Friday, February 26, 2010

Buy Real Estate in Your IRA

This is an article by Kelli Click at Sterling Trust that I've found very informative.

Retirement Planning
Buy Real Estate in Your IRA

A little-known IRS provision lets you extend your real estate purchasing with tax-deferred dollars.


Are stock market woes preventing you from building wealth in your retirement account? If so, you might be interested in a small, but growing, trend among individual retirement account owners—investing their retirement funds in real estate.

How It Works
If the option of using tax-deferred funds to purchase property sounds appealing, you’ll need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including atraditional IRA, a Roth IRA , and a Simplified Employee Pension plan, or SEP-IRA.

To find a custodian that specializes in real estate, search under terms such as “real estate IRA” or “self-directed IRA.” This latter term was coined by the financial industry in the 1980s to distinguish the self-directed IRA from other IRAs that focus on stocks and bonds. The IRA account holder can’t serve as the custodian of his or her own account. However, it’s important to select a custodian knowledgeable about the types of investment you’re interested in, because the custodian holds title to the real estate. Do your homework, and understand what you’re getting into.

Fees can vary widely among custodians, as can the flexibility of the services provided for account holders. If the custodian holds real estate on your behalf, but does not service it (collect the rent, etc.), you may have to contract with other providers. However, be sure that all rents are paid into the IRA and that all taxes are paid by the IRA.

Purchasing the Property
Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.

Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note.

Unfortunately, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you can’t have any personal use or benefit of the property. To do so may cost you plenty in taxes and penalties.

There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents, or your children also couldn’t have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only “lineal descendents” be disqualified.

Once you’ve chosen a property, your IRA custodian—not you personally—must actually purchase it. The title will reflect the name of your IRA custodian for your benefit (such as Silver Trust Co., Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you’ll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.

Operating an IRA-held Property
Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your IRA, you’ll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your IRA account so you can use that money to cover your costs. You also can make annual contributions within federal guidelines.
Currently, you can contribute $3,000 annually to a traditional or Roth IRA ($3,500 if you’re age 50 or older) and as much as 15 percent of your annual compensation, up to $40,000, if you’re a self-employed individual with a SEP-IRA. If your account doesn’t have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal.

It’s also possible to sell properties while they are held by your IRA, so long as the purchaser is not a family member. Once a deal closes, your IRA account now holds the cash proceeds—ready for you to make your next investment. An alternative is to sell an IRA-held property with seller financing so that all payments made by the buyers are paid to the IRA.

Distributing Your Property
You can withdraw real estate from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property. Under that arrangement, your IRA custodian assigns the title to the property to you. You will then have to pay income taxes on the current value of the property if it’s been held in a traditional IRA. If the property was held in a Roth IRA, you won’t owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate over time.

Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.

IRA Options
While any form of IRA allows for real estate investment, there are other pluses and minuses to consider when choosing the account type that’s best for you:

  • A traditional IRA lets you deduct annual contributions (currently set at $3,000, or $3,500 if you’re age 50 or older) from your income. However, once you begin withdrawing money, those funds will be taxed as regular income.
  • A Roth IRA gives you no deduction on your current contributions (again $3,000), but does allow you to withdraw funds tax-free. If you expect to buy a real estate investment in an IRA and hold it for a long period, this is probably your best option, particularly if the property increases in value over that period.
  • A SEP-IRA is designed for self-employed individuals and small companies. You can contribute up to 25 percent of your compensation, or $40,000, whichever is less. However, keep in mind that if you have employees, you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP-IRA are treated like those of a traditional IRA for tax purposes.

    Kelli L. Click is vice president of sales and marketing at Sterling Trust Co., a self-directed IRA and 401(k) custodian, in Waco, Texas.

Tuesday, January 19, 2010

FAQa About Owning Real Estate In Your IRA Or 401k

I recently put together the following list of FAQa on using your IRA or 401k to purchase real estate.

Real Estate IRA FAQ’s

Question: I’ve never heard of this before. Is it new?

No investments in real estate, non-traditional investments and LLCs have been allowed since the creation of the IRA. However, only about 2% of all IRA funds are invested outside of stocks, bonds and mutual funds. Why? Because most investors don’t know they have other options available. Stockbrokers and bankers have no incentive to explain all the options to you.

Question: Why does my current IRA brokerage firm say I can’t buy real estate in my IRA?

Custodians determine the type of assets they will hold and may not choose to hold all assets the Internal Revenue Service (IRS) allows. Life insurance contracts and collectibles are the only investment types prohibited by the IRS as an IRA investment. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option. So, just because your broker doesn’t offer real estate as an investment, doesn’t mean that you can’t do it; it just means that you can’t do it through that brokerage firm.

Question: Are there restrictions on the type of property that my IRA can purchase?

No. As long as it is an investment, your IRA can purchase any type of real estate (raw land, pre-development, commercial, residential, etc.).

Question: I’d like to buy a vacation home now and rent it out until I retire, then use it as my residence during retirement. Is this allowed?

No. This is a common prohibited transaction. You can never occupy a property purchased with IRA or 401k funds.

Question: Can my IRA invest in an LLC with other members?

Yes. You, any family members, their IRAs, eligible 401(k)s (or other qualified plans), and unrelated third parties may all be initial members of an LLC created to purchase real property. Each member’s interest is held separately within the LLC. Once the initial funding of the LLC is complete, however, future transactions may be limited due to the prohibited transaction and self-dealing rules.

Question: Are there going to be taxes and penalties when I move my IRA into the Self-Directed IRA?

Absolutely not! You are not taking money out of your IRA; you are transferring the assets into another type of IRA that allows you to self-direct the investment choices.

Question: At what again can I begin to withdraw money from my IRA?

You can begin at the age of 59½.

Question: I have an old 401k from a former employer. Can I roll it over to a self-directed IRA for real estate investment?

Though almost all 401k or corporate pension plans will not allow rollovers for current employees, once an employee leaves, he or she can rollover their pension plan into an IRA. The full amount does not have to be rolled over. Only move it to a self-directed account when you are ready to begin using the IRA for real estate investment.

Question: Can I buy a fixer-upper with my IRA, use the IRA money to fix it up and then be the property manager?

Yes. With the Self-Directed IRA you can do all of these things, check with your custodian to confirm they will hold the property in your IRA before you make a purchase offer.

Question: Can I contribute real estate or real estate paper to my IRA?

No. Contributions must be in cash. However, you can convert a traditional IRA that holds assets other than cash, to a Roth IRA. Some determination of value will need to be filed with the custodian to set the value of the conversion for tax purposes.

Question: Why wouldn’t I not go ahead and transfer to a true self-directed custodian?

There is no reason to move the IRA to a self-directed custodian until you are ready to start using the funds to invest in real estate investments.

Question: Can I make a loan to myself from my self-directed IRA to invest in real estate or must I use other people's IRA funds?

You cannot borrow from your own IRA personally or through entities you control. This is a prohibited transaction. Even if the money will be used to purchase an investment, neither can you personally loan money to the IRA to purchase property in the IRA.

However, you can borrow money from someone else’s IRA to fund the purchase of a property for yourself as long as that individual is not considered a disqualified person. Likewise, you could loan money from your IRA to someone who is not a disqualified person.

Question: When must I start distributions from my Roth IRA?

Unlike the traditional IRA where distributions must start at age 70½, there is no requirement to make distributions from a Roth IRA during the life of the owner. Only upon death must distributions begin to the beneficiaries.

Question: When can I begin an IRA for my child or grandchild? Are there age limitations?

Great idea! There are no age limitations, but the child must have earned income to qualify. The IRS sets some strict criteria to assure the child really did do work at a reasonable wage. Just two years of $3,000 contributions to an IRA starting when the child is 13 in an account that averages a 10% return will be over $1,000,000 when the child reaches 65!

Question: What am I not allowed to do with real estate in my IRA?

Your IRA cannot directly or indirectly buy real estate from a "disqualified person".

Who is a disqualified person?

The IRA owner;

The IRA owner's spouse, descendant (e.g., son), or ascendant (e.g., mother);

Spouse of a descendant of the IRA holder;

A fiduciary of the IRA or person providing services to the IRA (e.g., the trustee or custodian);

An entity at least 50% of which is owned (or at least 50% of the beneficial interests are held) by a combination of the above (e.g., if you and your spouse own 50% of an LLC, that LLC is a disqualified person with respect to your IRA); or a 10% owner, officer, or director or highly compensated employee of such an entity.

Question: Where can I get a non-recourse loan for my IRA to buy property?

There are at least four sources for financing which do not violate the non-recourse requirements for IRAs.

  1. Seller financing. Most sellers understand that if the loan goes into default they get the property back anyway, so asking for the loan to be non-recourse should not be too difficult to negotiate.
  2. Private financing from financial friends. If you cultivate a reputation as a professional real estate investor, there should be no reason that your financial friends would not loan your IRA money on a non-recourse basis, either from their own funds or from their own IRAs.
  3. Banks and hard money lenders. Non-recourse loans are not the norm; so many banks will turn you down. However, there are a few banks that make these types of loans, and at least one bank, which lends in all 50 states.
  4. Finally, as mentioned above, you could take over a property subject to an existing loan, provided the originator of the loan is not you or another disqualified person.

Question: Is a Roth IRA a smart estate-planning tool when I plan on leaving the assets to my children?

Yes. The Roth IRA continues tax-free compounding even after you pass away. The children can get distributions tax-free over their projected lifetimes. For example, just $30,000 left to a six-year old at a 10% annualized return will generate over $4.6 million in distributions over the child’s lifetime!

Question: What is a Simplified Employee Pension (SEP) plan?

A SEP, also known as a SEP-IRA, is a retirement plan established by an employer. A one-person business is considered an employer for these purposes and may establish a SEP. An employer can use this SEP plan to make contributions to the IRAs of eligible employees, including himself or herself.

Question: Who is eligible to establish a SEP?

Any employer, including a sole proprietor, partnership, or corporation, can establish a SEP. The corporation may either be a for-profit corporation or a nonprofit corporation. A governmental entity may also establish a SEP. When a self-employed individual sponsors a SEP, he or she is considered to be both the employer and an employee.

Question: What are Prohibited Transactions?

An understanding of prohibited transactions is very important. The IRS defines a prohibited transaction as follows: “Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).” IRS Publication 590

IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment. You need to make sure that it is your IRA that benefits from a transaction rather than you personally. Beware of any “self dealing” transactions.

Question: How do custodians make their money?

Each year you are charged a fee for simply having an account with a custodian. A custodian generates revenue in a variety of ways:

Asset based fees – a fee based off the value of your account holdings.

Transactional fees – a fee for processing a purchase or sale of account assets.

Holding fees – a fee on each asset held in your account.

Special fees – escrow fees, bank-wire fees, overnight mail fees.

For more info on using your IRA or 401k to hold real estate feel free to email me at or call 949-370-6737

Thursday, July 30, 2009

KBR Has Strong Second Quarter

KBR Inc. on Thursday reported a nearly 40 percent increase in second-quarter net income.
The Houston-based engineering and construction company (NYSE: KBR) reported net income for the three months ended June 30, 2009, of $67 million, or 42 cents a share, on revenue of $3.1 billion, compared with net income of $48 million, or 28 cents a share, on revenue of $2.66 billion in the same quarter last year.

Analysts polled by Thomson Reuters expected KBR to have earnings of 41 cents a share.
The company also said in a statement that it had a backlog worth $12.3 billion as of June 30, and a strong balance sheet with cash and equivalents equal to $1.1 billion.
“I am pleased with the strong revenue and operating income growth over the same period last year, which contributed to KBR’s solid earnings in the second quarter of 2009,” said Bill Utt, chairman, president, and chief executive officer of KBR.

Wednesday, July 29, 2009


New home construction rose in June, driven by a strong surge in construction starts on single-family homes, which were up nearly 15 percent from May's level, according to new figures released on July 17th, by the Census Bureau.

The increases in both building permits and construction starts surprised economists, who had predicted little or no change. Overall, building permits issued in June were up 8.7 percent from May, to a seasonally adjusted annual rate of 563,000. New permits for single-family homes were up nearly 6 percent in June, to an annual rate of 430,000. The survey covers building permits and housing starts for both single-family homes and multiunit buildings.

Overall new housing starts were up 3.6 percent in June, to a seasonally adjusted rate of 582,000 units. The big jump in single-family starts was dampened in the overall figures by a sharp drop in construction starts of multiunit buildings, which dropped by nearly 30 percent following a 60 percent increase in May. The big swing is likely the result of the survey's large margin of sampling error; the Census Bureau cautions that it may take 3-4 months for underlying trends to become reliably established.

By that measure, both new housing permits and housing starts have shown general increases since March after a series of sharp declines throughout the previous year. Both building permits and housing starts in June were at approximately half of their June 2008 levels.

- Don McGraw

Friday, July 17, 2009

Housing starts surge

By Ben Rooney, staff writer

NEW YORK ( -- Initial construction of U.S. homes and applications for building permits both surged in June, according to government figures released Friday.

Housing starts rose to a seasonally adjusted annual rate of 582,000, up 3.6% from a revised 562,000 in May, according to the Commerce Department.

Economists were expecting housing starts to increase to an annual rate of 524,000 units, according to a consensus estimate gathered by

Single-family housing starts were especially strong, up 14.4% on a month-over-month basis. It was the biggest surge in that measure, considered the core of the housing market, since December 2004.

Friday's report suggests that the battered housing market is gradually stabilizing, according to Mike Larson, real estate and interest rate analyst at Weiss Research.

"The new home industry has done a good job of reducing supply," Larson wrote in a research report. "But the existing home market is still vastly oversupplied, and we continue to be inundated with an influx of distressed and foreclosed properties."

Applications for building permits, an indicator of future construction activity, rose 8.7% to a seasonally adjusted annual rate of 563,000 in June. It was the highest number of applications since December and more than the 530,000 annual rate that economists had forecast.

June marks the second month that starts have increased after the annual rate of new homes breaking ground fell to an all-time low of 454,000 units in April.

New home construction activity was strongest in the Midwest, where starts were up by 33.3% versus the previous month. In the Northeast, starts jumped 28.6% in June.

But the West and the South both saw declines in the number of new homes breaking ground last month. Starts were down 14.8% in the West and 1.4% in the South.

Monday, July 6, 2009

Mid-Year Data for Private Equity Activity in 2009

PitchBook, a private equity-focused research firm, has published its report on private equity as of the second quarter of 2009. The findings show that private equity investors continue to wait before deploying their $400 billion in available capital.

The industry appears to be rethinking the leveraged buyout and focusing on middle-market private equity deals, financed with mostly equity and little borrowing. PitchBook CEO, John Gabbert says of the report, “PitchBook’s analysis shows that the private equity industry is currently shifting gears in a return to its roots. More attention is being paid to middle-market deals using a healthier amount of equity where private equity’s operational and financial expertise can make a big difference. ”

Total Amount Invested in PE Deal Type ($M)

Key Findings from the 2009 Mid-Year Report

The first half of 2009 was the slowest six-month investment period since 2002 with only 407 completed investments, and just 174 of those were completed in the second quarter. However, another 44 deals, totaling $6.5 billion were announced during the quarter but have yet to close.

In response to the current credit markets private equity investors have been using less leverage and targeting smaller operational improvement and distressed company investments. These lower and middle-market companies now account for 70% of all investments. PE firms are also strengthening their current portfolio companies through add-on acquisitions, which accounted for 43% of all buyouts in the first half of 2009.

In Q2 2009 only the Business Products & Services and Information Technology industries were able to maintain their investment levels from the first quarter, with 54 and 29 deals respectively.

The BankUnited Financial acquisition was the largest of the quarter and accounted for over 25% of the total invested capital for the quarter.

The decrease in private equity investment is not due to a lack of available capital, which remains at an all time high of $400 billion. PE investors continue to raise capital and currently have enough dry powder to more than support the combined deal activity of 2004, 2005 and 2006 with the use of moderate leverage.

So half-way through 2009 private equity is still in a slump and investors are holding onto about $400 billion in capital.

Wednesday, July 1, 2009

Hedge Fund Returns Up, Redemptions Down

Tuesday, June 30, 2009

BOSTON (Reuters)—Hedge funds are living up to their high-flying reputation again with strong returns in the last three months, but many investors burned by last year's losses are clamoring for reforms before committing new money.

Final June quarter data will not be released until next week, but Merrill Lynch analysts who track returns in the $1.3 trillion industry wrote on Monday [June 29] that hedge funds will likely post their best quarterly performance since early 2000.

The rebound became visible in April when the average hedge fund returned 2.7%. It gained strength in May with a 4.4% rise, Merrill Lynch analysts wrote. For the second quarter, they estimate a gain of 6% or more.

That would mark a dramatic recovery from 2008 when the average hedge fund lost 19% and some celebrated funds, including Citadel Investment Group LLC, run by Kenneth Griffin, the 41-year-old Chicago billionaire, were down as much as 50% at the height of the financial crisis.

This year's stock rally, sparked by hopes that the worst of the global economic downturn is over, has helped boost many funds' returns.

Tudor BVI Global Fund, run by Paul Tudor Jones of Tudor Investment Corp., gained 12.4% through the end of May, while Lee Ainslie's Maverick Fund gained 8.8% through the end of May, their investors said.

"I believe there's been a very big change of mood and it has come at least three months earlier than I was expecting," said Christopher Fawcett, chief executive of hedge fund firm Fauchier Partners in London.

Last year, pension funds, endowments and wealthy individuals reacted to hedge funds' heavy losses and high fees by demanding a record $152 billion back in the last three months of 2008, research firm Hedge Fund Research said. This year, the pace of redemptions has slowed. In the first quarter, investors pulled $103 billion, according to HFR.

In May, hedge funds saw inflows of $3.4 billion, their first inflows since May last year, researchers at TrimTabs found.

"Redemptions have really dried up," said Mark Kary, chief executive of hedge fund firm Polar Capital in London, noting that his firm also saw small net inflows in the second quarter.

While inflows are still small, industry researchers said they played a critical role by letting hedge funds stop selling market positions to raise cash needed to let investors out.

"The inflows kept hedge funds from being a drain on the markets," TrimTabs President Conrad Gann said.

Pension funds and other investors have said they plan to commit more money to hedge funds in the second half of 2009, but they are also ready to attach conditions about how their money will be invested and a right to get it back fast.

"Transparency, liquidity, good fee terms, no gates, no side pockets. That is what the institutional community will be pressing hedge funds for," said Eric Goodbar, hedge fund strategist at Mellon Capital Management, a unit of Bank of New York Mellon Corp. "Hedge funds that are essentially large lockup structures will be viewed with caution."

By Svea Herbst-Bayliss and Laurence Fletcher