Considering commercial property investments with an IRA.
With so many people disenchanted with the inconsistent performance of the stock market in recent years, commercial real estate has become a prime target for investors. This shift in investment focus has helped fuel the needs of commercial real estate builders and others in the market. Additionally, the ability to use retirement funds--which might otherwise be sitting idly or making marginal returns on stocks and bonds--gives the real estate investor the ability to diversify and makes congregating money considerably easier for financiers and builders.
Commercial properties of all kinds can be held within an IRA, or almost any other kind of retirement plan, if structured according to IRS guidelines. This includes everything from gas stations to office complexes, strip malls to mega-malls, hotels, motels and industrial parks to high-rise towers. Any property that will be used for business can be considered a commercial property, and its purchase can be treated like any other real estate transaction as far as a self-directed IRA is concerned. Flexibility is one of the main reasons to use a self-directed IRA for real estate transactions. A property can be quickly acquired, with the required fees and costs being directly paid for from the IRA. There are several other ways that investors can benefit by using an IRA to purchase commercial real estate as well.
The Kelley family of Charlotte, NC, recently used their IRA to purchase two commercial properties that have since generated excellent cash flow and appreciation. Investors like the Kelleys taking the route of investing in real estate with an IRA can gain a number of favorable tax benefits from the appreciation and cash flow of the property. In the case of a Roth IRA, funded with after-tax money, the investment is not taxed while growing and is tax-free upon distribution (unlike with a traditional IRA, which is funded with pre-tax money and is taxed at the time of distribution). In addition, a Roth IRA has no minimum distribution, so it is up to the investor when (after 59 1/2) and how much he or she takes as a distribution.
Unlike 1031 exchanges, when buying real estate with an IRA there are no specific investment timelines or requirements to purchase "like kind" investments to prevent being taxed. Finally, when the property is sold, the IRA prevents any capital gain exposure, since taxation of an IRA does not occur until distribution.
Structures available today make the process of using a self-directed IRA easier, safer and less expensive. A specially structured Limited Liability Company compliant with IRS regulations, known as an IRA LLC, allows the investor to maintain checkbook control of their account, meaning that he or she can write checks for the investment (such as putting down a deposit) more freely. An IRA LLC speaks directly to the investor's ability to control the disbursement of funds and reduce fees paid to a custodian (since he or she does not have to rely on the firm for approval or pay a fee for each check written). By nature, the IRA LLC also legally provides an added layer of asset protection.
When the Juraks of Dallas, TX, funded the purchase and development of a property in St. Croix, having complete control of their IRA funds was absolutely imperative in order to be able to make deposits and improvements. In contrast this transaction would not have been allowed by many self-directed IRA custodians not wanting to deal with investments beyond our borders as expressed in corporate policies. As well, the transaction costs and custodial requirements may have been high, and dealing with the custodian intervention may have been too cumbersome for the business owner and his family. Therefore, the use of a IRA LLC became a crucial tool in giving them control and leading to their success.
Because of the strict rules the IRS has established, investing in real estate with a Roth or other type of IRA is not something that investors should undertake alone or that people in the commercial industry should provide advice on without first partnering with someone who can provide expertise in this area. For people in the industry looking to invest or to help others to invest in this way, the following are some considerations to keep in mind:
* Extensive knowledge of self-directed investments should be sought out to implement advanced methodologies and provide solid advice. The advisor must supply support and education to put together all the pieces of the self-directed IRA puzzle, enabling the investor to see the big picture and make the most educated investment decisions.
* Ability to offer advice. It is impermissible for an IRA custodian (versus a self-directed IRA advisor, or other financial "advisor") to offer advice. By law, custodians must maintain a neutral position and can only convey the IRS regulations and their firm's investment policies; they cannot offer advice on transactions. Usually, the investment firm that holds your traditional IRA investments, like Fidelity or Vanguard, is not in the position to be able to advise you on self-directed IRAs.
* Checkbook control can be afforded by creation of an IRA LLC. An IRA LLC is not a regular LLC; rather it is an investment vehicle compliant to the IRS code, which provides the investor the ability to write checks against self-directed IRA funds so he or she can act quickly, as well as providing the benefits mentioned above.
* Protection. People in the commercial real estate industry looking to partner and investors themselves should look for a firm with the knowledge to provide protection against creditors and litigation, through increased overall asset protection with an IRA LLC.
* Staffed tax attorneys. Investing in real estate and other non-traditional assets with an IRA is greatly simplified by having the right individuals on hand. A reputable self-directed IRA advisor will have attorneys on staff who can provide accurate information and flexible tools to satisfy individual investor objectives. A very important consideration is the self-directed IRA firm's compliance with circular 230. Circular 230 IRS requirements demand that individuals and/or firms that offer tax advice provide accountability to their clients and to the IRS itself.
With the many advantages that nontraditional IRA investments enable--including greater control over investment options, tax favorable income and even the potential to count on higher returns with less risk--they can be a highly valuable retirement vehicle for investors of all levels. Self-directed IRA investments can also be a great way for individuals in the commercial real estate industry to distinguish themselves with clients, secure funding and/or make smart investments on their own.
BY DANIEL CORDOBA, PRINCIPAL, ASSET EXCHANGE STRATEGIES
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|Title Annotation:||INSIDER'S OUTLOOK|
|Publication:||Real Estate Weekly|
|Date:||Jul 5, 2006|
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