Monday, August 24, 2009

Buy Real Estate With Your IRA Or 401(k)

Since it's my birthday (not telling what number!), I thought I'd take the day off from blogging and publish an informative piece from one of our business partners. Entrust Arizona specializes in record keeping services for individuals and small business owners who wish to include non-traditional assets within their tax-deferred and tax-free portfolios. The following was provided by Timarie McClendon, director of business development with Entrust Arizona.

It’s a common misconception that the only investments allowed in an IRA or 401(k) is stocks, bonds, and mutual funds. The truth is that broader investment options, including real estate, have been available to the public since 1975. The key is to house your IRA or 401(k) at a company that will allow you to invest in real estate. All real estate investing with your IRA or 401(k) is legal - from single family residences to multi family, raw land, developed land, commercial property and even international real estate.

Self-directed retirement plans have quickly become the talk of the real estate community. Not only are real estate professionals self-directing their own IRA’s into property and projects, they are also using their knowledge about these plans to generate more business.

Don’t be confused by the marketing term “self-directed.” All brokerage firms will offer you their version of self directed. This means you can self directed your money into any of the stocks, bonds or mutual funds they offer. But…..that is where your investment choices end. Finding a truly self-directed administrative firm is not difficult. Some refer to this specific type of IRA as a “Real Estate IRA.” While this is not technically the legal description of a real estate investment within an IRA you can see how this might be the perfect description for the investor who is new to this option.

Understand these real estate investments are just that...investments. The real estate investment must be one that is an “arms-length” transaction. This means that the IRA account holder, as well as certain family members and business associates (disqualified persons), cannot live in a property, rent office space in a property, provide a service, or be involved in transactions in which the IRA buys or sells the property. The critical issue for many is making sure the property remains strictly an investment by avoiding self-dealing or prohibited transactions with family members or business associates. And an investor needs to be aware that all expenses, fees, etc. will have to be paid out of the IRA.

Retirement accounts can partner together in an investment. Utilize the investment power of multiple retirement accounts from people you trust and with whom you may already be doing business. Your IRA or 401(k) can even get a mortgage! You can partner your IRA with a 1031 exchange. You may also partner multiple IRA or 401(k) accounts or even partner personal monies!

You may hear false objections from uninformed advisors such as “that’s illegal”, “it’s too complicated” or “I’ve never heard of that.” Simply put, an IRA is a Trust. It’s that simple. If you understand a Trust, you understand an IRA. To simplify things even further, the IRS code is not written to specifically address what you CAN invest in. It is written to address what you CANNOT invest in. The IRS only prohibits two types of investment transactions - collectibles and life insurance.

You can use your retirement account to invest in real estate and harvest the same tax benefits of the IRA you may currently have invested in the stock market. Self-directed IRA administrative companies function just like your brokerage firms except that they specialize in alternative assets as opposed to securities.

For more information about self-directed IRAs and tax-deferred real estate investing, please take a look at Entrust Arizona's website or give them a call at (480) 306-8404.

Wednesday, August 12, 2009

Maine Adds 1031 Exchange Intermediary Regulation

The state of Maine recently added it's name to a growing number of states instituting 1031 exchange Qualified Intermediary (QI) regulation. Maine Public Law, Regulation of Exchange Facilitators, was enacted by the Maine Legislature in April and will go into effect on Sept 12, 2009.

The new law utilized much of the language we've seen from a number of western states that have been early in adopting new 1031 regulation. Like other states, the Maine law prohibits commingling of exchange funds with operating funds of the QI, but does not require the segregation of each client exchange account (which we strongly support). The new law prohibits any loans to the QI or affiliated person or entity, and requires that exchange funds be invested in a manner that will ensure liquidity and preservation of the principal. Similar to the recently passed QI bills out west, the Maine law also requires ten day notice of any change in control of the QI.

It does require a lower fidelity bonding and errors and ommissions (E &O) insurance coverage that we've seen in other states. The fidelity bonding threshold is $250,000. The Maine act allows the QI, in lieu of bonding, cash deposits or irrevocable letter of credit in that amount or the use of a qualified trust or escrow account. E&O coverage of $100,000 is required (or in lieu thereof cash deposits or irrevocable letter of credit in that amount).

The Maine law does differ in that it requires annual licensure of any person acting as QI for relinquished property in the state. We've written previously about other state licensure provisions being passed. While licensure may allow the state to keep track of those that are acting as QIs in the state, it does little to protect a consumer against fraud until it is too late.

As we've seen in other failed QI cases, having minimal fidelity bonding and E & O insurance doesn't provide as much security to the client as one would think. Bonding and/or insurance protects the firm, not clients of the QI firm. In addition, each act of fraud is not necessarily considered a "per occurance" event so the bonding may fall considerably short of protecting exchange clients.

While each state has, thus far, adopted segregation of client funds from operating funds, we've yet to see a state adopt segregation of each individual client escrow account. This is a recurring issue in the bankruptcies and subsequent legal procedings that have occured in the 1031 Tax Group and the LandAmerica Exchange cases. Clients of failed QIs that do not segregate - and distinctly identify the segregation of funds in their exchange agreement - will, unfortunately, learn that their interest is pooled together in a bankruptcy case as just another unsecured creditor. Since the funds are commonly "pooled" for greater investment returns, individual client funds are not protected as clearly being 'in trust for' a specific client.

Only segregated accounts and an exchange agreement that clearly makes use of segregation language can ultimately provide protection for clients of Qualified Intermediaries that sell. Of course, due diligence should be performed to make sure you know the financial condition of the QI you chose. Publically available financial statements, forthcoming answers to questions of segregation and investment policy/practices and a solid exchange agreement should all be provided.

If you've interest in discussing provisions of this new state law, or any other pending or passed exchange facilitator regulation, the Federation of Exchange Accommodators is working hard to balance the interests of clients and industry member firms to maximize protection of clients while minimizing the regulatory burden/costs and would be happy to answer many of the questions. We at 1031 Corporation would be happy to answer any questions you might have in selecting a Qualified Intermediary or information specific on how we protect our client funds. Give us a call today at 888-367-1031.

Tuesday, August 4, 2009

1031 Corporation is Going Green!

Going green is easy with a 1031 exchange. Green as in the Three R's - Reducing, Reusing and Recycling your capital gain tax dollars! The 1031 Exchange option is the perfect “green” way to hold onto your money and reinvest it into another like kind investment. Taxpayers should never have to pay income taxes on the sale of property if they intend to reinvest the proceeds in similar or like-kind property.

Through an IRS tax-deferred exchange, you are able to reduce your tax liability. A 1031 exchange provides the ability to defer the capital gains tax with the purchase of like-kind replacement property that would have been due and payable. For a real estate exchange, like-kind replacement property means any improved or unimproved real estate held for income, investment or business use.

Your Qualified Intermediary must hold and forward net proceeds from the sale of your property to the purchase of the replacement property. If you receive cash or have a trade down in value you may have "Boot". Boot is the money received or the debt reduction received by the taxpayer in an exchange. The rule of thumb for avoiding "boot" is to always replace with property of equal or greater value than the relinquished property.

The tax basis of the old property becomes the new tax basis in the replacement property. If you “bought equal,” the basis in the new property is the same as it was on the old property. In a 1031 exchange, the basis rolls forward from the old property to the new property. If your replacement is a trade up in value you will be able to increase your basis by the amount of the trade up. This trade up allows you to increase the amount available to be depreciated.

Just remember the three R's for going green are Reduce, Reuse, Recycle. 1031 Corporation is ready to assist you in Reducing your tax liability, Reusing your proceeds from the sale of your relinquished property on the purchase of your replacement property and Recycling your ability to depreciate by purchasing up in value on the replacement. Are you ready to go green? Give us a call today at 888-367-1031.