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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.

The Wall Street Journal

Five issues for housing in 2012
Just as in 2011, in 2012 many will be trying to figure out where housing is headed.  While the housing market didn’t worsen in 2011, it also didn’t stabilize either.  This year, the story will be about local markets.  While many housing markets rose and fell together, they’re recovering at difference paces so talking about housing on a national level is not beneficial.

Making sense of the story

• Confidence and jobs: Housing is more affordable than it has been in decades, but many would-be buyers are worried about buying today if prices are going to be lower tomorrow.  Still, others don’t want to buy a house until they have more evidence that they’re not going to get laid off or see their hours cut back.

• Foreclosures: Banks and other mortgage investors own around 440,000 foreclosed properties, but there’s another 3.4 million loans in foreclosure or serious delinquency, according to estimates by Barclays Capital.  Because banks are faster to cut prices to unload inventory than are traditional sellers, home values can fall further as the share of distressed sales rises.

• Rents: If low mortgage rates aren’t enough to give urgency to would-be buyers, rent hikes could accelerate buyers’ decisions to take the plunge.

• Mortgage credit and rates: It’s still hard for many buyers to get approved for a mortgage because banks are demanding lots of documentation of borrowers’ incomes.

• Regulation: Many analysts don’t expect Congress to make major changes to Fannie Mae and Freddie Mac during the election year, but several major regulatory changes could significantly reshape the future of the lending landscape in 2012.

• Meanwhile, the regulator that oversees Fannie and Freddie is revamping the way that mortgage companies are paid for collecting loan payments.  This could lead to a broader shakeup in the mortgage industry that ultimately influences how much borrowers are charged for mortgages and how banks handle loans that fall into delinquency.

Read the full story

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In other news …

MSNBC

Increase in short sales give market a little breathing room
It’s a tarnished silver lining for people at risk of losing their houses and homeowners in neighborhoods blighted by bank-owned properties, but the robosigning scandal that slowed the foreclosure process to a crawl appears to have increased lender interest in short sales.

Read the full story
Los Angeles Times

Low mortgage rates likely to continue through 2012, experts say
The mortgage market told a sad story throughout 2011: Record low rates, but few people taking advantage of them to buy homes.  The likely scenario in the new year, according to many analysts, is more of the same.

Read the full story

CNNMoney

FHA says: Flip that house
In an effort to help stabilize housing prices and unload some of the foreclosures that are flooding low-income communities, the Federal Housing Administration extended a waiver of its anti-flipping regulations through 2012.

Read the full story

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5-Minute Business Plan for 2012
Review this year’s results and set goals for next year.
The REALTOR.com® Ultimate Business Plan is free, interactive
and will help you build a better business plan in about 5 minutes.
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Sacramento Bee

State now allows smoking bans in multifamily housing
California landlords who have long had the right to restrict pets, noise, and even water beds in their units, can now prohibit smoking under a new law that took effect Sunday.

Read the full story
Reuters

First-time buyers lean on the bank of mom and dad
About a third of first time buyers in 2011 got either a gift (26 percent) or a loan (7 percent) from their families to help finance their home purchases, down slightly from 2010, but consistent with assistance levels seen during the last decade, according to data from the NATIONAL ASSOCIATION OF REALTORS®.

Read the full story
The New York Times

How low can rates go?
The Federal Reserve has committed to keep long-term interest rates low through next year, so a 30-year mortgage will be pegged about where it is now at least through spring, said Freddie Mac.

Read the full story

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Talking Points

• When the new year arrives, promises and resolutions abound, but few include home improvement.  Here are resolutions every homeowner should make.
• Cut energy use: Sealing and insulating ductwork can improve the efficiency of a heating and cooling system by as much as 20 percent, saving $200 per year or more, according to Energy Star.
• Budget for home improvements: Creating a yearly budget for home improvement and maintenance helps prevent overspending, and encourages homeowners to put aside money for major replacements — such as new roofing or a kitchen appliance — that come up every few years.
• Curb water use: The average household uses about 400 gallons of water each day, or almost $700 per year in water and sewer costs. Making a few simple changes, such as installing EPA-certified WaterSense products, could trim up to $200 annually from the water bill. Add to that energy savings from reduced costs to heat water, and the yearly savings could reach $300 or more per year.
• For additional homeowner new year resolutions visit http://www.houselogic.com/home-advice/home-thoughts/houselogic-new-years-resolutions-home/.

There is a new California law that will protect homeowners while pursuing short sales by prohibiting first and secondary lien holders from going after sellers for money owed after the short sales close.

SB 458 reinforces protections offered by a previous law, SB 931, which only required the first lien holder in a short sale to accept an agreed-upon payment as the full payment of an outstanding loan balance.

This new law, which became effective immediately, now prohibits secondary lien holders from pursuing deficiencies after a short sale closes.  By extending anti- deficiency protection to all existing loans on a home when a short sale occurs, homeowners are given the option to use a short sale as an alternative to foreclosure or bankruptcy.

Effective immediately for transactions closing escrow from this day forward, both senior and junior lienholders cannot require a borrower to owe or pay for a deficiency in a short sale.  This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units.  Any purported waiver of this rule shall be void and against public policy.

Real estate investors will outnumber traditional borrowers 3 to 1 during the next two years, a new survey says, helping clear millions of repossessed properties from banks’ books and pave the way for a recovery.

Currently, Fannie Mae requires a minimum of six months to elapse between the time a borrower purchases a home and subsequently applies for a cash-out refinance.

The Selling Guide has been updated to allow a cash-out refinance within six months of a purchase transaction when no financing was obtained for the purchase transaction.

There are of course all kinds of parameters, including maximum LTV (loan-to-value ratio), documentation, arms-length transaction and “all other cash-out refinance eligibility requirements and cash out pricing applied.” The mortgage cannot be larger than the value of the home, of course.

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Calif. First-time Buyer Affordability Index - Third quarter 2010: 64 percent (Source: C.A.R.)