Real Estate an investment option for retirement funds.
The unpredictable stock market this year has inspired many people to seek alternative investments for their retirement funds. One option that is attracting a lot of interest is real estate. In many parts of the country, real estate continues to offer higher, more stable returns than traditional investments in stocks, bonds, and mutual funds.
While investing your IRA Ira, in the Bible
Ira (ī`rə), in the Bible.
1 Chief officer of David.
3 Two of David's guard.
IRA. funds in real estate offers many potential benefits, the rules are complex and the penalties for noncompliance noncompliance
failure of the owner to follow instructions, particularly in administering medication as prescribed; a cause of a less than expected response to treatment.
noncompliance can be severe. Whatever you decide to do, be sure to obtain professional advice to avoid unpleasant tax and costly surprises.
Many Happy Returns
Investing your IRA in real estate not only offers potentially higher returns, but in most cases taxes on the property's income and appreciation are deferred until you start taking withdrawals. You can even sell the property and buy replacement property without taking a capital gains tax hit (although, as discussed below, your gain may eventually be subject to ordinary income taxes).
If you have a Roth IRA Roth IRA
An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first , the income and appreciation may escape taxation altogether. Roth IRAs are funded with nondeductible contributions, but withdrawals are tax-free, provided you hold the account until you reach age 59 1/2 (or die or become disabled) and meet certain other requirements. Also, unlike traditional IRAs, Roth IRAs are not subject to minimum distribution rules that require you to start taking withdrawals at age 70 1/2.
The rules governing IRA investments in real estate are far more complex than those that apply to more traditional investments.First of all, if your current custodian doesn't permit you to invest in real estate, you'll need to move the funds into a self-directed IRA Self-directed IRA
An IRA that the account holder can after appointing a custodian manager to carry out investment instructions.
self-directed IRA that allows it. Most custodians do not like to hold non-traditional (other than stocks and bonds) assets.
Next, you need to worry about unrelated business income tax Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization. (UBIT UBIT Unrelated Business Income Tax
UBiT Universitetsbiblioteket I Trondheim (NTNU Library) ). Ordinarily, rental income earned in an IRA is not currently taxable. But if the real estate is financed by a mortgage, some of the income may be considered unrelated business income. That means your IRA will have to file annual returns with the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. and pay UBIT on some of its income at ordinary income tax rates. The best way to avoid this is to have the IRA pay cash for the property, but then you lose the ability to leverage the real estate purchase.
The prohibited transaction rules are another big concern. These rules limit the ability of IRAs to engage in transactions with their owners or beneficiaries. For example, you're not permitted to sell property or lend money to your IRA, guarantee a loan to your IRA, pledge IRA assets as security for a loan, or provide goods or services to your IRA. Also, you can't use your IRA to buy a vacation home Vacation Home
A home separate from an individual's primary residence that is used for recreational purposes and may also be rented out at unused times.
For tax purposes, those who rent their vacation homes may result in a lower amount of allowable expense or other property for the personal en joyment of you or your family.
The prohibited transaction rules create some obstacles for investors in commercial or residential real estate. You won't be able to provide management services, for example, either personally, through a family member, or a company that you control. That means you'll have to hire an independent property management firm. Also, the IRA must have sufficient liquid assets Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. to cover operating expenses Operating expenses
The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. and other costs--you won't be able to pay them personally.
The penalty for violating these rules can be harsh: Taxes and penalties on the entire IRA balance, regardless of the size of the prohibited transaction.
Investing your IRA in real estate offers several potential tax benefits, but there are many tax disadvantages as well. You'll lose the benefit of depreciation and other deductions, for example, and if you have a traditional IRA, the gain on any property sales will ultimately be taxed as ordinary income instead of as a capital gain.
Also, with a traditional IRA, you'll need to be sure you have sufficient liquidity to make required minimum distributions once you reach age 70 1/2.
Weigh Your Options
Using a traditional or Roth IRA to invest in commercial or residential real estate can provide significant benefits, provided you plan carefully and understand the risks and limitations. To determine whether this strategy makes sense for you, work with your advisors to weigh the expected tax benefits, against the potential tax costs.
Marc Wieder, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. ANCHIN, BLOCK & ANCHIN LLP LLP - Lower Layer Protocol