June 17, 2014

Can You Use IRA Money to Invest in Real Estate?

The IRS allows an IRA to legally own real estate, but is it the right decision for your retirement funds?  There are multiple pros and cons to owning real estate within your IRA, along with many requirements that must be met to ensure the tax-deferred status of your IRA is not busted.  Below are a handful of the most important obligations and requirements for investing IRA money in undeveloped land, rental and commercial real estate.

First, the big financial institutions that act as custodians for most IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs. Therefore, you’ll first need to move your IRA to one of the smaller custodians offering, “self-directed IRAs.”  Once you have the self-directed IRA setup, don’t think the sky is the limit as to what assortment of real estate can be invested in through the IRA.  Having IRA owner involvement via a self-directed IRA greatly increases the risk of a prohibited transaction occurring.

  • The IRS prohibits certain types of transactions between an IRA and a “disqualified person,” which includes the IRA owner and his or her spouse, children, grandchildren, great-grandchildren, parents and grandparents.  This is a legal principle that prevents IRA owners from making investments (or loans) that benefit themselves or certain family members, even indirectly.
  • Consequently, you cannot occupy any real estate owned by your IRA, such as having your IRA buy a vacation home that you use two weeks a year, even if you rent the property to third parties during the rest of the year.
  • The IRS also bars co-mingling of your IRA and nonretirement funds.

If either of these disallowed transactions occurs, your entire IRA could be immediately taxed as ordinary income and could be subject to the 10% penalty on early withdrawals.

Being conscious of the disallowed transactions noted above, it’s important to note that the IRA owns the property, not you.  Therefore, all expenses related to the real estate, including repairs, taxes, and potentially, a property manager, must come directly from the IRA, and all income must go directly into the IRA.  This also means you are not entitled to the tax deductions for real estate taxes, mortgage interest, or depreciation that you would otherwise be allowed to take.  Additionally, a custodian of the IRA, not the IRA owner must handle these transactions.  If your entire IRA is needed to fund the purchase, as you cannot use both IRA and nonretirement funds to purchase the property, cash flow may become an issue for covering any costs related to owning the property.  Besides having the cash to cover the costs, required minimum distributions (RMD’s) down the road should also be considered.

Satisfying the requirements for IRA payouts can get more complicated with illiquid assets in your IRA. An IRA owner must take an annual RMD starting at age 70½ unless the account is a Roth. Non-spouse heirs, regardless of age, must begin withdrawals from both regular and Roth IRAs by Dec. 31 of the year following the IRA owner’s death. Miss an RMD and the IRS could hit you with a penalty equal to 50% of the required payout.  The RMD is based on the account balance on Dec. 31 of the previous year divided by life expectancy, as listed in IRS tables. You will need to have the property reappraised each year to calculate the RMD.

As you can tell by now, investing in real estate via your IRA is not as simple as it may sound.  Your Anders advisors are here to be your sounding board if you are considering holding real estate in your IRA.  We want to help you have your retirement funds when you need them later on in life.  Stay tuned for an upcoming blog where we go into more detail on the pros and cons of owning real estate in an IRA.

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June 16, 2014

Assisted Client by Grouping Several Real Estate Activities

June 10, 2014

Accounting Standard Update Issued by FASB Concludes Decade Long Project

The Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) on May 28, 2014, as a conclusion to a decade long joint project with the International Standards Board (IASB) to clarify principles for recognizing revenue for industries worldwide.

The objective of the new guidance is as follows:

  1. Improve comparability of revenue recognition principles across entities and industries from all countries governed by either the FASB or IASB
  2. Provide more useful information to financial statement users
  3. Simplify the preparation of financial statements by reducing the number of requirements to which an organization must refer and providing a more robust framework for addressing revenue recognition issues

The core principle of ASU No. 2014-09 is to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The following five steps should be performed to achieve this core principle.

  1.  Identify the contract with a customer
  2. Identify the performance obligations (promises) in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation.

The new standard will require entities to provide financial statement users with information regarding the entity’s contracts with customers.

ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities.  Early application is not permitted.

For nonpublic companies, ASU 2014-09 is effective for periods beginning after December 15, 2017 and interim periods within annual periods after those reporting periods.  A nonpublic company may elect early application, but no earlier than the effective date for public entities.

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