Buying Real Estate with Your IRA
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Transcript of Buying Real Estate with Your IRA
KEY POINTS TO TAKE AWAYReal Estate in Your IRA
You choosethe investment
All expenses are paid bythe IRA and all incomeis received by the IRA
Any IRA or formeremployer plan qualifies
Advanta IRA is a self-directed retirement plan administrator serving clients nationwide. We provide our clients
exceptional personal service, experience, and knowledge that is paramount in administrating self-directed IRAs.
With a combined 20+ years in our industry, Advanta IRA is the nation’s premier self-directed IRA administrator. We also provide a more flexible fee schedule than most custodians.
EXPERIENCED
We use multiple banks that are insured by the FDIC to protect the undirected cash held within your IRA.
SECURE
With clients across the nation, Advanta IRA holds over $700 million in assets and partners with a network of trusted CPAs and attorneys.
TRUSTED
Our account manager system guarantees clients concierge-style personal service. Advanta IRA also offers cutting-edge educational tools for all types of investors.
PERSONAL
WHO WE AREAbout Advanta IRA
OUR LOCATIONSAbout Advanta IRA
We serve clients nationwide with regional offices in Florida and Georgia.Call us at 800.425.0653 or visit www.AdvantaIRA.com today.
OUR LEARNING CENTERAbout Advanta IRA
ADVANTA ON-DEMANDADVANTAIRA.COM/LEARNING-CENTER
Watch free investment training videos and learn how to build a
self-directed plan that’sright for you
THE ADVANTA BLOGBLOG.ADVANTAIRA.COM
Get the latest industry news, updates, and insights from our
team of professionals
ADVANTA EVENTSADVANTAIRA.COM/EVENTS
Seminars, webinars, networking, and lunch and learn events to help
you learn the ins and outs of self-direction
Powerful knowledge about self-directed retirement plans and alternativeinvestments is available at your fingertips:
Did you know self-directed accounts only add up to less than 2% of IRA investments.
HAVEN’T HEARD OF A SELF-DIRECTED IRA?
Maybe it is because the most common IRAs are administered by banks and investment brokers who offer limited investment products.
However, the IRS regulations allow a much broader range of investments.
What Is a Self-Directed IRA?
?
A self-directed IRA is a unique investment account that allows alternative investments to be held as assets that can potentially build tax-free or tax-deferred wealth at a faster
pace than traditional methods may.
The term self-directed simply means that theowner of the IRA has control over what
investments the IRA makes.
DEFINITION
Self-directed IRAs can acquire real estate, hold mortgages and notes, private placements (such as LLCs and trusts), precious metals, invest in foreign currency and participate in futures trading and other investment options.
These plans can certainly hold the traditional stocks, bonds, and mutual funds, but the myriad of alternative investments are what attract owners of these accounts.
What Is a Self-Directed IRA?
SELF-DIRECTED PLANSTypes of Assets and Accounts
TraditionalIRA
SEPIRA
RothIRA
EducationSavingsAccount
SIMPLE IRA
Individual(k)Plan
HealthSavingsAccount
PLANS
PLANS AT-A-GLANCETypes of Assets and Accounts
TRADITIONAL IRA
CRITERIAAnyone with earned income is eligible to contribute to a traditional
IRA; deductibility may be limited based on annual income
BENEFITSTax deduction, lowering your current tax bill* + Tax-deferred growth +
Former 401(k) can be rolled directly in with no tax consequence +Retirement savings
*Deductibility phased out depending on income
Check with your CPA or accountant to help determine which option would be the best fit for you and your business.
1
PLANS AT-A-GLANCETypes of Assets and Accounts
ROTH IRA
CRITERIAAnyone with earned income which does not exceed the income limits
is eligible to contribute to a Roth IRA*
BENEFITSTax-free earnings and no taxation on withdrawals + No mandatory
withdrawals + Low tax situation this year and expect higher taxes in the future + Contributions may be made after age 70½
*Can contribute to traditional and then convert to Roth
2Check with your CPA or accountant to help determine which option would be the best fit for you and your business.
PLANS AT-A-GLANCETypes of Assets and Accounts
EMPLOYER-BASED ACCOUNTS: SEP IRA, SIMPLE IRA, 401(K)
WHO THEY ARE FORSole proprietors, independent contractor, self-employed, partner,
corporation, or S corporation
BENEFITSSEP and SIMPLE IRAs offer tax-deferred growth like traditional IRAs, but have larger contributions limits; they also offer lower administrative costs than a 401(k) plan + You must include certain employees in SEP
and SIMPLE + Individual(k) offers largest potential contribution for a business without employees (no discrimination testing necessary) +
Roth individual(k) option available
3Check with your CPA or accountant to help determine which option would be the best fit for you and your business.
PLAN CONTRIBUTION LIMITSTypes of Assets and Accounts
FOR YEAR 2017
Traditional / Roth IRA $5,500 ($6,500 if over 50)
SEP IRA Up to $54,000 (25% of compensation)
SIMPLE IRA $12,500 (additional $3,000 if over 50) +up to 3% of employer match)
401(k) $18,000 (+ $6,000 if over 50) of salary deferral+ 25% employer match up to $54,000 ($60,000)
ESA (education) $2,000 per year, per child
HSA (health) $3,400 individual (+ $1,000 catch-up) / $6,750 family
INVESTMENT OPTIONSTypes of Assets and Accounts
Realestate
Single-member
LLC
Notes &mortgages
Privateplacements/
privatestock
Otherinvestments*
Futurestrading
Foreigncurrency(FOREX)
INVESTMENT
OPTIONS
*Other investments include: Oil and gas rights � Tax certificates � Structured settlements � Commercial paper � Convertible notes � Commodities � Livestock �Timberland � Rights or warrants � Accounts receivable factoring � Equipment leasing � and more
TYPES OF ASSETSTypes of Assets and Accounts
Real Estate Assets• Commercial• Rehabs/flips• Timeshares• Residential• Condos• Duplexes
TYPES OF ASSETSTypes of Assets and Accounts
Paper Assets• Mortgage loans• Tax liens• Unsecured notes• Debenture notes• Option contracts• Assignments• Joint venturing• Accounts receivable
TYPES OF ASSETSTypes of Assets and Accounts
Other Alternative Assets• LLCs• Farm animals• Partnerships• Movie projects• Precious metals• Equipment leasing• Forex accounts• Private stock• Commodities• Oil/gas
MOVING MONEY TO A SELF-DIRECTED ACCOUNT
TransferMoving funds directly from one IRA account to another without the client handling the funds. This is a non-taxable, non-reportable event.
Types of Assets and Accounts
Transfers with an IRA are unlimited.
How and WhenComplete a transfer form with the firm you will be moving funds to. They submit it on behalf of your IRA. Transfers are non-recordable and you can do them as often and whenever you like.
MOVING MONEY TO A SELF-DIRECTED ACCOUNT
Direct RolloverMoving funds directly from an employer-sponsored plan (401k, 403b, 457, TSP, pension, etc.) to an IRA, without the client handling the funds. This is also non-taxable.
Types of Assets and Accounts
Direct rollovers with an IRA are unlimited.
How and WhenContact your plan administrator and let them know that you are rolling funds to an IRA. Direct rollovers are a recordable event, but as long as they come directly from your qualified plan to your IRA, there are no consequences and you can do them as often as you like.
MOVING MONEY TO A SELF-DIRECTED ACCOUNT
Indirect RolloverIf you personally take possession of the funds from an IRA or employer plan, you have 60 calendar days to move those funds back to an IRA to avoid taxes. This can only be done once per 12 months.
Types of Assets and Accounts
Indirect rollovers with an IRA are unlimited.
How and WhenAn indirect rollover occurs when you take a distribution from your IRA or qualified plan. One per 12 month period. This is a recordable event and should the funds fail to be deposited to your IRA account within 60 days, they are forever out of the account.
PROHIBITED TRANSACTIONSTypes of Assets and Accounts
INVESTMENT RESTRICTIONS
Life insurance
Collectibles (antiques, alcohol, artwork, stamps, and coins*)
*Some coins are allowed if they are valued based on the trading value of the metal
✕There are three elements to a prohibited transaction (the IRA, the DP, transactions
between IRA and DP). An IRA cannot lend money to a disqualified person or entity under any circumstance. There are no exceptions to this rule.
PROHIBITED TRANSACTIONSTypes of Assets and Accounts
DISQUALIFIED PERSONS (DP)
IRA owner and spouse
Lineal ascendants of IRA owner (parents and grandparents)
Lineal descendants of IRA owner (kids and grandkids), as well as spouses of lineal descendants
Business or entity owned or controlled by one of the above
Others
✕There are three elements to a prohibited transaction (the IRA, the DP, transactions
between IRA and DP). An IRA cannot lend money to a disqualified person or entity under any circumstance. There are no exceptions to this rule.
PROHIBITED TRANSACTIONSTypes of Assets and Accounts
OTHER CONSIDERATIONS
Dealing with brothers, sisters, other family members for less than fair market value (i.e. lending money to them at less than what a third
party might charge)
Using a middleman between IRA and disqualified person (step transaction doctrine)
A’s IRA lends to B; B’s IRA lends to A
Having an IRA lend money on a note and having that note secured by a collectible (collection/re-possession issue)
There are three elements to a prohibited transaction (the IRA, the DP, transactions between IRA and DP). An IRA cannot lend money to a disqualified person or entity under
any circumstance. There are no exceptions to this rule.
✕
TRANSACTIONS WITH DISQUALIFIED PERSONSTypes of Assets and Accounts
IRA owns real estate and leases it out to your daughter
Your father’s IRA lends money to you or your son
IRA purchases a piece of real estate from your son
Your IRA makes the down payment for a property andyou personally guarantee
the mortgage
Spouse’s IRA owns a pieceof real estate and wants tosell your IRA a portion ofthat property (could have partnered at the outset?)
Your IRA purchases real estate and hires your son
(or his company) to performthe rehab work
USING IRA FUNDS TO INVEST IN REAL ESTATE
§ Don’t take funds out of your 401(k) to invest in real estate
§ If you remove funds from an IRA or employer’s plan, you are then personally subject to taxes
§ If you then use these funds to invest in real estate, you will have lost 20-30% of your purchasing power to taxes
§ By transferring or rolling these funds over to a self-directed IRA, no taxes are due and you have more cash to invest
Example:
- Client has $100K in an IRA
- Doesn’t know about self-directed IRAs
- Removes cash from current custodian to invest and faces possible 10% early withdrawal penalty and income taxes
- By using self-directed IRA, NO taxes or penalties for early withdrawal to invest
Real Estate in Your IRA
!
THINGS TO REMEMBER: FRACTIONALLY OWNED LLCs AND LLPs
§ Since the LLC is fractionally owned, if there is a capital call for the LLC, the IRAs would all need to put up the same percentage of the capital call to maintain ratios
§ If an IRA owner puts up the money for the capital call, this would be a prohibited transaction
§ The manager of the LLC is responsible for then making the investments, receiving and depositing income, and paying expenses out of the LLC account
§ When the IRA owners want cash disbursed back to the IRA accounts (either periodically or when the LLC is closed), the funds then return to each IRA or party according to the percentage of ownership
Real Estate in Your IRA
INVESTMENT STRATEGY: CHECKBOOK CONTROL
§ A checkbook control IRA is an entity in which the IRA owns 100% of the LLC membership, and the IRA owner is named the manager of the LLC
§ Checkbook control allows the manager/IRA owner to write checks directly to fund investments, pay bills, sign contracts, etc.
§ If the IRA owner wants to be the manager, they should consult with an attorney prior to setting up the LLC
Real Estate in Your IRA
§ The IRA custodians who offer the “one-stop shop” of an IRA, an LLC, and a checkbook to get started, charge several thousand dollars for this arrangement
§ There is no secret formula that an IRA custodian has that makes an LLC allowed or disallowed by the IRS, and Advanta IRA does permit this investment with a signed disclaimer
§ If you are interested in reading the IRS cases on which the checkbook control IRA is based, they are:
- Swanson v. Commissioner 106 TC 76 (1996)- T. L. Ellis, TC Memo. 2013-245
INVESTMENT STRATEGY: KNOW YOUR FACTSReal Estate in Your IRA
1 2 3PURCHASING REAL ESTATE THROUGH TRUSTSReal Estate in Your IRA
CASE STUDY
The private trust document is drafted
• Within private trust, the IRA is listed as grantor and beneficiary of trust
• Advanta IRA FBO Joe Smith IRA #8001234
• Joe must name a non-disqualified person as trustee
• Trust is not public record
CASE STUDY
The trust document isapproved by Joe
• Joe must read and approve trust and sends approved copy to Advanta IRA
• Joe also has trustee sign trust document
• Advanta signs trust agreement on behalf of IRA
CASE STUDY
Joe opens and funds anAdvanta IRA account
• Completes an IRA application• Transfers/rolls over funds from an
existing IRA or 401(k) • Account number issued in less than
24 hours
4 5CASE STUDY
Joe’s trust operations
• Joe instructs his trustee to purchase particular assets in name of trust
• Trustee will sign documents, enter into contracts, etc. • Trustee will then deposit income to trust account and pay any
bills out of trust account
CASE STUDY
FundingJoe’s trust
• Joe’s trustee must get tax ID number for trust to open bank account
• Advanta IRA issues check from IRA to fund trust• Joe’s trustee deposits check to trust bank account
PURCHASING REAL ESTATE THROUGH TRUSTSReal Estate in Your IRA
TWO MAIN TYPES OF TRUSTS WITH IRAsReal Estate in Your IRA
PERSONAL PROPERTY (TO HOLD NOTES, MORTGAGES, AND OTHER ASSETS)
Joe’s trustee opens bank accountand purchases assets
Joe’s trustee must maintain records ofincome and expenses
LAND TRUSTS (TO HOLD REAL ESTATE)
Advanta IRA will act as record-keeper
Joe must approve all closing documents
Joe’s trustee signs closing documents
All rents and expenses flow in and out of IRA
USING FINANCING WITH AN IRAReal Estate in Your IRA
UDFI TAX CONSIDERATIONS
Total monthly rents $12,000 $1,000/month
Total rent subject to UDFI $6,000*
Tax rate (using top end) 39%
Total taxes paid $2,340
Net income after UDFI $9,660 $6,000 + $3,660
Monthly payment $3,597.36
Total income minus taxes $5,108.64
*This doesn’t include deductions and depreciations that would limit impact of UDFI.
LET ADVANTA IRA HELP YOU TODAYGetting Started
OPEN ACCOUNT
Opening an account with Advanta IRA only takes
a few minutes. We pair you with your own client services
representative who guides you every step of the way.
DONE STEP1
FUND ACCOUNT
Add funds by making a cash contribution or by moving or transferring funds from an existing IRA or 401(k) plan.
DONE STEP2
START INVESTING
Choose from a wide variety of alternative investments
including real estate, notes and mortgages, single-member
LLCs, private placements and private stock, precious metals,
and other assets.
DONE STEP3