You have the option to self-direct your IRAs and other retirement plans into real estate, and benefit from the tax advantages those plans provide.  Investments in IRAs benefit from tax-deferred profits or in some cases tax-free profits.  The IRS does not allow you to personally “touch” your self-directed IRA account, so you need a passive custodian.

 

The tremendous advantages a real estate IRA and other self directed retirement plans offer taxpayers include the following:

 

•    The power of compound interest
•    Reduction of taxable income
•    Asset protection
•    Estate planning

There are certain types of transactions that you can not perform through an IRA.  Basically, the IRS prohibits “self-dealing,” which are investments in which you or your family members of lineal descent have prior ownership.

 

The most important thing to remember is that with a self directed real estate IRA, the type of investments you make will be exactly the same kind you presently are making for your personal account.  The only difference is that the profits in your real estate IRA investments are tax free/deferred.

 

There is also a self directed 401(K), (The “Plan”).  This is a 401K plan setup for your company and you are the manager of the company.  Direct ownership of real estate is not permitted; but indirect investment via the self directed 401K is the only choice.  Some of the benefits include:

 

  1.  Deferral of real estate capital gains  

  2.  Direct, hands-on control of

       decisions                                      

  3.  “The Plan” can finance or borrow for real 

       estate purchases

 

Contact your accountant for assistance in tax advantaged strategies such as these.

 

For more finance advice, click here to see our Idaho Falls real estate library.

So, what is a 1031 exchange?

A 1031 Exchange allows you to sell and buy property of like-kind while deferring tax consequences.  This exchange offers investors a reliable strategy for reinvesting up to 100% of the equity from the sale of property into purchasing a like-kind replacement property – without recognizing any gain.  It cannot be used for the sale of your personal residence.

Regarding real estate properties, the term “like-kind” refers to the nature or character of property and not to its grade, quality, or use.  Therefore, no distinction is made between parcels of real estate, however dissimilar they may be in location or quality.  In fact, the term “like-kind” as it pertains to real estate has been very broadly interpreted by the courts.

The following would be considered like-kind exchanges:

1. Commercial real estate for residential real estate
2. Metropolitan high rise for a ranch or farm
3. Improved real estate for unimproved real estate
4. An office building for a hotel, or in exchange for either developed or undeveloped land

The exchange process allows taxpayers a range of opportunities to improve their real estate portfolios:

1. Upgrade size and/or quality of investment
2. Change investment location
3. Create or improve cash-flow
4. Facilitate the formation or dissolution of an investment group
5. Facilitate estate planning

The identification period under IRC Secton 1031(a)(3) applies when property is conveyed in a deferred like-kind exchange.  It is extremely important that this process be done correctly; so contact your Idaho Falls real estate agent or your personal accountant for direction.

Click here for more finance information in our Idaho Falls real estate library.