Serrano Country Club's Finest

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Realtor Mag recently reported that optimism is building in the housing market. American IRA is noticing the increased optimism as they are receiving an overwhelming interest in Real Estate IRAs.

Jim Hitt, CEO of American IRA, explains, “Many people are surprised to learn that you can own real estate – not just REIT shares or other stocks, but actual rocks, soil, brick and timber real estate – within your Individual Retirement Arrangement. The IRA vehicle allows you to realize all the advantages of the IRA – tax deductions, no capital gains taxes, deferral of income tax, asset protection, and in some cases, tax-free income – while allowing you to invest in all types of real estate.”

Self-Directed IRAs
The key to using their IRA to invest in real estate is a special vehicle called the ‘self-directed IRA ,’ sometimes called a “real estate IRA.” With these plans, they take over the role normally played by investment companies, such as brokerage companies, mutual fund houses and insurance companies. Instead, they, or their designated representative, take close control of their IRA.

IRS rules don’t allow them to have possession of the assets directly, however. They can’t have a suitcase of stock certificates next to the pile of oily rags by the furnace in their garage and call that their IRA. Instead, they have to have a third party administrator hold the assets on their behalf. When they select our firm as the administrator of their IRA account, however, they have much more flexibility to invest in what they know than they would with a traditional brokerage or insurance company. If they are a mediocre stock picker but a real estate ace, it makes sense for them to stick to their circle of competence. Our firm lays the administrative foundation, and lets them do what they do best – pick real estate – within their IRA.

Prohibited Transaction Rules
The IRS does place some limits on what they are allowed to do with assets in their IRA:

•They cannot use the property for their own benefit. This means they cannot stay in a rental property, even for a night. Many people make the mistake of thinking they can use the property for up to two weeks for their own benefit without losing the tax advantages of the IRA. It is true that tax rules for rental properties do allow them to stay in their own property for up to two weeks. However, this is not true for real estate within an IRA.

•They cannot buy property directly from their IRA, nor sell directly to it. Nor can their designated beneficiary, nor any of ancestors or descendants or any spouse of an ancestor or descendant. For example, their IRA cannot buy or sell directly to their parents, grandparents or children, nor to their spouses. Furthermore, their IRA cannot buy or sell directly to companies or entities they own or control.

•They cannot have the IRA pay them or their company to manage it, nor provide any product or service to it. They also cannot have their IRA do business directly with companies controlled by them or their family members.

•Their IRA cannot do business directly with any of the professionals who service the account. For example, their CPA or financial planner cannot also be the person repairing the roof on a property owned by their IRA.

•They cannot lend money directly to their IRA, nor borrow from it.

•They cannot borrow money directly from their IRA, nor can they use their IRA to lend to their family members , defined as their children, grandchildren, parents or grandparents and any of their spouses or entities they control. However, siblings, aunts, uncles and cousins may be acceptable.

•They cannot pledge their IRA as collateral for a loan – all debt in the IRA must be non-recourse debt. They cannot sign a personal guarantee on a loan within the IRA.

•They cannot commingle personal funds with funds within IRA accounts . They may, however, partner with themselves and others at the time of acquisition of the asset.

But enough of what they can’t do. Here is what they can do, investing in real estate in a self-directed IRA :

•Contrary to popular belief, they can, in fact, borrow money within their IRA to purchase real estate. It has to be non-recourse financing (terms may vary by lender); however, non-recourse financing and unrelated debt income tax (UDIT) will apply. UDIT is only assessed on the percentage of the profit that relates to borrowed funds. For more information on this topic, see our article on leveraged real estate.

•They can collect rental income, tax-deferred and all the income goes into their retirement account.

•They can own real estate within a Roth IRA and collect rental income, tax free.

•They can sell property within the IRA without having to worry about capital gains taxes.

•They can buy raw land.

•They can buy residential or commercial real estate.

•They can diversify by buying real estate in other countries.

•They can use a tax-deferred exchange inside their IRA to defer UDIT tax.

Mr. Hitt concludes, “If you enjoy real estate, you want the chance to use leverage within your IRA account to fund your retirement, and you are up for acting as a landlord, you should consider using a self-directed IRA to own real estate. This is a great opportunity afforded to us by our government; however, you need to be watchful of a few pitfalls. If you are mindful of those pitfalls, this is a phenomenal tool.”

About:

American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

To learn more about American IRA, LLC and self-directed IRAs/self-directed Solo 401(k)s, please contact our office at 1-866-7500-IRA(472).

As a self-directed IRA administrator they are a neutral third party. They do not make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms ). They are not responsible for and are not bound by any statements, representations, warranties or agreements made by any such person or entity and do not provide any recommendation on the quality profitability or reputability of any investment, individual or company. The term “they” refers to American IRA, located in Asheville, NC.

Fewer than three of five short sales close in California, illustrating the complexity and difficulty of navigating lenders’ and servicers’ short sale procedures, according to C.A.R.’s survey, which gauged REALTORS®’ experience in working with short sale transactions – transactions in which the lender or lenders agree to accept less than the mortgage amount owed by the current homeowner.

The U.S. Dept. of Housing and Urban Development recently announced a new agreement with the nation’s top mortgage lenders to offer select state and local governments, including California, and nonprofit organizations a “first look” or right of first refusal to purchase foreclosed homes before making the properties available to private investors.

The National First Look Program is the first-ever public-private partnership agreement between HUD and the National Community Stabilization Trust and is intended to give communities participating in HUD’s Neighborhood Stabilization Program  a brief exclusive opportunity to purchase bank-owned properties in certain neighborhoods so the homes can be rehabilitated, rented, resold, or demolished.

The Obama administration recently announced a new program to help underwater homeowners who are current on their mortgage payment refinance into a new FHA-insured loan.

In the State of California 47 percent of home sales went to first time home buyers.  This is the highest percentage since 1995.

Slightly more than half of the home sales were distressed properties- foreclosures and homes that are upside down. (short sales)

FHA, the most popular loan program available is going to change soon.

• FHA currently allows the buyer to put as little as 3.5 percent down. Changes in FHA guidelines will require that the  buyer put at least 5 percent down-a significant increase of cash reserves required of the buyer at the closing table.
• Another  FHA guideline set to change  is that a one time, up front mortgage insurance premium will increase from 1.75% 2.25% of the loan amount.
• The monthly mortgage insurance is going to increase.  This insurance is calculated by multiplying the base amount of the loan times .055 and then dividing that number by twelve.  The exact increase is unknown but may go up to as much as .1 rather than .055.  This insurance is mandatory for 5 years on FHA loans.
• Some real estate  experts say that FHA guideline changes will happen April 5th 2010. Others sources like Realty Track claim changes will take place  in the summer.
• Another important FHA guideline change is that the maximum allowable seller credit has been reduced from 6 percent to 3 percent.  So, the buyer will have to come to the closing table with more cash because sellers can only credit the buyer (at close) up to 3 percent for closing costs. (rather than 6 percent)

The consequence of these changes is that money is more expensive to borrow and more cash is needed at the closing table.

The latest news blurb calls for a “possible double dip” in home sales based upon the fact that the number of  pending home sale was down in November.  Less pending home sales around the holidays is normal.  The buyers are finished with the holidays, interest rates are still low, and homes continue to sell very quickly.  The news of a “possible double dip” is absurd.  Homes priced competitively along side the foreclosure homes sell in less that thirty days.  Homes go pending in as few as 5 days.  The demand is strong and price point homes sell quickly to first time home buyers and to real estate investors.

First time home buyers made up nearly 50 percent of all home sales transactions in November.  Supposedly first time home buyers are taking advantage of the first time home buyer program. Perhaps buyers are more inspired by low interest rates between 5 and 6 percent or maybe first time home buyer are motivated by foreclosure bargains.  In any case, sales were up 44 percent from last year.  Congress has extended the deadline for first time home buyer tax credit and offered a 6500 dollar tax credit for existing home owners that want to upgrade.  The volume of foreclosure priced at a discount is enough to get most buyers off the couch and out and about to explore opportunity in home buying.