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Industry News |
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February 20, 2012
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Some individuals choose to invest self-directed IRA’s in businesses owned by a neighbor, friend or sibling. For example, an individual could roll over money from a previous 401k or existing IRA into a self directed IRA. Once this process took place, they could then designate their business investment and their retirement account could collect profits from the investment. All this tax deferred or tax free depending upon the type of retirement account.
There are a variety of Self-directed retirement plans that can be funded via a self-directed retirement account which include: A Roth Solo 401(k), which can provide many similar tax benefits as the Roth IRA (tax deductible contributions and no taxation upon withdrawals); Savings Incentive Match Plan for Employees, also known as a S.I.M.P.L.E., a smart decision for investors with lower incomes ($45,000 per year or less) who would like to invest in small corporations of less than one hundred employees. The S.I.M.P.L.E. account allows tax deductible contributions and taxable deferment on any gains until distributions are made. If you’d prefer not to invest directly into a business, another option is to make an IRA loan from the account. Before deciding upon an investment, be sure to speak with a knowledgeable accountant or tax advisor concerning Unrelated Business Income Tax (UBIT).
Whatever expenses associated with maintaining the business can be written off on the corporate tax return. Don’t forget that any profits from your investment cannot be used personally (i.e. you are not allowed to work for the company or be paid a salary). Making a business investment is another excellent way to utilize the flexibility associated with a self directed IRA. This is a great way to put your business savvy , corporate experience, and creativity to work by paving the way towards retirement.
Self-Directed IRA holders tend to most commonly invest in Real Estate within their accounts. However, did you know that your self-directed IRA can fund a privately owned business? Though providing private capital for companies is oftentimes a more difficult investment to quantify compared to real estate or the stock market, it could prove to be profitable nonetheless. A few options for consideration in that venue may include: opening your own new company, equity investment into an existing business, or purchasing an existing franchise. The ability to decide where and how your self-directed IRA will be invested does allow you the flexibility to consummate the investment at your own pace. For self-directed Roth IRA’s, beneficiaries are able to utilize the tax-free gains to further grow their self-directed retirement account balance.
While making a private equity investment into a business with a self-directed IRA is less traditional compared to other investment options, the I.R.S. prohibited transaction rules are still applicable. If a beneficiary of the self-directed IRA violates the prohibited transactions rules, it may result in devastating federal income tax consequences. If a beneficiary invests in an entity that is owned by a spouse, parent, child or grandchild this would constitute an I.R.S. prohibited transaction, making the entire amount of the investment subject to early distribution plus penalties. To safeguard against prohibited transactions, self-directed IRA custodians help account holders stay in compliance with these rules. Custodians also assist with account disbursements for investments, account recordkeeping, however, as a third party administrator they do not provide any investment advisement.
Utilizing a self-directed IRA to acquire unimproved real estate has proved to be a good long term investment option for many investors. If it would be advantageous to finance your land purchase, you may consider the use of a non-recourse loan which could be provided through Island View Mortgage. All capital used to purchase and improve the real estate must come from either the IRA or a non-recourse loan on the property. Most locations within the U.S. are considered non-recourse states. The mortgage you use for any real estate held within a self-directed IRA must be a non-recourse loan. With your self-directed IRA as the borrower, you are not personally liable for any more dollars than the real estate is worth. Any creditor may take your land through the foreclosure process in the event of a loan default. Because it is a non-recourse loan, the creditor is not legally permitted to require any further money from you or your IRA, even if the value of the land is less than the amount owed.
Non-recourse states hold their own unique anti-deficiency statutes that provide protection for borrower of the loan. These states include: Alaska, California, Idaho, Arizona, Texas, Washington, Utah, North Dakota, Minnesota, North Carolina, Connecticut and Florida. It is important to consider that different non-recourse states each have differing laws. For instance, certain states, including California, stipulate that a borrower is only protected by non-recourse laws if the loan is a purchase money loan where they borrow from the seller as opposed to a bank. In addition to non-recourse states, you should also know that there are one-action states, which include: New York, Montana, California, Idaho, Utah and Nevada. Here, lenders are entitled to one lawsuit in which to collect their debt from the property.
A self-directed IRA allows flexibility to acquire any type of residential or commercial property, from an office building, single family investment, or raw land. Self-directed IRA’s combined with real estate investing create many options for investors. One such option is to purchase a parcel of land very inexpensively. There are typically two primary options: you can resell the parcel of land for a higher price than you bought it for or you can build a new structure on the property with additional IRA dollars or obtain a non-recourse construction loan. If you decide to resell the land, all profits flow back into your self-directed IRA. Some advantages of acquiring land in a self-directed IRA are:
- The ability to diversify your investment portfolio;
- It generally is a stable investment;
- When completed properly, there is a higher likelihood of profit over the long term.
If you choose to invest in real estate with your self-directed IRA, there are quite a few prohibited transactions to be aware of. You cannot participate in the following:
- Sell land that is owned personally to your IRA
- Purchase land from your IRA
- Use the land for any personal advantageous reasons
- Allow a family member or descendent to utilize the land
- Grant a loan from your IRA for the land
- Use your IRA as security pledge to obtain a loan
- Provide or receive services or goods to or from your self-directed IRA
The Internal Revenue Service (I.R.S) periodically published bulletins regarding transactions that are prohibited with a self-directed IRA (e.g., re-purchasing investments owned personally, purchasing or selling to/from a spouse, child and/or a parent). Allowable investment options aren’t classified by the IRS, only specific prohibited transactions. Some examples of acceptable that are within the scope of I.R.S. compliance include: investment properties, private mortgage loans, condos, duplexes and tax lien certificates. A good rule to remember is that any asset owned by your self-directed IRA that would be used personally would be constituted as an “indirect benefit” and could jeopardize the tax deferred status of your IRA. Each self-directed IRA beneficiary has the sole responsibility to ensure they are always in compliance with I.R.S. rules regarding prohibited transactions.
While there are rules that must be adhered to, growing your wealth through a self-directed IRA is limited only by the ingenuity and expert knowledge of the person making the investment decisions. Directing your own IRA offers the flexibility and control needed to incorporate the most useful and profitable assets to your IRA. When investing in real estate it provides benefits like compounded interest, asset protection, and potentially a reduction of taxable income. Coupling a self-directed IRA with investment real estate has proved to be a profitable choice for many investors. Knowing how to ensure the transaction meets the I.R.S. rules will help safeguard your self-directed IRA from any early withdraw penalty.
It’s essential to know your options when it comes to your self-directed IRA. Real estate investments have been used by many to pave the way for a more comfortable retirement. Investing in properties can be a smart way to maximize returns for a self-directed IRA. When employing the use of a non-recourse loan, investors are able to purchase real estate for a deep discount off and potentially earn enough profit to completely pay off their non-recourse loan. Non-recourse loans are beneficial because they protect other assets held by the IRA by using the property solely as collateral for repayment of the loan. Be sure to speak to an accountant or C.P.A. regarding Unrelated Business Income Tax (UBIT), which could affect your investment strategy.
Self-directed IRA’s are a useful vehicle to purchase distressed homes. These properties can be acquired for a reasonable discount and then either rented or resold. Purchasing a larger commercial rental property such as an apartment is also considered by many investors. Being your own property manager allows your oversight on any repairs and renovations. Instead of owning and renting a property, you may decide to purchase and resell real estate—both domestic and foreign. Investing in raw land or personal loans are also other investment choices for your self-directed IRA. Because self-directed IRA’s allow you to control your own retirement funds, these transactions swiftly, cautiously, and decisively be implemented.
Deciding what kind of investments to make using your IRA funds can be a daunting process. While the traditional options of stocks, bonds and mutual funds still remain available, re: there are also alternative investments as well, like precious metals or real estate. Choosing to invest in real estate is a common way to build your self-directed IRA portfolio. Foreclosed property can often be purchased at a discounted price or tax lien certificates could be purchased. Profits can be made in your retirement account with little to no involvement in managing or maintaining the real estate. This option doesn’t require a great deal of money to be in your self-directed IRA. Many self-directed IRA holders select a non-recourse loan in conjunction with their purchase of investment real estate. The rental income generated from the property repays the non-recourse loan and any additional cash-flow is credited back to the self-directed IRA custodian.
One of the most important things to determine before opening a self directed IRA is how to abide by the guidelines regarding IRS prohibited transactions. The security that is provided by managing your own self-directed IRA can prove to be a lucrative one, however maintaining this requires adherence to the limitations of the accounts use. Prohibited transactions, as defined by the Internal Revenue Service (IRS), could mean your IRA becomes disqualified and your tax deferred status for that account revoked, causing tax liability to the beneficiary of the account. Some examples transactions include involvement of: a spouse, a parent, a grandparent, children and/or their spouses, grandchildren and their spouses. Staying updated about IRS guidelines for self directed IRA’s is the first step to preparing for a self-directed account.
A self-directed IRA, whether used solely or combination with a non recourse financing, creates new potential for investment opportunities and allows the flexibility to manage your own wealth. With this program, you have the power to determine how to invest and your transaction can be completed by issuing a check or wiring funds from your self-directed IRA account. With an LLC funded by a self-directed IRA, any investment that you choose is able to be completed without needing approval from a 3rd party IRA custodian. Not only do self-directed IRA’s allow for additional investment freedom, they still provide asset protection, estate planning benefits, and income tax deferred profits.
If you are considering opening up your own self-directed IRA, then you must decide whether a traditional IRA or a Roth IRA is a better fit for you. Both types of IRAs offer some form of tax benefit. Contributions to a Roth IRA are made with after-tax dollars, while a traditional IRA calls for pre-tax contributions. Any contributions made to a pre-tax are tax listed as a deductible expense on your personal tax return. Also, with a traditional IRA, your account balance remains tax free until funds are withdrawn. With a Roth IRA, this keeps your funds tax free during a withdrawal if the account has been opened for more than 5 years and the account holder is over the age of 59 ½. A Roth IRA is favorable choice for investors who may be expecting to move into a higher income tax bracket in retirement. A Traditional IRA can increase the account balance through tax-deferred reinvestment compounding.
Minneapolis, MN, August 9, 2011 – Island View Mortgage, a commercial real estate finance company, announces the official roll-out of their self-directed IRA non-recourse loan programs.
With investors looking for innovative ways to safeguard their nest egg and generate a return on investment, real estate has become a fast growing asset class for self-directed IRA holders. The various programs offered by Island View Mortgage allow investors to obtain a non-recourse 1st mortgage loan on 1-4 family residential properties, apartment buildings, or other commercial real estate. Unlike other commercial finance companies, Island View specializes in this unique type of non-recourse financing used almost exclusively for self-directed IRA investors and Institutional purchasers of commercial real estate. These innovative programs allow self-directed IRA investors to take advantage of historically low real estate prices and leverage their purchase.
The company, based in Long Lake, Minnesota which is a suburb of Minneapolis, has begun a new venture in an emerging market of self-directed retirement accounts. Catering to the seasoned real estate investor, Island View Mortgage has various programs for both qualified retirement account holders or privately held corporations.
The CEO, Joshua Manier states, “At Island View Mortgage, fidelity to the client, industry leading programs, and specialized personnel make us head and shoulders above our competitors.”
Island View Mortgage approaches every business decision with the clients’ interests first in mind. Never before has a commercial finance company offered the combination of product offerings along with the first hand personnel to advise clients on these matters. Mr. Manier went on further to say “it is time to give the real estate investors the resources and convenience they deserve with detailed examples of lending strategies, easy-to-use online loan applications, fast response time, and expert advisement.” It is clear that Island View Mortgage has tapped an emerging market with self-directed IRA real estate investors.
Island View Mortgage is a Investment Real Estate Financing company based in Minneapolis. Island View Mortgage provides investors a professional approach to assessing and implementing their investment real estate financing needs.
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