Three Lesser-Known Benefits of the Roth IRA

It's not a secret to the bigger pockets community that I'm a big fan of the Roth IRA, but I love its features so much that I'm doing writing about it again. If you haven't already read my previous Roth IRA piece, it serves as a good primer. The information below, however, will illustrate some of the lesser-known perks of owning a Roth IRA.

Many investors and financial professionals are familiar with the main benefit of a Roth IRA. In short, it's the fact that after you pay taxes on the money going into the Roth IRA, the plan's investments grow tax free. Even better, when the time comes to take your distributions, you won't have to pay taxes on those either.  That being said, there are so many more benefits to the Roth IRA that you should know about if you're considering this retirement account option. Below, you'll find the top three.
 


Roth IRA Benefit #1: Exemption From Required Minimum Distributions

First, Roth IRAs are not subject to Required Minimum Distributions (RMDs). Traditional retirement plan owners are subject to RMD rules which require the account owner to start taking distributions and paying tax on the distributions at a given age. For most plans, the RMD rules kick in when the account owner reaches the age of 70 ½.
 
Why is this a benefit to you? To put it simply, dodging the RMD rules allows the Roth IRA to keep gathering and growing tax-free income. This tax-free benefit extends to capital gains or other taxes on the investment returns. This allows the account to continue to accumulate tax-free income during the account owner’s life time.

And perhaps even beyond. Learn more about how your Roth IRA can outlive you and provide your loved ones with additional security below.
 

Roth IRA Benefit #2: You Can Share the Love With Your Spouse

Death is inevitable. But if you were a smart investor who got a Roth IRA, your surviving spouse can continue contributing to that Roth IRA, provided your significant other is a beneficiary of that account. He or she can combine your Roth IRA into his or her own Roth IRA.

Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. By contrast, a  Traditional IRA cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account. Non-spouse beneficiaries, such as the children of a Roth IRA owner, cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. Other beneficiaries are subject to required minimum distribution rules,  but they can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death. Additionally, they are also able to continue to keep the tax-free return treatment of the retirement account for 5 years after the death of the owner.

The second option for non-spouse beneficiaries is to take withdrawals of the account over the life expectancy of the beneficiary. So, young beneficiaries can delay taking money out of the Roth IRA for quite a longer than older beneficiaries. The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA as possible while also reaping the benefits of tax-free returns and growth.
 


Roth IRA Benefit #3: No Early Withdrawal Penalties

 
That's right!  Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ based on their own contributions or conversions. This is one reason that many investors choose to go Roth-style: the early withdrawal penalty certainly applies to those using 401ks or Traditional IRAs.

However,  growth and earning are subject to the early withdrawal penalty and to taxes too. But if you do find yourself in a situation where you must withdraw early, you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted. These funds will be available to you tax- and penalty-free.  But if you do this, be aware that conversions have a five-year waiting period before you can take out funds while avoiding penalties or taxes. If you're relying on conversions, you'll want to let them sit for those five years.
 
Roth IRAs are an awesome resource for investors who are eligible to open them. There are some qualification rules for Roth IRA eligibility that leave out many high-income individuals. But as always, there are loopholes you can exploit in this situation.  You can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a "backdoor Roth IRA") as the conversion rules. This works and is legally permitted because there is no income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.

And everyone includes you. So, are you considering a Roth IRA? Have you already been seduced by this sexy beast of a retirement account? Do you have any more questions? Let's keep the conversation going in the comments section below. I'd love to hear from you, and will do my best to answer questions with the time I have available.
 

5 Most Common IRA Contribution Questions

My clients are always asking me what the deal is with the individual retirement account (IRA).  Don't worry if you're totally lost when it comes to retirement accounts. I spend a lot of my time addressing all sorts of IRA-related queries. Like if it's a good idea to get one even if you're young. Or why  I'm so into this Roth dude that people are constantly talking about talked, and if he's paying me off? (He isn't. He also isn't a "he" either--more on that below). Or what the maximum IRA contribution level is. And will the taxman cut retirees a break, finally? Maybe if I ask super nicely?

Fear not, friends. I've got your backs.  Here are the five most common questions I get about IRAs, finally answered in plain English.

Question #1: Is My Contribution Tax Deductible?

Maybe. All sorts of things factor into whether you will get a deduction. Some circumstances the taxman considers include whether you're married, if your job is backing your IRA, what tax bracket you fall into, etc.  Depending on those variables, you’ll be placed into one of three categories.

Group 1: No Tax Deductions

Contributions to a Roth IRA aren’t deductible. Never. Sorry about it. That said, contributing to your Roth account is still a good idea. You'll want to check your  modified adjusted gross income (MAGI) . Roth accounts have a cut-off for how much you can earn annually and still be eligible to hold the account at all.
 
If you're really looking to save in tax terms, one strategy you can use is maxing out your 401(k) or 403(k) first. You'll get all the same tax perks of the old-school IRA, and more, since you're a superstar taking advantage of multiple accounts.  You can even have one of these AND an IRA if you want to be super comfortable in retirement.

Group 2: Deductions with Limits

You may fall into this group if either of the following apply to you.

  1. You or your husband/wife are covered by your employer.
  2. You or your husband/wife are outside of the allowed income range.

Now you'll need to be aware of the fact that the IRS changes its parameters on this matter all the time. You'll want to do some research to ensure your eligibility before moving forward with filing. If this is confusing for you, call your lawyer and ask for help.

Group 3: Total Tax Deductions

You belong to this group if both of the following statements apply.

  1. You don't have a retirement plan through your work, and aren't married to someone who does.
  2. Your income(s) falls under the IRS cut-off point.

See above for information on income ranges. We'll talk more about the cut-off points below.

Question #2: Can I Contribute To An IRA Even if I Have It Through My Employer?

You bet! And frankly, you  probably should, especially if that employer is matching or offering other incentives to do so. You don't even have to have a conventional account.  SEP (self-employed) or SIMPLE IRA account holders can take advantage of this as well.

You'll want to note that there are limits to how much you can contribute. You may not be able to deduct the entire amount, but that will depend largely on your circumstances. (See Question #1 for more details on that).
 
I can already hear some of you saying, "Wait! I'm not covered by my job."  Take a deep breath now. That's okay. You can still contribute to an IRA. One of the perks of IRA plans is that they're available to literally anyone: which type (self-directed, Traditional, etc.) is best for you will depend on your circumstances. There's even the SEP IRA option for self-employed folks. Those contributions could even be deducted entirely depending on your income. Again, consult a CPA on this matter.

Question #3: Is It Possible to Contribute if I Didn't Earn Anything This Year, But My Spouse Did?

Absolutely.  You'll have to file your taxes jointly to do this, but it's A-okay with the taxman if only one partner is earning taxable income. It doesn't matter which individual  earned the money you plan to contribute.
 
As with all things tax-related, there are some restrictions. You have to ensure your contributions don't exceed those. The limits for 2018 are $5500 in if you're under the age of 50, or $6500 if you're over the age of 50.

Question #4: Is There a Way to Contribute To My Roth Account If I Earned Too Much Money In 2018?  

The IRS has set the contribution cutoff at $135,000.00 for single individuals and $199,000.00 for couples who file jointly, which up significantly from last year. Some exceptions apply if you are a qualified widower. If you're married and filing separately, you aren't eligible for a Roth account. Whether you want to reconsider how you file is up to you.

It comes right down to whether you earned more or less than that figure above. If you're under that number, you're good to go.  But if you have earned more, your Roth custodian can limit or even freeze your account.


But there are loopholes here if you do earn more than the Roth cut-off. You can use a Traditional IRA (which is available to everyone, regardless of income). Contribute to that, and pay the taxes upfront. Now roll that cash money over to your Roth IRA. Why this is legal is you've already paid the taxes, so it's eligible to transition into the Roth. Pretty cool, right?

Fun fact for all my retirement superstars out there: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Question #5: Can I Contribute To My IRA if I'm older than 70½?

Maybe. The type of IRA you use is the critical factor here.
 
If you've gone with the old-school IRA, the answer is no. Once you hit that age, you won't be able to contribute any further. But if you've opted for a Roth IRA, you can still add funds there. You may also move funds between IRA accounts.  Barring any unforeseeable and unlikely dramatic changes of law, this will always be true, even if you live into your 100s.

And I sincerely hope you do!

There you have it. Those are the short versions of answers to the five most common IRA questions I get. If there's a detail still gnawing away at you, or if a question you didn't see answered above, please use the comments below to ask about anything still on your mind. Thanks for reading!

Quick Fix: IRA Contribution Limits for 2018

Hello, fellow investors. Every new year, I get many questions about IRA contribution limits and what changes have taken effect. This year, there have been many more questions than usual about this subject, as well as the new tax laws.  Don't worry, there's an article in the works about how these new tax laws will impact real estate investors soon. While it would be impossible to answer all of the questions I've received in this space, I will be giving an update on the IRA Contribution Limits for 2018.

Today, we're just going to talk about a "quick fix" for your IRA and retirement concerns. We'll also show you one big way to get around the 2018 limits and make the most of your retirement savings.  Even better, you can learn all of this information in less than ten minutes.

2018 IRA Contribution Limits

Let's start with the good news:  IRA contribution limits remain the same in 2018 as they did in 2017 (and even as far back as 2016). Here's the quick and dirty update:

 
But maybe you want to contribute more. If you're ready to take your retirement account to the next level, here is our Quick Fix solution:  take advantage of a self-directed IRA LLC.

Why Is a Self-Directed IRA LLC Good For Me?

 
Self-Directed IRA LLCs  are a mouthful to talk about, so it's possible you haven't even heard of this tool at all. But they will offer you the ability to make tax-free investments without custodian consent. Since you don't need to get permission from a custodian (you are, after all, an adult--or possibly an extremely bright teenager planning retirement early), you can make the investments you want, and you can make them faster than you would if you were stuck in Traditional IRA Land. Self-directed IRA LLCs are special purpose liability companies. Yours will be fully owned and managed by you. You can lord over it and feel like a God on the weekends. The LLC can become a pass-through for tax purposes, which allows you, the owner, to assume the tax burden instead of the LLC. This gives you tax options.

In most cases, income and gains flow back into the IRA tax-free. You are also able to keep and funds in an LLC bank account without having to go through a custodian. These accounts operate similarly to personal checking accounts, but the company is separate from you as an individual. You have control over, and access to your money, which means greater investment flexibility.

You can invest in anything from your IRA LLC. And when I say anything, I mean literally anything: real estate, gold, Bitcoin, and so much more is all fair game. Your only limit is your imagination. No matter where you put your money, your income and gains flow back into your fund tax-free. You can stick it to Uncle Sam--who among us hasn't wanted to? And even better, you can maximize your contributions and plan the retirement you've fantasized about for during your working life.


Quick and Dirty Recap of Self-Directed IRA LLC Benefits

 
So, to briefly review for the scanners in the audience, when you get a Self-Directed IRA LLC:


Pretty cool, right?

That's it for today. If you have any questions about Self-Directed IRA LLCs, want to sing their praises, or want to pick an argument with me because you think I'm totally off-base, you can do so in the comments below. Let's spread the Self-Directed IRA LLC Gospel  and work towards a happy, healthy, and comfortable retirement plan together.


 

What's The Right Business Structure For Multiunit Real Estate Investors?

Real estate investors love multiunit properties. These rental properties are in high demand, with renters scrambling to find duplexes, fourplexes, and of course, traditional apartment complexes in the parts of town close to work and play.

Multiunit investments are also surging in popularity in part because they are more resistant to inflation than traditional single-family homes.

While many of the same principles of business entities for real estate investors carry over to this topic, there are certainly special considerations that multi-unit investors must take into account. Below, we'll talk about the types of business structures that favor these investors, how they work, and what to keep in mind if you're considering adding a multi-unit to your real estate empire

Joint Venture Arrangements

Joint Ventures (JVs) are a popular choice for beginner investors, as well as those who prefer quick, one-and-done deals. They allow investors to pool money and equitably share risks and profits alike. Multi-unit residences and industrial properties make for a logical application of a JV agreement, as they easily divided for practical purposes.

JVs are a great option because they are clearly defined from the beginning. If your investment or partner(s) don't work out, you aren't locked in for life. But if you're successful, the JV leaves the door open for future collaboration.

Limited Partnerships

Limited Partnerships are most useful for investors operating their property with one partner. The terms of LPs are flexible, so your partner can be a fellow investor, property manager, angel investor, or anyone you see fit.

LPs are agreements that offer investors a high level of control over their terms. If you're considering this option, ensure you share your needs with a qualified attorney. Strong contracts will ensure you're getting the deal you want and will beef up your asset protection system.

The Series LLC

The Series LLC is among the strongest structures for any investor, and multi-unit real estate investors are no exception.  This structure is extremely versatile. It's easy to form a multi-member Series LLC, but it works just as well if you're investing on your own.

Common reasons multi-unit investors love the Series LLC include the following:

We hope this has given you a starting point on the best business structures for multi-unit investments. Of course, everyone's situation is unique.  Ideally, you want your structure in place before making any investment.

Interested in learning more? Check out our article, When It Comes to Taxes, Is Managing Rental Properties a Business or an Investment?

 

Should You Worry About the Due on Sale Clause?

Should You Worry About the Due on Sale Clause?

Despite what you might read on the internet, don't worry about the due-on-sale clause. The fact is is, since before 1960, we haven't seen any bank foreclose based upon a violation of the due-on-sale clause while the note's performing. The fact is is that banks are in the business of making loans and collecting mortgage payments. The due-on-sale clause would allow them to foreclose on your property by transferring the asset. But why would they do that? This could only hurt their interest. Like I've seen it a couple of times, where banks have foreclosed based upon it. But those were always in situations where the mortgage wasn't getting paid, and that was gonna get foreclosed on anyway. So in that sense, don't worry about it. Protect yourself with your proper asset protections strategy. My name is Scott Smith. I'm an asset protection real estate attorney, out of Austin, Texas, and I wanna help you.

Anonymous Trusts & Asset Protection

 

Rich people employ asset protection specialists to make sure that their wealth is preserved from any particular lawsuit.

How do we protect the assets and keep people from finding out about them? We do this is by using anonymous trust.

You already know about the LLC and the protections that an LLC is going to give you in terms of anybody trying to sue you and get you your assets. What you might not know is that as a matter of public record and traditional filing that you would do with Legalzoom or another legal website or your average CPA or attorney is that now everybody knows what you're LLC is? Well, what we use is a trust.

You can use a trust to be able to own the LLC well trust or private documents so nobody would be able to find out who actually owns that trust, where the beneficiary of the trust assets, you can own the LLC anonymous. You also know that the ultimate goal of actually having this LLC is to hold the asset. Your ultimate goal for this piece of property.

This piece of property has a deed, and on that deed it says who owns it. Well, if that's your LLC and people can connect it to your company's structure, if it's you, now they know that you own it. That's your worst case scenario.

But you might have not known that a trust itself can actually be the title holder to the property. This keeps anybody from being able to connect your property to your company. So in effect, you have complete anonymity. Nobody can find out who owns your company and nobody can find out who owns your property.

 

Preparing Your Taxes With Your Land Trusts

Land trusts are incredibly useful for real estate investors. They allow clever investors to remain anonymous, prevent lawsuits, and manage investments. They offer many more financial and legal perks.

With all of those sexy benefits, it's no wonder real estate investors want to know more about them. So this article is here to guide you through the decidedly unsexy part of land trusts: taxes.

Nobody likes to dole out any more cash to Uncle Sam than necessary. But we're here to show you the tax requirements and benefits of using a land trust. It as painless as possible. Here are quick and dirty answers to the four most frequently asked questions we get about land trusts and taxes.

1. Do I Have to File Taxes For My Land Trust?

In short: definitely. Failure to file taxes on anything that produces income is considered tax evasion, which you may know as the felony that finally landed Al Capone behind bars. While you're probably not running an illegal bootlegging operation, tax evasion on its own is a very serious matter. The last thing a real estate investor, or any business owner, needs is to get into a fight with Uncle Sam.

2. Do Land Trusts Offer Any Tax Benefits?

Land trusts absolutely come with certain tax perks. Some of the most popular are the following:

3. What Will My Land Trust Taxes Cost?

How much your land trust taxes will actually cost you is going to depend on the state the trust is formed in. If the trust is for an investment property outside of your home state, your state of residence may also have additional tax requirements. To be sure you're filing appropriately, make sure you have a good CPA.

Regardless of your level of experience, it's a good idea to have a real estate dream team that includes a CPA and qualified, detail-oriented attorney. That said, you can get an idea of your state's requirements with a cursory internet search.

4. How Do I Report My Land Trust on My Tax Return?

Because you'll receive pass-through treatment, you simply will report your taxes on your personal return. For detailed instructions, consult with one of the dream team members mentioned above. If you still haven't formed your dream team, that's okay: we can help.

Royal Legal Solutions has attorneys, tax professionals, and CPA partners that can help you navigate these tedious waters. As investors ourselves, we love helping our clients get the most out of both their land trusts and their tax preparations. To learn more about how to best take advantage of your land trust for tax purposes, take our Tax Discovery Quiz.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

The Self-Directed IRA Pitfalls When Considering Real Estate Investments

The self-directed IRA is a widely popular option for real estate investing. Investors can enjoy high yields, while hedging themselves against stock market uncertainties. However, there are some pitfalls to avoid. Knowing these common pitfalls can help make managing your investments easier and more cost-efficient.

Common Pitfalls

Pitfall One: Prohibited Transactions

“Self-dealings” are defined by the IRS as any transaction that involves the self-directed IRA and a disqualified person. A disqualified person includes the IRA holder, but also anyone with significant authority over the account. This includes plan custodians. Family members are also disqualified. A good rule of thumb for defining “family” is to ask yourself if they are lineal descendants, spouses or forebears.

Family members include: Spouses, parents, grandparents, children and their spouses, and grandchildren.
Even if a prohibited transaction isn’t intentional, it can lead to tax penalties or even worst early distribution of your account. Here’s an example of a seemingly harmless transaction that is prohibited:

Sarah owns a real estate investments. She notices that the yard could use some work. Her son- in-law does some landscaping work, so she figures why not pay him to do repairs? Since Sarah’s son-in-law is a “disqualified person,” this transaction would be considered prohibited. In fact, if Sarah herself was a landscaper she would also be prohibited from doing the landscaping work herself. This is considered “sweat equity.” In both these cases, a disqualified person is benefiting from conducting the landscaping work on the IRA owned asset.

Pitfall Two: Unrealistic Expectations

The self-directed IRA owner usually has enough common sense to avoid any claims of “guaranteed returns” or “risk-free investments.” However, I’ve seen a few smart investors fall prey to unreal expectations, especially when it comes to the administrative work and costs required to maintain their investments. The IRA owner must review and sign off on transaction related documents. She must keep up with fees associated with these transactions and fulfill IRS required reporting requirements. While we can’t get rid of most of these requirements, we can make it easier. Our online platform gives investors “checkbook control” and allows transactions anywhere with an internet connection.

Pitfall 3: The Wrong Structure

Investors can reduce fees and gain more control over their IRA account by choosing the right self-directed IRA structure. Investors who who use a custodian managed account, sometimes deal with costly custodial fees and delays. Using an LLC self-directed IRA can reduce custodian involvement, however it can result in additional fees during tax time. We offer a self-directed IRA connected to an FDIC insured asset trust. The trust reduces tax fees while also giving investors “checkbook control” over their account.

Avoid Costly Mistakes

Using the wrong structure, having unreal expectations and participating in prohibited transactions are all common pitfalls self-directed IRA real estate investors face. We’ve helped several clients avoid these pitfalls, while enjoying the benefits of tax-deferred real estate gains. We’d love to help you do the same. Contact us today to address your personal concerns.

The Business Trust Owned Self-Directed IRA

A business trust is an IRS-approved entity for handling IRA investment funds. With a business trust, the investor becomes the trustee and gains management rights over investment funds. We’ve seen investors gain checkbook control over their self-directed IRA using this method. Besides more control, investors can enjoy reduced cost and investor confidentiality. Let’s discuss these benefits and how we can help you get started with a business trust for a self-directed IRA today.

Investing Efficiency and Control

Using a business trust for a self-directed IRA allows for more efficient investing. We’ve seen investors wait up to three days for their investments to go through the typical custodial review process. The advantage of a business trust is that the IRA owner become trustee. As trustee, they gain management control over investment decisions, rather than giving up this control to a custodian. Once a business trust is established, the trustee can open a checking account for IRA funds to be held. Investing then becomes as easy as writing a check. With this ease, investors no longer have to worry about delays on investment opportunities or recurring fees.  Our technology uses a similar trust structure to cut out custodial involvement and the need for in-person or mail transactions.

Save Hundreds on Taxes

Business trust are exempt from state franchise taxes, which are taxes imposed on corporations, partnerships and LLCs for doing business within a state. These taxes are usually charged annually. In California, the minimum franchise tax is $800. However, a 2016 Chief Counsel Ruling decided that business trusts are not considered corporations and thus exempt (1). In contrast, self-directed IRA LLCs don’t enjoy this exemption.

Save on Redundant Fees

The self-directed IRA for real estate investing is popular for several reasons. However, choosing an LLC as the holding entity for a self-directed IRA can incur costly fees. This is especially true for out of state real estate investments. Investors must register and pay a fee to conduct business in a new state. They may have to hire an additional agent to comply with state by state licensing requirements. Like the franchise tax, these IRA management fees can be avoided by using a business trust for the self-directed IRA.

Avoid Filing Taxes

A business trust can avoid filing both federal and state income taxes by qualifying as a “disregarded entity.” According to Professor Carter G. Bishop: “Under a default rule, all business trusts are considered either disregarded entities (one beneficiary) or partnerships (two or more beneficiaries) (2).” When using a business trust for a self-directed IRA, the IRA becomes the sole beneficiary and thus qualifies the trust as a “disregarded entity.” In contrast, using an LLC that qualifies as a “disregarded entity” isn’t guaranteed both federal and state tax filing exemptions. In California, LLCs are required to file state taxes regardless of entity status. Using a business trust owned self-directed IRA can save on these costly and time consuming tax filing requirements.

Maintain Confidentiality

A business trust self-directed IRA allows investors more confidentiality. Unlike an LLC, where the agent’s name must be kept in public record, a business trust keeps the trustee name confidential. Some states also require the LLC agent’s address be included in its Articles of Organization. Unfortunately, in Nebraska, Arizona and New York LLCs are still required to give public notice in local publications. With a business trust, IRA owners can enjoy anonymity. Investors can establish their business trust and enjoy self-directed privated investing all in one online platform. No leaving home or filing public documents required.  

Forming Your Business Trust

Like an LLC, forming a business trust begins with drafting required legal documents. For a business trust, the starting point is the Declaration of Trust. This document is similar to an LLC’s articles of incorporation in that it defines the nature or purpose of the trust. The rights of the trust beneficiary and who is named trustee are all critical to obtaining the benefits mentioned above. We can help ensure accuracy and position investors like you for maximum cost savings and tax benefits. We also streamline the self-directed IRA setup process, including business trust formation.

Stay Compliant

We’ve discussed some of the benefits of using a business trust for a self-directed IRA. These benefits all lead to time or money savings and increased confidentiality. However, structuring a business trust for a self-directed IRA is a detailed process. Several of the compliance requirements you’d find with an LLC and basic custodian managed self-directed IRAs still apply. We’ve developed a wealth of expertise when dealing with these compliance concerns. We can help you form your business trust owned self-directed IRA and provide further consultation on plan structuring and IRS regulations. Call us today at (425) 449-4554 for a consultation.
Sources:

  1. California FTB Says RIC Business Trusts do not Owe Minimum Franchise Tax
  2. Dealing with ‘Check-the-box' Regulations

VIDEO: 'Investor' Vs. 'Dealer': Why It Matters To The Internal Revenue Service

Many real estate investors aren't sure if they are "investors" or "dealers" in the eyes of the IRS. The distinction is important because a dealer does not enjoy the 1031 exchange benefits that an investor has.

You may not know it, but you might be disqualified from taking advantage of the 1031 exchange. You may also be subject to a 39.6% tax rate.

You can ensure that you're an investor, not a dealer, by having a corporation that owns and controls LLCs, which in turn ultimately own the assets.

If you take this approach you will not be considered a dealer by the IRS.

The IRS, notably, gets to make this decision on their own. So you need to work with a CPA and an attorney to make sure you follow these rules so that you're not surprised by huge tax consequences.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

How the 'Three Company' Structure Protects Real Estate Investors

A typical real estate investor should be looking at a three-company structure.

The first of these companies should be a buy and hold LLC. The buy and hold LLC is going to be for long-term rentals. It's going to hold a number of different properties that you will be holding for longer than a year.

The next company that you're gonna have is your fix and flip LLC. Those are properties that you're gonna be holding for less than a year.

The reason that we need two of these is because they have different tax treatment. Your buy and hold is going to be a long-term capital gains taxation, your fix and flip is gonna be short-term capital gains.

Your third company will be your operating company (corporation or operating LLC). Typically we use corporations for some instances and LLCs for other instances. The corporation shields you from any personal liability in conducting your business. If you run your business personally, you're collecting the rent, you're negotiating with contractors, entering the contract, etc. This all can mean a lawsuit against you personally.

Even if you were smart and protected all of your assets inside of the LLC, what will happen is that a judgement against you gets recorded onto your credit report, impacting your credit score. The lower the credit score you have, your less ability to have financing. And that means real dollars out of your pocket.

 

Land Trust Foreclosures & How Investors Avoid Them

It's time to talk about the f-word: foreclosure. Foreclosure is a fear for any property owner, and during the housing crisis became something of a collective national nightmare.

Wise investors often take advantage of land trusts for investment properties because they offer a broad range of specific benefits. Among these is the fact that land trusts allow you to obtain personal financing while also safeguarding the property inside of an LLC structure.

But land trusts aren't immune from foreclosure.  Real estate investors using land trusts can suffer from the actions of their beneficiaries.  Read on to learn about the relationship between your trust's beneficiary and foreclosure, as well as some tips on preventing this financial nightmare from becoming your reality.

Do Land Trusts Protect Me From Foreclosure?

Unfortunately, a land trust alone does not prevent foreclosure. This is actually a fairly common misconception about land trusts. This fiction has persisted because of wishful thinking on behalf of those in debt, and also because disreputable land trust companies have pushed the idea. Outright scammers have also exploited it.

Further, the legend of land trusts preventing foreclosure lives on because investors often confuse liability protection with foreclosure prevention. Land trusts absolutely offer liability protections.  

There is, however, a grain of truth beneath the misconception. Some states will extend liability protection to the beneficiary of the trust. But in reality, this is extremely rare.  Most states hold all "permissible parties" accountable in the event of a foreclosure. This includes the beneficiary--and that's you.

The good news is you don't have to tango with the threat of foreclosure at all.

How Do Investors Avoid Foreclosure on Land Trust Property?

The good news is you don't have to tango with the threat of foreclosure at all.

Be financially responsible in your investments. This means planning ahead and actively working with your CPA to ensure you can afford any financing you obtain for your investment property.  Work with your attorney to actively oversee your trust and its activities. Your proactivity will pay off by ensuring you're on top of any payments you may owe.

Choose Your Trustee Wisely

Trustee fraud is an unfortunately common occurrence. Essentially, your trustee is in the pilot's seat of your trust. That means that your trustee has the power to cause your property to crash and burn.

Trustee fraud occurs when the trustee  misuses or abuses their power over the property. It isn't always deliberate, either. Sometimes, trustees are simply negligent and fail to fulfill their duties. If this happens with something like a mortgage payment, you could be faced with foreclosure. This is why it is critical that you choose a trustworthy trustee.

If the integrity of your trustee is at all in question, you can always appoint a board of trustees to guard against the possibility. Using a board prevents any single individual from tanking your investment without your knowledge. To stretch the airplane metaphor: would you rather have one pilot, or three commercial airline certified pilots operating your aircraft? Remember, you're the passenger and the owner here. With a board, if one pilot decides to knock down three martinis during the flight, you'll have other people who can take the wheel and regain control.

Get Help Making Sure Trust Foreclosure Isn't An Issue

Following these tips should keep your plane in the air and your land trust on solid legal ground. If you still have questions, feel free to ask in the comments section below. If you need specific advice, set up a consultation with Royal Legal Solutions today. Asset protection is not a do-it-yourself gig.

My name is Scott Smith. In addition to being an attorney, I’m a real estate investor myself. Before I began specializing in issues surrounding trust foreclosures, I would play for the other side.

If you’re considering a land trust, let us help you protect your valuable investments with a foolproof asset protection strategy from people who’ve been around and seen it all. 

How to Hold Real Estate Notes in a Land Trust

Chances are if you're reading this, you already know a little bit about land trusts. Maybe you've even taken the next step and secured some of your real estate investments in a land trust.

But if you're new to investing or land trusts, you may not be aware of the fact that you can actually use them to hold all sorts of things, including real estate notes. Learn more about how, and why, you may want to use this fact to your advantage below.

What Can I Hold in a Land Trust?

Most investors who are already familiar with land trusts aren't hip to their level of versatility. Most people think of land trusts as a place to stash a property and title. In fact, almost anything connected to your properly at all can be secured in a land trust.

We'll talk more about real estate notes below, but some other things your land trust can hold include deeds, financial agreements, accounts for regular upkeep services related to the property, and more.

The practical applications here are broad. Let's say you learn your new investment home is sitting on top of a natural gas deposit. Cha-ching: that's great news! The even better news is once you hammer out a contract to capitalize on your new-found resource, the rights to the natural gas (or oil, etc.) can also be protected by your land trust.

What Are Real Estate Notes?

Just like you don't want to hold property in your legal name, you don't want notes tied to your identity. This is a rule of thumb for any asset. There are several reasons for this, and most of them have to do with asset and liability protection or staying out of civil court. But there are also considerations specific to note holders.

Notes can be a risky business for everyone involved. If you're just now learning about notes, they essentially function like loans. While notes and other types of loans can be very lucrative, there is always a definite risk that the recipient will default, or otherwise fail to pay up. Traditional lenders will find this costly and annoying, but note holders have an additional problem on their hands when things go south: foreclosure.

That's right: if you are holding in a note and your arrangement goes sideways, you're left holding the bag in the event of a foreclosure. And even if you're one of the wealthiest and most successful investors out there, you don't want a foreclosure dirtying up your record.

Why Should I Hold a Real Estate Note in a Land Trust?

The good news is, you can completely sidestep this problem by holding your notes in a land trust. If you do a lot of this type of business, a default is nearly inevitable at some point. But the use of a land trust will protect you and your good name from the consequences. It's only fair, considering you're not the one who failed to keep your end of the deal.

This strategy works because the land trust keeps you as an individual separate from any properties, notes, or other related assets. Your trustee's name will appear instead of your own on the documents. But you are the one that will be spared the bruises to your budget and reputation.

The mechanics of moving your notes into the land trust are the same as they would be for any other asset. Our experts at Royal Legal Solutions can help you. If you're in this business, or planning to incorporate notes into your investments, make the smart move. Schedule your consultation before issuing anything.

Using Business Trusts To Protect IRA Assets

When you have an individual retirement account (IRA), you may believe your investments are protected. After all, if you are not a doctor, corporate executive or professional in a litigation-prone field, you may feel there is little that could cause you to lose your assets when it comes to investing.

Are My Assets at Risk?

Unfortunately, there are a lot of ways in which your assets, IRA-related or personal, can be at risk. Filing for bankruptcy, divorces, and civil lawsuits are all possible ways to lose your assets. In fact, if your minor causes a car accident, you will likely be the one to pay the price. You are also considered at fault even for accidental injuries that occur on your property, like a slip and fall.

Protecting Your Investment Assets

Fortunately, there are state and federal laws that enable you to protect many of your assets from certain types of situations.

Business Trusts: Protection that Goes Deeper

Additional asset protection is a smart way to further ensure your property and finances stay in your hands, regardless of the legal situations occurring in your life. To do this, most financial advisors recommend you create a legal entity, of which you are the manager or trustee, through which you invest your IRA funds. This IRS-approved strategy separates your personal assets from those owned by your trust.

Full Confidentiality

When you form a business trust, there is no legal requirement to publicly file. The trust agreement, also referred to as a Declaration of Trust, can remain private. There is also no automatic publication of the trustee’s name, ensuring your identity remains private as well. This is important because it allows you to prevent creditors and lawyers from easily identifying your full net-worth should a lawsuit be filed against you.

Disregarded Entity

For federal and state income tax purposes, a business trust is classified as a partnership. However, partnerships that have a sole owner are “disregarded as an entity separate from its owner.” Once this occurs, the entity becomes exempt from filing federal income taxes. As a business trust, vice a LLC, earnings are also exempt from filing state income taxes as well.

 

Understanding How Important Rental Property Liability Protection Is for Modern Investors

Are you a landlord? Do you run your business in a haphazard and lax manner with no regard to how your tenants and other potential litigants perceive you? Are you totally clueless about how to reduce risks and limit personal liability? Then you’re what we refer to in legal circles as a high-profile target. You’re basically walking around with a “SUE ME!” neon sign on your forehead.  To understand the importance of taking a proactive approach towards rental property liability protection, you need to be aware of some of the flimsy and not-so-flimsy reasons that can result in substantial damage awards.

7 Ways You Can Lose Your Shirt Without Rental Property Liability Protection

Disagreements

The number one reason for lawsuits is disagreements as demonstrated by one of our clients. You can do very little to prevent them from happening, even on your best behavior. If you don’t have an asset protection strategy in place, then you might as well hand over the keys to your castle to a complete stranger. We recommend setting up a Series LLC and shell companies to hide your assets from litigants.

Injury on the Premises

You will be held personally responsible for injuries to tenants and guests that occur on your property. If the litigant can prove that the injury was caused by negligent behavior on your part, then you might be in for it.

Dangerous Conditions

Sometimes, it’s not even necessary for the litigant to prove negligence. If they can show that you know, or should have known, about a dangerous condition on your property and you failed to remedy it or give adequate warning, then you will have to pay up.

Vehicle Liability

Any vehicle used by your business including those of employees and agents can result in a claim that can expose your business to a liability. It may have nothing to do with your tenants but you may have little recourse if you have not adopted smart liability protection strategies.

Dogs and Critters

Pets and other animals can also expose you to liability. This is the reason why most landlords prohibit dogs on their property. While you won’t necessarily assume liability for your tenant’s dog, all that the litigant needs to prove is that you “knew” or “should have known” the dog was dangerous or that you exercised some control over it. As you can imagine, it wouldn’t take much doing to prove this.

Security Issues

It’s not your responsibility to protect tenants from criminal acts. However, the law has evolved to a point where it’s possible in some circumstances to take responsibility for the tenant’s security. You’re expected to keep the common areas such as stairways, hallways, and elevators safe from criminals.

Bad Tenant Behavior

You may assume liability for the bad behavior of a tenant. If you are aware of any obnoxious, unlawful or other bad behavior by tenants, you should take the necessary steps to protect the other affected tenants. Failure to do this could result in a lawsuit.

There are plenty of lawsuits based on liability claims that can arise from other sources such as invasion of privacy, libel, slander, and discrimination based on religious beliefs, race, or even evictions.  This is why you need to establish an LLC as the first step towards protecting your investment from liability claims. We can help you come up with an asset protection strategy that will hide your personal assets and make you an undesirable target. 

 

Self-Directed IRA Cryptocurrency Investing: Your Questions, Answered!

We’ve already went over the finer points of Bitcoin investing using a self-directed IRA. However, cryptocurrency is such a new retirement investment that even those with prior experience face questions. Today, we’re answering three major questions in this handy Q and A guide. Don’t let your questions stop you from this whole new digital world of investment potential.  

Question 1: Is Cryptocurrency Investing With a Self-Directed IRA Allowed?

The short answer is, yes. The only types of investments the IRS specifically forbids is collectibles and life insurance. However, the IRS doesn’t specifically list cryptocurrencies as an alternative investment. But this shouldn’t cause concern, as the IRS has been historically hesitant to endorse investments, as this can backfire later on.

Question 2: What Entities Are IRS Approved to Administer My IRA?

Just like real estate or other alternative investments, cryptocurrency must go through a custodian administered self-directed IRA. With this structure, you’re handing over a transaction fee and access to your cryptocurrency wallet PIN. This risks safety and increases administrative cost.
Another option is to invest using an LLC as an extension of the IRA. This gives you "checkbook control" over your investment funds, since you become the manager of the LLC. However, like an LLC for any other purpose, it requires legal work to establish. Plus, you have to establish a checking account to link with the LLC. Lastly, investor confidentiality isn't maintained since LLC agents must have their names filed with state records. We eliminate some of these pain points by establishing an IRA linked trust, where you as the trustee gain immediate access to Bitcoin and other cryptocurrency investments.

What Factors Influence Cryptocurrency Prices?

We can examine this question using Bitcoin as an example. According to Arthur Hayes, CEO of the BitMex cryptocurrency exchanges, Bitcoin prices can reach $50,000 in 2018. Here are some price factors to consider:

Streamline Cryptocurrency Investing

We’ve answered some important questions regarding regulations, pricing factors and how to structure and administer your self-directed Bitcoin IRA. We can answer more of your questions and walk you through our online platform, which streamlines the entire setup and investing process. Contact us today if you have additional questions.

The Self-Directed IRA - Real Estate Investments

The self-directed IRA allows individuals to invest retirement funds in real estate focused assets. We’re seeing more investors utilize this unique investment vehicle and we can help you get started with this guide. We’ll go over the benefits of the self-directed IRA, what to watch out for and how to start investing. But first, let’s understand the history of the self-directed IRA.

The Rise of The Self-Directed IRA

The traditional IRA rose in popularity during the 1990s. However, investors were limited to traditional investments. These included stocks, bonds and mutual funds. By the 2000s the self-directed IRA gained popularity. It allowed investing in alternative assets including real estate. Today, the IRA is innovating even more with online platforms for accessing high-yield private investments.    

Four Self-Directed IRA Benefits

1. Diversification- Portfolio diversification is the obvious benefit offered by this product. Some investors find real estate to be a higher yield investment. Plus, some prefer real estate as a tangible asset. Even within the real estate category, investors can diversify with several types of real estate categories.

Here is a breakdown of the main real estate categories allowed by the self-directed IRA:

2. Flexibility - Using a self-directed IRA for investing in some of the assets mentioned above gives investors the freedom to invest in opportunities as they arise. Investors also have the freedom to choose whether to flip or rent out their property. Finally, investors can invest or divest funds in multiple properties as they wish. Plus, self-directed IRA services now exist to make these transactions online-based and even more flexible.

3. Tax Benefits - One of the biggest advantages of using the self-directed IRA for real estate is the tax benefits. Instead of immediately owing taxes on investment gains, the tax is delayed. We’ve seen investors reinvest these funds or allow them to grow for decades. Either way, taxes are only applied at a later date when funds are dispersed. Plus, with a Roth IRA gains aren’t taxed at all.

4. Hedge Against Market Fluctuations - Real estate can provide a hedge against market volatility. When global market insecurities emerge, investors can benefit from having local and familiar investments. Also, real estate of all categories are a tangible asset. This in itself can create more certainty for the investor. All these factors contribute to making real estate a viable option for portfolio diversification.

Pitfalls to Avoid

In order to enjoy the full tax benefits of the self-directed IRA real estate investment, be aware of “self-dealing” rules. In general, these rules prohibit dealings between the IRA owner or his family members/spouse and the IRA account. For instance, an investor can’t buy a property owned under his self-directed IRA. An investor also can’t rent out one of his IRA owned investment properties to a family member. These transactions would result in an unfair double benefit to the IRA owner. Engaging in one of these transactions or any other prohibited “self-dealing” can result in a taxable event.

How to Start a Self-Directed IRA

When setting up a self-directed IRA investors have a few options, each with its own caveats. Below are two options:

What to keep in mind: These custodians have different fee structures and levels of expertise to take into consideration. An approved custodian should be listed by the IRS in their Approved Non-bank Trustees and Custodians listings (1). A custodian will invest self-directed IRA funds based on the owner’s discretion. It is up to the investor to do his own due diligence when making investments. Potential processing delays should also be taken into consideration, since these can be costly when dealing with time sensitive real estate investments. Our online platform can reduce processing delays and administrative cost.  

What to keep in mind: When the IRA owner wants to make an investment she simply accesses the account as she would a normal checking account. No custodian approval is required for dispersing funds. This results in a more efficient investing process. However, LLCs are sometimes subject to filing taxes and paying an annual franchise tax.

Set up your self-directed IRA today

A self-directed IRA for real estate investing provides flexibility and the benefits of portfolio diversification. Unlike traditional investments, a self-directed IRA allows for a tangible asset to hedge against market uncertainties. Perhaps most appealing is the deferred taxes on real estate investment gains. However, these benefits can be undermined through violation of the IRS’s “self-dealing” rules. Structuring a self-directed IRA under the wrong terms can also lead to transaction delays and costly custodial fees.
We specialize in setting up self-directed IRAs to maximize tax benefits, cost savings and control. Whether you require a self-directed IRA for residential or commercial investments, we can provide you with a nuanced solution. Contact Royal Legal Solutions with your questions or to set up a consultation.

3 Pros of Self-Directed IRA Investing (& 2 Cons To Review)

Rolling your IRA over into a self-directed IRA isn’t for everyone, but those who take the time and effort to oversee their investments can cash in on a number of benefits that others can only dream of. Here, we’ll review some of the pros and cons of using your self-directed IRA for investing.

Pro: Self-Directed IRAs Allow for Tax-Free and Tax-Deferred Status

Traditional IRAs typically allow for a few very safe, very low-yield options. But one of the major benefits of an IRA is that it allows you take advantage of a special tax status. Roth IRA’s, for instance, allow your investments to grow tax-free. Non-Roth IRAs are tax-deferred (for example, you only pay taxes once you begin cashing in on your IRA). With Roth IRAs, the taxes are paid beforehand on deposit.

Roth IRAs are an excellent opportunity to store lucrative investments for your retirement. In addition, with a Roth IRA, there is no set age at which you are absolutely required to begin taking withdrawals. Roth IRAs are thus a great place to store investments.

Con: Self-Directed IRAs are More Costly than Traditional IRAs

While this may be a con for some, the truth is that you can make a lot more money with a self-directed IRA than you can with a traditional IRA. The catch is that yearly fees are more expensive, and they cost more to set up.

Pro: IRAs are Generally Safe from Creditors

IRAs are some of the safest places in which to store assets. While individual laws will differ from state to state, IRAs are technically considered trusts making them very difficult to sue and even immune to bankruptcy.

Con: IRAs are Complicated and Subject to Regulations

The legalities of using an IRA as an investment bucket are subject to regulation. That is the price paid for having preferred tax status. Self-directed IRAs offer you a lot more options in terms of what you can invest in, but there are some restrictions. For instance, you can’t fund your own or your family’s business with your IRA account. You can, however, invest in businesses in which you don’t have any active involvement.

Pro: Self-Directed IRAs Give Your More Options and More Control

For obvious reasons, this is a bit of a mixed blessing. You can save more money for your retirement by investing in ventures with higher yields, but you also have to do your research and keep on top of how your investments are performing.

Just a few of the interesting things that you can invest in with a self-directed IRA that a traditional IRA would not allow for:

Basically, rolling over your IRA to a self-directed IRA allows you to invest in anything that is legal to invest in. It’s a great opportunity for those that want to take control of their future, and enjoy the tax benefits of their retirement account.

Your Resource On Self Directed IRA Real Estate Investing

Real estate has been a popular investment over the last 50 years. Today, many investors are choosing the self-directed IRA as a vehicle for their real estate investments. There are a ton of resources on the tax benefits and compliance guidelines associated with this type of investment. However, some valuable information can get lost amidst those lengthy resources. I’ve highlighted some of this overlooked information in this handy do’s and don’ts guide.  

Self-Directed IRA “Do’s”

Use Trusted Self-Directed IRA Custodians and Services

This may seem like a no brainer, but the sheer amount of funds in IRAs make it a target for scammers. Also, the advantage of tax deferrals can turn out to be a curse. I’ve seen scammers use this as a lure to keep investment funds under their fraudulent activity for decades. A legit self-directed IRA custodian should be IRS approved and use safety protocols to secure your financial information. We set-up self-directed IRAs for real estate and other private investments, using an FDIC insured IRA trust. Our online platform uses Amazon’s trusted Web Services and our servers our audited regularly.

Compare Administrative Cost

The obvious costs to watch out for are recurring fees. For the typical self-directed IRA, these include a transaction fee on each asset sale or purchase. Transactions on real estate assets can incur even higher transaction fees. There are also some lesser known costs. The IRS requires real estate in a self-directed IRA to be valuated annually. Getting this valuation can be costly. A common pain point investors cite in IRA real estate investing is lack of transparency around costs. We provide a clear, cost-effective method of real estate investing with your self-directed IRA.

Self-Directed IRA “Don’ts”

Give Up Too Much Control

Self-directed IRA real estate investments can go through custodial delays. Mailing forms and transferring funds can take time and are subject to external factors. These extra layers of administration mean less control for the self-directed IRA owner. We provide real-time access to your funds, giving you more control over your real estate investments.

Limit Your Investment Options

Portfolio diversification is what attracts several investors to a self-directed IRA. Real estate, in particular, takes this advantage even further since there are so many different types of real estate. We’ve seen investors enjoy high yield returns on a variety of assets from raw land to condos. Mortgage notes and other lesser known real estate investments are often overlooked, but can also help with diversification.

Start Investing Today

A self-directed IRA for real estate is a good way to diversify your retirement portfolio. However, using a trusted and cost-effective service is important. Gaining checkbook control over your account and accessing a diverse variety of private investment options are equally important. Our online platform meets all these investor needs. We can help you set up a self-directed IRA for real estate and other high-yield investments. Contact us today at (425) 449-4554 for a consultation.

How Should I Separate My Personal Property From My Real Estate Investments?

Separating your personal property from your investments is absolutely critical for real estate investors. Ensuring that you do this correctly is important for both saving and making as much money as possible. Also, doing so will ensure your assets are protected.

Fortunately, the law is on your side. Even ice-cold Uncle Sam respects the needs of homeowners. Your home gets certain protections that your investments do not. We will show you below how to take advantage of these protections, establish clear boundaries between your investments, and defend all of your properties with simple legal tools.

Keep Your Home in Your Name

The law distinguishes between your home and your investment properties for a reason.  It may not surprise you that this reason comes down to taxes.

Some investors get so fired up about the LLC or Series LLC structure that they want to protect their home by sticking it in a corporate structure, just as they do with their investments. This is a bad call for two reasons:

  1. You will save far more money keeping it in your own name and taking advantage of the tax benefits, like the homestead exemptions discussed below.
  2. Having your personal home in your SLLC or other structure will "comingle" your personal property with the company.  This is a legal no-no that completely destroys your anonymity and undermines the asset protection properties of the Series LLC.

Know and Exploit Homestead Exemptions

All Americans receive homestead exemptions on the federal level, and 48 of the 50 states offer them at the state level as well. These exemptions are amounts you can claim on your taxes to save you costs related to your home. How much you will save will depend heavily on where you live, but this is fairly easy to research. Of course, our professionals at Royal Legal Solutions are well-versed in this information and are also happy to walk you through it.

However, if you try to use the business strategies for your home, you will almost certainly end up losing access to these exemptions.
 

Use the Series LLC Structure for Your Real Estate Investments

Of course, you could use other business entities as well. A Traditional LLC is just fine for a single property. But if you're even considering growing your investment portfolio over time, level up to the Series LLC. We tend to recommend the Series LLC for real estate investors, primarily because it comes with all the perks and protections of a Traditional LLC, and many, many more. We're so passionate about this tool because it costs the same as an LLC (sometimes less, depending on your state), but offers asset protection, liability, and taxation benefits.

And it gets better: the Series LLC costs exactly the same as the Traditional LLC, but has a host  of additional benefits. The biggest perk for investors is that you have the ability to grow your real estate business infinitely, and create as many Series as you like--and you won't pay a penny more than you would for a Traditional LLC. Essentially, you're getting an infinite amount of LLCs for the price of one. Not all LLCs are equal:  the best states to form your Series LLC in are Texas, Delaware, and Nevada.

Ensure You Are Banking Properly

Use personal accounts for matters related to your home. As discussed above, you want your home in your name. So you want to treat any expenses related to your homestead as personal expenses. The best way to ensure the lines don't blur between your own house and your investment properties/corporation is to keep absolutely separate accounts for both.

If you're making a real estate transaction, or an expense related to your rental property, you will want to use a business checking account. The owner of the account isn't you--it's your corporate structure. This will ensure you have the legal standing to prove they are separate entities, should you ever find yourself in court.

Don't worry, you can still pay yourself for your rental properties. Just make sure you're doing it correctly. Check out our play-by-play on how to pay yourself from your LLC structure for more details.


Bottom Line: Separate Business and Pleasure

The old axiom is true. Think of your home as your pleasure palace, and your investments as your business.

We're here to help you set up your Series LLC and everything else you need for a bulletproof asset protection plan. Keep those money-hungry attorneys at bay: take action and set up your $150 consultation today.

Title Holding Trust (AKA Land Trust), Explained

Land trust or title holding trusts are used for anonymity, but they don't actually provide protection from a lawsuit.

An LLC is required to provide that protection.

A trust is made of three parts. You have a grantor of the trust, a trustee, and a beneficiary. A trustee is used to actually control the property of the trust and manage the trust itself. The beneficiary is the person entitled to all the benefits of the trust, all the money flowing from the trust.

Now in some circumstances you'll be required to be able to disclose who the trustee of a trust is. In these cases, you can use a nominee trustee. This is a person listed on the trust document who has defined powers. These powers might include filing a tax return on behalf of the trust with the comptroller or the tax agency for the state or perhaps just for filing purposes of the deed.

The nominee trustee can be limited to have no other powers inside of the trust besides those specified.

Anybody that's looking to actually alienate a property, sell it or dispose of the trust asset will want to look at the trust agreement before they know that they're going to buy an asset from your trust. In that agreement they'll see that the nominee trustee doesn't have those powers.

So you don't have to worry about somebody running away with your property and the person that will have those powers will be laid out in that document. And that person can be you.

 

Invest in Distressed Properties With Your Self-Directed IRA

A lot of real estate investors tell me they are hesitant to sign up for the self-directed IRA, also known as a SDIRA or solo IRA. They’re usually not sure they have the investment chops to see decent returns.

Here's why I disagree: Self-directed IRAs offer a great variety of investment choices. Traditional IRAs are quite limited by comparison, and one of the most lucrative investments right now is real estate.

The value of real estate has steadily increased since the housing collapse of 2008—a collapse that had little to do with the real estate itself. It had more to do with the quality of mortgages that were being offered to homeowners.

Real estate investing through your self-directed IRA can be a sure thing when done properly.

distressed propertyFinding a Sure Thing for Your Self-Directed IRA

One of the reasons that so many investors lost so much money was because they invested in the debt associated with mortgages. When millions of homes were foreclosed on all over the country, much of the anticipated returns evaporated into the thin air.

You don't want to leave your SDIRA money to chance. One surefire way to get a return on your investment is to rely on distressed properties.

In case the terminology is new to you, a distressed property is one which, for whatever reason, is run-down to the point of being uninhabitable. It may fail housing inspections or a housing authority may deem it unsafe for renters. In that event, the property is still valuable, but the original owners may be unwilling to put more money into the property. An investor then buys the property and fixes it up. This entails both bringing it up to code and making it desirable to tenants for the purpose of inhabiting.  

The capital that’s invested there then needs to be replenished. That’s where passive investors come in.

Real Estate As An SDIRA Asset

With a traditional IRA, holders are left to choose from a set of handpicked mutual funds. A self-directed IRA offers a much larger set of options, and one of those options is real estate. For the aforementioned reasons, real estate offers investors an excellent opportunity for returns. An investment in an already performing asset offers the holder of an IRA excellent security.

For investors that may be leery about taking on the responsibility of a self-directed IRA, opportunities to become a passive investor should not be overlooked. A qualified professional can help you spot and exploit these.

Pros And Cons Of Self Directed IRA Real Estate

Self-directed IRA real estate is among the most popular alternative assets. However, it’s not for everyone. We’ve already given you a helpful overview of what a self-directed IRA for real estate investing is. Below is a closer look at the pros and cons of this type of investment. Read on to find out if this growing investment option is right for you.

Pros

Higher Returns

Real estate as a non-traditional asset can lead to higher returns. According to Investopedia: “Real estate has outperformed the stock market approximately two to one since 2000, earning 10.71% annually versus 5.43% for stocks (1).” This is not always the case. However it can explain why according to a 2014 Morgan Stanley Survey, real estate is the most popular alternative asset class among millionaires (2).

Tax-deferred Gains

Real estate investment gains are tax deferred. When real estate is purchased outside of a self-directed IRA, gains are taxed at the federal and sometimes state tax level. In contrast, gains on self-directed IRA real estate are taxed when those funds are withdrawn. This can occur after decades of unhindered growth.

Control and Stability

Unlike traditional IRAs, a self-directed IRA real estate investment can be more familiar and manageable. Global conditions and political factors often increase the uncertainty of stocks. Real estate as a physical and often local asset offers a more manageable alternative. Plus, when combined with checkbook control through an LLC or business trust, transactions aren’t subject to administrative control from a faraway custodian.  Investing can be as easy as writing your own personal check.

Cons

You Must Do Your Own Due Diligence

A self-directed IRA doesn’t include a separate entity who will perform due diligence on each transaction. The custodian’s role is as a “passive custodian.” She may have real estate investing experience, but this doesn’t mean that your investments are vetted. We can help simplify self-directed IRA access to real estate and other private investments, so you can focus on performing your due diligence.  

You Must Learn Complex Rules and Regulations

A common mistake when dealing with this particular form of investment is “self-dealing.” This includes any transaction that unfairly benefits the owner of the IRA or any of her family members. Examples include renting out an IRA owned rental property to a child or paying yourself for rental property management. A mistake like this can lead to a taxable event or even worst jeopardize the status of your IRA.

A Streamlined Self-Directed IRA Approach

The self-directed IRA real estate investment can offer high returns, tax deferrals and an increased sense of control over investments. However, these benefits come with a responsibility to complete due diligence on all transactions and be aware of “self-dealing” rules. We’ve streamlined the self-directed IRA investing process so that you can focus on these responsibilities. Contact us today for more information.