Quest Ira Inc. Archives - Quest Trust Company

Should You Use Your Self-Directed IRA to Buy Investment Properties While Interest Rates are Low?

Posted on October 20, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

The ability to invest in real estate is one of the most common reasons why retirement savers first start becoming interested in the self-directed IRA. An individual retirement account with a self-directed IRA custodian such as Quest Trust Company individuals to out their retirement funds to work in investments that traditional IRA custodians simply wouldn’t allow.

Adding to the desirability of investment real estate for retirement savers is that interest rates on mortgages and other types of borrowing continue to be quite low.

UBTI

Even if interest rates are low, you may not be able to derive the benefit you hope from borrowing money to buy real estate with your self directed IRA. This is because the tax laws that authorize individual retirement accounts put some limitations on how those accounts may be used. In particular, the activities of IRAs must be related to the fundamental purpose of the account, and that means to make investments. Borrowing money to make investments, however, is called out as an activity that’s at odds with the fundamental investment purpose.

As a result, when an IRA borrows money, the investment gains that result from that borrowing are considered to be unrelated business taxable income (or “UBTI”), which means that you’ll face a current year tax bill because of your investment borrowing. In many cases, this can greatly reduce or even exceed the advantages you gain by taking out a mortgage.

Investment Quality

If you choose to borrow money within your self-directed IRA in order to invest in real estate, be sure you are doing so because you are presented with a quality investment opportunity, rather than simply because interest rates are low. You should have a plan for how each piece of property you acquire is going to become a productive part of your portfolio, and your anticipated timeframe for that to occur.

Note that this doesn’t necessarily mean every piece of investment property you acquire needs to be productive right away. “Fixer uppers” are certainly appropriate for investment; just be sure you take into account any repair or remodeling costs into your financial analysis.

Fees

Regardless of how you choose to use your self-directed IRA to acquire investment properties, you should have a comprehensive understanding of the costs and fees that come with holding the property. For example, many real estate investors will tell you that as they build larger portfolios of property, they find that their costs on a per property basis tend to decline. This is because they are able to leverage certain economies of scale when it comes to property managers, repair and maintenance professionals, and other types of support they need in maintaining those properties.

Low interest rates can be a factor in deciding whether or not to buy investment real estate with your self-directed IRA, but it should not be the only factor.

Legal Considerations for Using Your Self-Directed IRA to Invest in Real Estate

Posted on October 12, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

As far as “do it yourself” retirement planning goes, the IRA structure is one of the easiest and least expensive to set up, use to invest, and use to finance your retirement.

Self-directed IRAs are even more advantageous than IRAs with traditional custodians because they can be used to invest in less traditional assets like real estate. But there are some particularly tricky legal issues that you need to take into consideration when you use your self-directed IRA to invest in real estate.

Investment Financing

The investment process is relatively straightforward when you have adequate resources in your account to purchase a piece of property outright. But if you choose to employ financing to complete a particular investment transaction, then you are likely exposing your account to “unrelated business taxable income” or “UBTI.”

The IRS rules for IRAs state that an IRA which borrows money is engaging in an activity that is unrelated to its fundamental purpose of retirement savings, and that that borrowing activity (or, more accurately, the portion of any income or gain attributable to such borrowing will be taxable.

Property Taxes, Maintenance Expenses and Carrying Costs

Virtually all types of investment properties will involve some type of carrying costs, such as property taxes, maintenance fees and repair expenses. This won’t raise any legal implications if you have sufficient liquid resources in your self-directed account in order to satisfy those financial obligations. But if you’re forced to pay those costs and fees with funds from outside your account, you could again be hit with negative UBTI tax implications.

Avoiding Self-Dealing

One of the biggest mistakes that individuals inadvertently make with the real estate holdings in a self-directed IRA is violating the legal prohibition on “self-dealing.” In short, his prohibition states that an IRA account owner (as well as his or her family and other “related person”) cannot receive any benefit from their account without taking a distribution from the account.

In the context of real estate investments, this means that you and your family are prohibited from using any of the real estate your account holds prior to you taking a distribution of that property (and paying any taxes and early distribution penalties that may be due on such distribution) from the account. So if you hold a vacation property as an investment within your self-directed IRA, you can’t use that property before retirement.

If you or your family violates this prohibition, the consequences could be severe, including that the use constitutes a distribution of the property, which means that you’d own it outright (rather than in your retirement account), and that you’d have to pay early distribution penalties if you’re not of retirement age yet, and taxes on the entire amount of the distribution if your self-directed IRA is set up as a traditional account.

Understanding SEP IRA Tax Rules

Posted on April 18, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

Most working adults are at least somewhat familiar with the two most popular types of personal retirement accounts – the IRA and the 401(k). The 401(k) plan is by far the most common type of retirement program that we see at work. Unfortunately, these types of retirement plans are generally somewhat costly to administer, and the administrators of those plans really only promote them to mid-size and larger businesses.

Furthermore, many of the plans are limited to only certain types of mutual funds, which significantly reduces the ability of retirement savers to select exactly the types of investments they want to hold. For small businesses (even sole proprietors), setting up a 401(k) is likely to be a less than ideal way to provide additional benefits to themselves and their employees.

Fortunately, there is another option – the SEP IRA. SEP IRA stands for “Simplified Employee Pension IRA,” and it’s an account type that combines the best of both worlds; the higher contribution limits of employer-sponsored plans with the tax benefits and low costs and investment flexibility of IRAs. Here are some of the key SEP IRA tax law basics.

The SEP IRA Must Not Be Preferential. All employees must receive the same benefits under an SEP IRA. This means that a small business owner cannot open up this type of retirement plan only for themselves. If they choose to open the plan they must set up an account and make the same types of contributions for all eligible employees.

Additional Employee Requirements. In addition, employees other than the business owner must also meet several additional requirements. The employee must be at least 21 years old, must have worked for the employer for at least three of the past five years, and must have received at least $500 in compensation during the year.

Tax Treatment of Contributions and Withdrawals. Contributions to a SEP IRA are similar to those of a traditional IRA when it comes to taxability. That is, contributions are generally tax-deductible, and withdrawals are generally taxed at the account holder’s then current marginal tax rate.

SEP IRA Contribution Limits. Calculating the annual contribution limits for a SEP IRA is more complicated than doing so for a Traditional or Roth IRA. The SEP-IRA is considered an employer-sponsored plan. Contributions must be made by the employer and can vary each year between 0% and 25% of compensation (maximum $57,000 for 2020 and $58,000 for 2021). Each eligible employee must receive the same percentage.

For self-employed individuals who set up a SEP IRA, determining the contribution limit is more complicated. The best way to make the computation is to use IRS publication 560 (section 5), but in general the contribution limit will be approximately 18.6% of the businesses in net profit. Further complicating matters is the fact that the contribution limit is computed not from the businesses net profit but from an adjusted figure that takes into account the applicable self-employment tax.

There are a few other factors that could further effect the computation. For more information please contact Quest Trust Company or any other experienced IRA custodian.

Understanding How Short Sales Work

Posted on October 18, 2013August 12, 2019 by questadmin

Estimated reading time: 3 minutes

In order to get the most from your self-directed IRA, you’ll want to consider all the different types of investments that are permitted within your account. In fact, the opportunities that come with a self-directed IRA at a custodian such as Quest Trust Company is likely to be what got you interested in this type of retirement account in the first place.

Being able to invest your retirement nest egg in things such as real estate, private equity and precious metals remove the self-imposed limitations of traditional IRA custodians. Within some of the broad investment classes there may be some particular investment types that remain a bit of a mystery. For example, many individuals have gone through the process of buying a home, so they’re likely to feel at least somewhat comfortable with the idea of buying residential real estate for investment purposes with their self-directed IRA. But the process of buying so-called “short sale” properties might be wholly unfamiliar to them.

There is sometimes a temptation to think of real estate foreclosures and short sales as being virtually the same thing. While it’s true that both involve the purchase of properties in which the prior owner was not able to fulfill their mortgage obligations, the processes are actually quite different. Foreclosure is a well-defined legal process that provides certain guaranteed rights to the property owner. On the other hand, you can think of a short sale process as a debt renegotiation.

In a short sale, the property owner (or his or her representative) negotiates with all mortgage lien holders to allow the property to be sold for an amount that is less than the aggregate outstanding loan balances. After a short sale the prior owner will sometimes (but not always) be relieved of any further financial ability.

It’s important to understand that for the creditors on a short sale property to agree to accept less than they are owed, they generally want to make sure the short sale process goes as smoothly and quickly as possible. This means that to maximize your chances of having your short sale offer except, you must present the most attractive offer to those creditors. This generally means that your transaction time frame is flexible – both in terms of being able wait for the creditors to evaluate your offer, and to be able to close on the transaction quickly once it is accepted – as well as being able to pay cash or have no financial contingencies that could prevent you from closing the short sale.

As a result, the process for a distressed homeowner to apply for (and get a decision on) a short sales is generally shorter than for a foreclosure. Still, when you’re looking to invest funds from your self-directed IRA, you need to plan for a longer transaction time frame than if you bought a similar property on the open market.

A real estate agent who’s been through the process before it can provide invaluable assistance if you never purchased a short sale property before.

Things to Consider Before Investing Abroad

Posted on October 14, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

For those individuals who wish to expand the range of investment opportunities they have available, a common approach is to invest outside of the United States. While it’s possible to gain international exposure through domestic markets (such as by buying stock in U.S. companies that have a large multinational presence, or buying shares of foreign companies that are traded on U.S. stock exchanges), some investors are looking to commit more directly to investment opportunities outside the United States.

Before you devote a portion of your investment portfolio or self-directed IRA to investments abroad, here are some things to consider.

Publicly Available Information. Many of the regulations that govern the U.S. stock market have one thing as their goal – the protection of investors by making sure they have as much information as possible about potential investments. These public company disclosures are a necessary part of being able to offer securities on U.S.-based exchanges.

In large part, these types of investor protections don’t exist in most other countries around the globe. So before making any investments abroad, be sure you have all the information you need to make an intelligent and well-informed decision.

Taxes. Making investments outside of the United States can trigger tax liabilities in those countries. While tax treaties between the U.S. and certain other countries can reduce that liability, that’s not always the case. It’s therefore essential to consult a tax expert so that you know exactly what to expect in tax liabilities. It’s also important to note that the tax landscape abroad can change over time, potentially to the detriment of your investments.

Currency Exchange Risk. Similarly, currency exchange rates fluctuate over time, and sometimes these fluctuations can be significant. And even if you have any long-term horizon for your foreign investment, at some point you’re going to need to bring the money back into the United States. If the dollar has strengthened in relation to the currency of the country you are investing in, then you’ll be losing a portion of your investment gains simply because of the currency exchange. There are ways to hedge against this risk, but doing so can greatly increase the complexity and costs of investing abroad.

Ownership and Currency Transfer Restrictions. Some countries have laws that restrict the types and amounts of assets that non-citizens can own. For example, numerous areas throughout Europe and Central America restricting the ability of foreigners to own real estate outright. or to own more than a minority interest in certain local industries. Some countries also limit how much money can be transferred outside of their borders, although this type of restriction is less common than the real estate ownership limitations. Before you go too far in planning an investment in a particular foreign country, be sure there are no legal limitations to you reaching your goals.

Investing abroad can be highly rewarding, but only if you understand all of the potential obstacles and challenges you may face.

Should You Steer Clear of Real Estate Foreclosures Within Your Self-Directed IRA?

Posted on October 8, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

Savvy retirement savers are likely to consider every type of investment that’s available to them. Unfortunately, individuals who set up IRAs with traditional custodians are missing out on a wide range of investing opportunities. Those who set up a self-directed IRAs with custodians such as Quest Trust Company can invest in private equity, certain precious metals, and even real estate.

And there are many potential types of real estate investments. Depending on an investor’s account balance, their willingness to take on debt within their IRA, as well as their appetite for risk, they can invest in residential properties. commercial properties, industrial or farmland properties.

In recent years, given the number of residential properties that have faced (and continue to face) foreclosure, more investors are looking at foreclosures as having good potential for significant long-term gains. But there are a number of factors that can make investing in real estate foreclosures more challenging than a straightforward market transaction, so you’ll need to consider each of them before you decide whether foreclosures are right for you.

Long Investing Timeframe. Because there are many legal steps and obligations that must be met as part of the foreclosure process, it can take significantly longer to buy a foreclosure property than to buy a property on the open market. The timing varies from state to state, but the entire process can extend for a year or more in some jurisdictions.

No Opportunity for Appraisal or Inspection. It’s quite likely that once a property goes far enough through the foreclosure process that is ready for public auction, there will be no opportunity to conduct an independent appraisal or inspection on the property. In instances where a pre-auction inspection is allowed, it is often little more than a quick “walk through” by the prospective bidders. Since conducting your research and having a good idea of what you’re getting into is important for any investment – real estate or otherwise – this information gap must be taken into account.

Unhappy Prior Owners. With foreclosure properties, not being able to conduct an inspection is likely to be even more important than would be the case for an open market transaction. It’s not unheard of for property owners who are being foreclosed upon to stop their normal upkeep and maintenance of the home (and in more extreme cases even do intentional damage to the home and its infrastructure).

No Occupants. During those stages of the foreclosure process in which no one is living in the home, it can quickly fall into disrepair or perhaps become a target for theft. Even if there are no personal effects in the home, thieves might target copper tubing, wiring, appliances and other fixtures.

Local Market Dynamics. Finally, it’s important to realize that sometimes you get exactly what you pay for. Look behind the reasons for the foreclosure – did the neighborhood become unreasonably expensive to quickly (in which case there may be more foreclosures in the same area, thus perhaps making it harder to realize a profit on the property you’re interested in)?

Don’t automatically assume that a foreclosure property will yield large investment returns. Take all the relevant factors into consideration so that you can decide whether a particular property is right for you.

Best Practices for Tracking Your Real Estate Investments

Posted on October 2, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

How well are your stock market investments performing? Even if you don’t know the answer off the top of your head, you could probably calculate a performance measure fairly quickly. Chances are your investment broker has access to online account tools that give you all the information you need. Even if you have other types of investments in your portfolio, you may use investment management software or online service to help you track those investments.

The same holds true for real estate. Like any other investment type, you can only evaluate your real estate investments if you have all the necessary information available – in a form that’s easy to use. Here are some things to consider for tracking your real estate investments. regardless of whether they’re in a self-directed IRA or are one of your taxable investment holdings.

Tracking Your Expenses. Some investment types don’t generate much in the way of current expenses. For example, you probably pay a commission each time you buy or sell a publicly traded stock owned. Beyond that, you might not pay an annual fee to the investment brokerage that handles your account. But simply owning the stock doesn’t cause you to incur additional fees.

Real estate investments, on the other hand, require a broad range of fees, from annual maintenance and upkeep expenses, to hazard (homeowners) insurance, to property management fees for someone to manage your property and find you new tenants whenever necessary. Identify all of the categories of expenses you’re likely to face, and use the tools that best suit your recordkeeping style. This might be a piece of dedicated financial software. or possibly a notebook and pencil.

Tracking Your Taxes. While your expenses for investment real estate may to some extent the variable (for example, you can save on management fees by managing a property yourself), your annual property taxes will be beyond your control. In addition to monitoring and measuring these taxes, you’ll want to set up a system whereby you ensure that you are never to link went in meeting your tax obligations.

Tracking Your Time. Real estate investments also differ from many other investment types in that they require a much more active management style. You might stay on top of your stock and mutual fund investments by regularly reviewing quarterly reports and disclosures, and researching those companies and funds to make sure that your original investment assumptions are still true. But there’s nothing you must actively do in order to maintain your investment positions.

In contrast, investing in real estate will require much more of a “hands-on” approach. For developed properties, this will include finding tenants, maintaining any structures or improvements on the property, and making sure all taxes and other legal obligations with respect to the property are met. Even in the case of undeveloped or speculative properties, you’ll still have to pay taxes, ensure the property and make sure that no problems arise. By tracking your time you can make sure you wouldn’t be better off with outside assistance.

Investing in real estate can be financially rewarding, but it takes more effort than buying stocks or bank CDs, Make sure your record keeping process for real estate investments helps you meet your financial goals.