Real Estate Investing

The Advantages Of Investing In Real Estate Through Your IRA

December 22, 2015 by IRA Services

Real estate has become an increasingly popular investment for a growing number of Americans, due in large part to the consistent property appreciation and rental income that it promises.

Many people do not realize that they can invest their retirement in real estate; as a result, they purchase real estate without reaping the tax benefits of a 401k or IRA.

With a self-directed IRA, you can invest your retirement plan in real estate with several significant advantages, enumerated below.

Delayed taxes on investment gains

When you invest in real estate outside of a retirement plan, you owe tax right away on your rental income. When you sell the property for a gain, you’ll also owe taxes on your gain even if you plan on reinvesting that money in other real estate investments. An IRA delays taxes on your real estate income as long as you keep the money in your retirement account. This can help you earn a higher after-tax-return on your real estate portfolio.

Tax-free growth through a Roth IRA

If you invest through a Roth IRA, your investment earnings are tax-free when you take a withdrawal after the age of 59 1/2. By investing in real estate with a Roth IRA, you will not have to pay taxes on your rental income, your capital appreciation, or your gains from selling a property. In exchange, you do not receive a tax deduction for your contributions into the Roth IRA like you would with a Traditional IRA. However, with a large real estate investment the tax-free growth offered on a Roth IRA may be a better incentive than the initial tax savings on a Traditional IRA because gains in a Traditional IRA are taxable when you start to make withdrawals during retirement.

Leveraged growth

When you invest in real estate, you do not have to pay off the entire purchase at once. You may choose to pay off a portion of the cost and then take out a mortgage for the rest. As such, you can leverage your money through borrowing to earn a higher return. For example, if you put down $100,000 to buy a $250,000 property, your rental income will be coming out of an asset worth $250,000. Even when you take into account the borrowing costs, your return should be higher than if you had just bought an asset worth $100,000– and even better, that higher return is growing tax deferred in your IRA.

Upon purchasing real estate with a mortgage in your IRA, the mortgage can’t be titled in your name; instead it must be titled in the name of your IRA. Furthermore, it must be a non-recourse loan which means the loan is only backed by the value of the real estate that it’s paying for. Therefore, if you default on the loan, the lender is able to seize the property, but your other assets or personal credit score won’t be affected. Thus, while a non-recourse loan may charge a higher interest rate than regular mortgages, it also enables you to better protect your finances.

Protection against inflation and market volatility

The real estate market tends to be more stable than the stock market, as the real estate market lacks the same daily volatility of stocks. As a result, many view investment in real estate as a less stressful and lower-risk opportunity to invest retirement savings. Furthermore, real estate returns historically outpace inflation, allowing your retirement spending power to grow.

Rental income

When you purchase real estate property, you can rent it out for steady rental income. This rental income can then be used to pay off the mortgage and other expenses on your investment property, meaning you just need to come up with the down payment. Any extra rental income can stay in your IRA, where it will grow tax-deferred, and can be used for future investments. When you retire, you may continue to receive rental income to supplement your other savings.

A chance to pay for your dream retirement home

Do you have a dream retirement home in mind? Then your IRA can help you finance that dream. By purchasing retirement property through an IRA, you can use the property’s rental income to pay off the mortgage, as the IRA tax savings will allow you to do so quickly and effectively. When you’re ready to retire, you can withdraw the property title from your IRA and then move into your new home.

If you wait until you are at least 59 ½ to take the property out of your IRA, you’ll avoid the 10% early withdrawal penalty. In addition, you can’t live on the property while it’s still owned by your IRA, as this can lead to tax problems; however, nothing’s stopping you from driving by and seeing your future home, knowing that it’s steadily being paid off with your rental income.

If you’re going to invest in real estate, why not invest with all the possible tax benefits? By using your IRA benefits to their fullest, you can make real estate a more effective part of your retirement plan.

7 Advantages Of Real Estate Investing For Savvy Entrepreneurs

October 15, 2015 by IRA Services

investing, ira advantages

Real estate investing isn’t for everyone. It takes a lot of self-motivation, a willingness to keep up with local market trends and an appetite for some calculated risk. But for those that have a touch of the entrepreneurial spirit, the right real estate investments can yield big rewards for your portfolio.

Here are seven of the biggest benefits of investing in real estate. Are you taking advantage of these?

1. Immediate positive cash flow

When you start a conventional business, it can take years to turn a profit and start earning positive cash flow. But investment real estate properties can be cash-flow positive almost immediately. In most markets, monthly rents are higher than the payments on a long-term mortgage so, even after expenses, you start earning money once you find a rental tenant. The profit margin can also grow over time as you gradually increase monthly rent, while your mortgage payments stay the same.

2. Tax deductions and lower rates

The federal government has a number of tax benefits that encourage real estate investment and can add up to big deductions on your annual tax bill and enhance your overall earnings. You are allowed to deduct all the expenses you incur for renting the property from your rental income, including a large depreciation deduction for the amount you paid to buy the property. Rental income is also taxed at a lower rate than regular business income because you don’t need to pay self-employment tax. In addition, when you sell an investment real estate property, your gains are taxed at the lower capital gains tax rate, instead of regular income tax rates.

3. Tax savings through an IRA

Investing in real estate as part of your retirement plan can offer even more ways to save on your tax bill. The IRS allows investments in real estate through a self-directed IRA, but be mindful of some caveats and exclusions. One of the main benefits of doing this is that you defer paying taxes on your real estate gains as long as you keep those gains – which includes both rental income and profitable property sales – in your IRA. If you use a Roth self-directed IRA, you also won’t owe any taxes on your investment gains when you make withdrawals during retirement.

4. Long-term appreciation

The hallmark benefit of a real estate investment is the steady, long-term returns it creates. While there are market fluctuations – sometimes severe, as we saw in the 2007 crash –real estate values have still consistently increased faster than inflation over the long run. As the United States population continues to grow, so does the need for housing, pushing up market prices. Over the long term, real estate returns are comparable to the stock market, but that’s before factoring in additional tax savings on real estate.

5. Control over your investment

While stock market and real estate investments may yield similar returns, you have much more control over the latter. When you buy a company’s stock, you have minimal to zero ability to influence company decisions that could affect your investment. But with real estate investments, you have a far greater ability to influence your returns. You can research and choose the most profitable investments, add value to the property through reparis and renovations and set rental rates. While rental properties certainly demand a lot of work, the payoff can be considerably more rewarding than stock market investments.

6. Debt leverage

The ability to leverage debt effectively is a crucial investment growth strategy, because it allows you to earn a profit off someone else’s money. In the case of real estate, that “someone else” is the mortgage lender financing the property. If you rent out the property over the life of the mortgage, you are able to pay off the debt incurred for purchasing the home using rental income. Eventually, the house property will be paid off, but you have only paid for a fraction of the investment out of your own pocket.

7. Positive community impact

Finally, real estate investments have the potential to positively impact your community, by improving properties in your area and providing good homes for local residents. All too often, people end up renting from dishonest owners who don’t take care of their properties. By being a reputable landlord, you can feel good about your contribution to society while earning a solid profit at the same time. There aren’t many other growth strategies out there that offer this same intangible benefit.

When you consider these advantages, it’s clear why real estate is a popular investment. Read more about the advantages of investing in real estate using your self-directed IRA.

How To Directly Invest In Real Estate Using An IRA

September 21, 2015 by IRA Services

Investing in real estate or a retirement account are two common – and smart – money strategies that can become even more advantageous when combined. By using the right type of IRA, you can invest in property as part of your retirement plan, allowing you to combine the investment benefits of real estate with the tax benefits of an IRA.

But there are IRS rules to be aware of when using this strategy and, if you run afoul of these, the penalties can be costly. Here are a few important steps and guidelines to keep in mind if you are investing in real estate using an IRA.

Setting Up a Self-Directed IRA

In order to buy real estate for your IRA, you need to set up a self-directed IRA with an investment company that allows such purchases. Self-directed IRAs are managed by custodians and offer a wider range of investment options compared to large brokerage firms, which typically disallow real estate investment. These large firms limit your investment options in order to keep their own expenses down.

Once you find the right company, setting up a self-directed IRA is a simple process. If you already have your money in a regular IRA, you can rollover those funds to a new self-directed IRA.

Buying the Right Property, From the Right Seller

While there are no rules on the type of real estate you can buy with an IRA, there are some strict rules about who you can buy the properties from. You are not allowed to transfer real estate that you currently own into your IRA. You also are not allowed to buy property from a list of “disqualified persons” determined by the IRS. This list includes family members and anyone else with whom you have an existing, personal relationship.

The IRS created this rule to prevent people from buying real estate at an artificially low price and taking unfair advantage of tax benefits when they later sell the property at market prices. The penalties for violating this rule can be steep – the IRS will force you to withdraw real estate out of your IRA portfolio, which would incur taxes and, possibly, a 10% penalty on the value of that withdrawal.

It’s also important to note that you need to put the property title in the name of your IRA, not your own name. Officially, your IRA owns the property, not you. Consult with your IRA custodian on the title when you make the purchase so that you can avoid problems down the road.

Financing Your Purchase

An all-cash purchase – meaning, in lieu of a mortgage, you pay off the entire property all at once – is probably the best way to buy real estate through your IRA. This approach can help you save on taxes and extra financing costs.

If that is not an option for you, it’s still possible to qualify for financing for an IRA investment purchase. But it is more difficult than securing financing for a regular, non-IRA real estate purchase because the lender can only use the actual piece of investment real estate as collateral. You are not allowed to back up an IRA real estate purchase loan with your personal assets. As a result, you’ll likely need to make a larger down payment and owe a higher interest rate on the loan.

Borrowing money can also lead to extra taxes on any rental income you will accrue through this property. The IRS charges Unrelated Business Income Tax (UBIT) when you borrow money to buy an income-producing property for your IRA. This tax applies to the share of the income equal to the amount you borrowed. For example, if you borrowed 50% of the price of the property, you would owe UBIT on up to 50% of your rental income.

Managing Your Investment

After you have made the purchase, you need to make sure you do not run afoul of IRS regulations when you manage the property. The IRS has very strict rules around IRA investment property management. You must pay for any expense that is related to your investment real estate using IRA funds. This includes any repairs, renovations, utility bills, property taxes, and more, so make sure you keep some extra cash in your IRA account to cover these expenses.

In addition, according to IRS rules, you are not allowed to even make repairs yourself to the property. You must hire someone for all repair and maintenance jobs using IRA funds. If you are caught breaking this rule, the IRS can force you to take a distribution.

You are also barred from living in or using your IRA investment real estate for your own personal use. For example, if you buy a beachfront property, you cannot vacation there. Once again, making this mistake can lead to a forced distribution.

Investing in real estate through your IRA takes some extra work but the tax benefits can also make this effort worthwhile.