Best Practices for Tracking Your Real Estate Investments

tracking real estate investmentHow 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.

The Penalties for Self Dealing in a Self-Directed IRA

Having a self-directed IRA can open up your retirement savings to a new set of investing possibilities. With a self-directed IRA you can invest in real estate, make private equity investments, invest in tax liens and even make mortgage loans to unrelated third parties.

But because you have more control over the investments you make with your IRA assets, it’s especially important that you don’t run afoul of the prohibited transaction rules that govern all IRA accounts. In order to understand the full impact of not following these rules, let’s take a look at the penalties for self-dealing in a self-directed IRA.

Self-Dealing Overview. Self dealing is generally considered to be doing business with any disqualified person, including engaging in any transaction that benefits the account holder. “Disqualified persons” include your spouse, any direct descendants (children, grandchildren, great grandchildren, etc.) as well as parents and grandparents. When you engage in self-dealing with your self-directed IRA, you risk facing the imposition of significant penalties.

Disallowed Tax Benefits. Prohibited self-dealing transactions put the statutory tax benefits of your entire account at risk. If your account is no longer considered to be a self-directed IRA, you’ll have to deal with the consequences of having your account assets deemed to be immediately distributed to you, as well as face any applicable early withdrawal penalties.

Immediate Distribution. Perhaps most significantly, engaging in self-dealing could lead to your entire account balance being deemed distributed to you. If your self directed IRA is set up as a traditional IRA, this means that the entire value of your account will be included in your current year’s taxable income, which will undoubtedly generate a significant tax bill. This might prove doubly problematic if the property held within your self directed IRA is not liquid – as is the case with real estate. If you don’t have the cash or other liquid assets necessary to pay your tax bill, you might be force to sell the property in order to pay the taxes on it. If you originally made your investment decisions based on a very long-term outlook, having to sell them early just to pay the tax bill can damage your overall financial status even more.

Early Withdrawal Penalties. If they deemed distribution of your account assets occurs before you reach age 59½, then you may also be assessed a 10% early withdrawal penalty on the full amount of the distribution. This penalty is in addition to the taxes you’ll owe on the distribution amount.

No Tax-Free Growth. If the tax-advantaged status of your account is disallowed, you’ll miss out on the most powerful advantage of a self-directed IRA – the ability for your account assets to grow tax free. Over the years and decades that many retirement savers hold their accounts, this tax savings component often comprises a significant portion of their overall savings.

Having an experienced self-directed IRA custodian such as Quest Trust Company can help you be confident that you’ll never face any of these penalties.