I've recently been sharing steps to consider before investing in real estate in your IRA.
There are layers and layers of complexity when it comes to this topic. Right now, I'm going to wrap it up with two commonly overlooked issues when it comes to real estate in an IRA.
When I create a wealth strategy with a client, two components I always discuss are:
1 - How will they use leverage in their wealth strategy?
2 - What will their role be in their wealth strategy?
Successfully identifying these two key components can make it possible to achieve their goals faster than they thought possible.
These two concepts are even more significant if an IRA is involved because these are two areas where many people get unpleasant tax surprises.
While I am referring to the U.S. tax law here, the importance of analyzing the impact of specific retirement plan rules on your wealth strategy is universal.
#1 Using Leverage in Your IRA Most of the wealth strategies I develop with clients include leverage. The most common form is a mortgage on piece of property.
Leverage can present a few challenges in an IRA.
First, there are tax consequences of using leverage in an IRA.
To the extent an IRA produces income from assets that are leveraged, that income (even if it is tax favored income that is normally not taxed in an IRA) is subject to tax within your IRA.
There are some exceptions to this rule, but the strategy of regularly using the appreciation in a property to fund new deals can present tax consequences to an IRA.
Second, finding a lender who will finance real estate in an IRA may be difficult because you cannot personally guarantee a loan made to your IRA without jeopardizing the tax benefits of your IRA (this is explained more in #2). Therefore, the mortgage must be non-recourse financing secured only by the IRA's assets.
Most banks and financial institutions will not finance residential home loans without a personal guarantee. Those lenders who are willing to do this usually require a higher percentage of cash which then diminishes the role of leverage in the overall wealth strategy.
#2 Your Role with Your IRA With more and more people using self directed IRAs, I see more and more people getting in trouble with the prohibited transaction rules.
Your role with your IRA can have serious tax consequences.
If an IRA engages in a prohibited transaction, it loses its favorable tax status and the entire value of the IRA (not just the portion involved in the transaction) is taxable to the owner as a distribution and may include penalties.
What is a prohibited transaction? A prohibited transaction is a specific transaction the IRS has disallowed if it takes place between your IRA and a "disqualified person."
A disqualified person includes, but is not limited to: - You - Your spouse - Your parents - Your grandparents - Your children - Entities that are controlled 50% or more by any of the above - A person providing services to the IRA
The following are examples of prohibited transactions.
The sale, lease or exchange of property
Example: Your IRA purchases a property from your parents (even if everything is done at fair market value).
Lending money or extending credit to or from your IRA
Example: You personally guarantee the mortgage on a property owned by your IRA. This is an example of extending credit and is the reason why the mortgage on a property in an IRA must be non-recourse and not guaranteed by the owner
Providing services to the IRA
Example: Your spouse performs repairs on the rental property owned by your IRA. Be aware of these potential issuesThe examples I have provided here are just a small glimpse at the prohibited transaction rules. The important thing to remember here is that any time your IRA is dealing with you or a person or entity related to you, you should take the time to make sure you are not engaging in a prohibited transaction.
Focus on your wealth!
Simple 401(K) Asset Allocation Options 401K Investment Advice How Do I Choose the Best Retirement Investment? Provident Fund Withdrawal - Duties of the Regional PF Commissioner
0 comments:
Post a Comment