Alternative Investments in an IRA

The Potential & Pitfalls of Land, Loans, LLC’s and Llamas
in a Self-Directed Retirement Plan

Alternative investments like real estate, mortgage loans, tax liens and option contracts are little known and often misunderstood options for IRA’s and other retirement accounts. While most active real estate investors are familiar with the concept of self-directed IRA’s, there is still a great deal of misunderstanding and misinformation circulating among the investor community.

Self-Directed IRA’s are one of the most powerful wealth building tools available, but in order to capitalize on this opportunity you MUST know the rules. I speak with investors every week who have been misinformed or have a misunderstanding of the IRS rules pertaining to self-direction. Surprisingly, these misunderstandings apply to both new investors and seasoned successful investors alike. Many experienced investors have been hearing the same incorrect information and receiving the same misguided advice from fellow investors for so long they have come to accept it as the gospel truth. This can be a dangerous and costly mistake. While the IRS penalties for prohibited transactions can be severe, the flip side of not knowing the rules of the game can be just as costly and comes in the form of missed opportunities. Many investors forego completely legitimate opportunities to build tax-free wealth in their self-directed IRA’s because they don’t understand the rules. Over time, these missed opportunities can be just as costly as the IRS penalties resulting from relying on your “friend’s” misguided legal and tax advice.

So, how do you capitalize to the fullest extent on the true potential of self-directed IRA’s while avoiding the dangerous pitfalls of the dreaded “Prohibited Transaction”? You must take control and educate yourself; knowledge is power. Join us next Tuesday, November 18^th at the Wealth Builders meeting for a powerful seminar about the Potential & Pitfalls of Self-Direction. 

Section 1031 Tax Deferred Exchange Defined

Tax deferred exchanging is an investment strategy that should be considered by any person

or entity that owns investment real estate. Anyone involved with counseling real estate investors,

including real estate agents, lawyers, accountants, financial planners, tax advisors, closing agents,

and lenders, should know about tax deferred exchanging.

What is a Tax Deferred Exchange?

A tax-deferred exchange is a method by which a property owner exchanges one property for another

without having to pay any federal income taxes on the transaction. In an ordinary sale transaction,

the property owner is taxed on any gain realized by the sale of the property. But in an exchange,

the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold. These exchanges are sometimes called tax-free exchanges, because the exchange transaction itself is not taxed. Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code.

The requirements of Section 1031 and other sections must be carefully met, but when an exchange

is done properly, the tax on the transaction may be deferred. In an exchange, a property owner simply sells one property and buys another property. The transaction must be structured in such a way that it

is in fact an exchange of one property for another, rather than the taxable sale of one property and the purchase of another. Today, a sale and a reinvestment in a new property are converted into an exchange by means of an exchange agreement and the services of a qualified intermediary (QI) a non-agent party who helps to ensure that the exchange is structured properly.

Misconceptions about Exchanging

Investment property owners often fail to consider tax deferred exchanging as an investment strategy because they are misinformed about the requirements of exchanging. However, once misconceptions have been cleared up, property owners usually find that Section 1031 is worth considering.

Here are a few common misconceptions about Section 1031 exchanges.

Myth: Exchanges require two parties who want to trade each other’s properties.

Fact: Two-party exchanges are possible, but such two-party swaps rarely occur.

Today, an exchange is accomplished with the help of a qualified intermediary and usually involves four parties: the exchanger (the taxpayer), a buyer for the sale property, a seller of the new property, and

the intermediary. The parties often do not know each other and their properties may even be located in different states.

Myth: The like-kind requirement limits an exchanger’s options.

Fact: Property must be exchanged for like-kind property. But like kind: simply means that investment real property must be exchanged for investment real property. All real property is like kind, so a whole interest may be exchanged for a tenancy-in-common interest; one property may be exchanged for multiply properties; a duplex may be exchanged for vacant land; a single family residence may be exchanged for an office building, etc. Note: real property may not be exchanged for personal property.

Myth: In an exchange, title on the exchanged properties must occur simultaneously.

Fact: The properties do not have to close at the same time. However, in a deferred exchange, the new property must close within 180 days after closing on the sale property.

$        Jack Shea (Certified Exchange Specialist)

$        Daniel Imbior (Certified Exchange Specialist)

KEYS CAPITAL INC. Members of the Federation of Exchange Accommodators, (FEA)

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