, a legal and business consulting firm that differs from other business consulting firms, because it offers comprehensive legal and business counseling. Jo Ann has a law degree, an MBA, and a degree in Economics, but she is not a traditional attorney. Rather, she is a strategic business attorney who works closely with clients to create and implement strategies that will greatly improve their performance and success.
Jo Ann uses her talents, expertise, and education to inspire enterprising and imaginative people to make their goals a reality and enjoy professional and personal growth. Her background includes commercial and real estate law, accounting, financial planning, mortgages, marketing, product development, and business strategies. She ran a successful business for 10 years, and she has written and given presentations on many different legal and business subjects.
The self-directed IRA must be set up with an IRS-qualified custodian, and the IRA will have a custodian account funded with IRA funds only. The IRA owner must comply with all custodian requirements in timely manner. The IRA owner must report all transactions, income, and expenses to custodian, in most cases before the transaction occurs. The custodian will keep records of all investments, transactions, contributions, and distributions and file required reports with I.R.S.
The IRA owner must send contract, title, closing, appraisal, and other documents to custodian for approval and with wiring instructions to fund transaction. IRA funds from the LLC bank account must pay closing costs, maintenance, mortgage payments, and other expenses
A third-party property manager can be hired and paid by with IRA funds. The IRA owner cannot be compensated for property management, commission, accounting, or other duties performed. Property-related expenses must be paid from LLC checking account with IRA funds. No “self-dealing” is permitted, and IRA funds cannot be co-mingled with personal or other funds. Property-related income must be deposited into the LLC checking account and becomes IRA-owned funds. The IRA owner can continue to make IRA contributions to the custodian account in the full amount allowed by I.R.S. The IRA contribution limits still apply, and the custodian keeps track of contributions and report them to IRS.
According to the IRS, a “disqualified person” cannot directly or indirectly buy, sell, or use the IRA real estate. A disqualified person would be the IRA owner, the IRA owner’s spouse, children, parents, and children’s spouses. A disqualified person would also be fiduciary of the IRA owner, an entity owned 50% by the above-stated relatives of the IRA owner, or a 10% owner, officer, director, or highly compensated employee of such entity. The tax laws prevent “self-dealing” between the IRA, the IRA owner, and disqualified persons.
IRA real estate mortgages are usually 70% loan-to-value. The IRA loan must be non-recourse. It is recommended that the IRA real estate be appraised yearly to determine the actual value of the IRA investment. The IRA property can be sold, and the proceeds from the sale must be held in a separate account until they are reinvested. Net income or gain from the non-leveraged portion of real estate is part of the IRA and is not taxed. Net gains from sale of the leveraged portion of the IRA real estate are taxable as capital gains.
Before setting up a self-directed IRA, you should consult a tax professional who is familiar with IRS laws relating to IRAs. Many accountants are opposed to self-directed IRAs, because they are concerned about the lack of IRS guidance on the subject. They are also concerned that the IRS may eventually consider self-directed IRA investments to be taxable IRA distributions.
The foregoing is a general discussion only and should not be relied upon as an opinion or advice on legal, tax, investment, or other aspects of IRAs or self-directed IRAs.
Jo Ann Joy, Esq., MBA, CEO
Copyright 2006 Indigo Business Solutions. All rights reserved.
You may contact Jo Ann by phone at (602) 663-7007, by fax at (602) 324-7582, by email at joannjoy@Indigo Business Solutions.net, and by mail at 2313 East Ocotillo Rd., Phoenix, AZ 85016
For more information about these and other important business topics and for legal consultation, please visit our website at http://www.IndigoBusinessSolutions.net
The future of your business starts here.
About the author
Jo Ann Joy is the CEO and owner of Indigo Business Solutions, a legal and business consulting firm that differs from other business consulting firms, because it offers comprehensive legal and business counseling. Jo Ann has a law degree, an MBA, and a degree in Economics, but she is not a traditional attorney. Rather, she is a strategic business attorney who works closely with clients to create and implement strategies that will greatly improve their performance and success.
Jo Ann uses her talents, expertise, and education to inspire enterprising and imaginative people to make their goals a reality and enjoy professional and personal growth. Her background includes commercial and real estate law, accounting, financial planning, mortgages, marketing, product development, and business strategies. She ran a successful business for 10 years, and she has written and given presentations on many different legal and business subjects.
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