INVESTING YOUR RETIREMENT FUNDS IN BLACK HILLS LAND FOR SALE: PLAN YOUR EXIT BEFORE YOU ENTER

More and more Boomers are investing in real estate for vacations now, retirement later, and eventual resale for a profit. It is not that simple! How you own it, what you do with it, and how you later divest of it can have huge affects on it's value and your net worth.

First, "how you own it:"
When Congress set up the IRA retirement investment program, there was no (i.e., zero) preference for investing in any particular type of asset. It is just as mainstream to invest your IRA in real estate (or gas stations for that matter), as in stocks and mutual funds. Just because nearly all employers and retirees default to the familiar mutual fund/stocks path, there is no reason you need to feel that is the "normal" path. And certainly, the stock brokerages aren't going to council you away from stocks. Many people, including me, have quite successfully invested IRA nestegg in real estate.

The only difference is conceptual, but not so tangible. When you buy stocks or funds with your IRA through a stock broker, they send essential reports to the IRS about your transactions (or they send the forms to you and you forward them to the IRS). But when you buy real estate, your real estate brokerage does not hold the records for you and report to the IRS for you. So you have to locate an IRS-sanctioned "Custodian." My own Custodian is a trust officer at my bank. I have a contract with his bank that assures he will submit essential forms to the IRS, to be sure I stay on the good side of the IRS.

The Custodian role is important, because if you disobey one of the IRS' "prohibited transactions" it could cost you (your IRA) very dearly. In my case, the deal I have with my trust officer is that even though I control every decision about how it is invested or divested, I make sure with him before hand that it won't cross the IRS wrong.

The second factor is "how you use it:"
If the real estate is held in your "self directed IRA" then the IRS treats the asset pretty much as if it belongs to another taxpayer, one with independent tax status and finances. The IRS is very picky about assuring this "other taxpayer" (your IRA) does not slip any benefits to you under the fence. For example, if your IRA owns some land, then if your IRA provides land for you to go hunting on it, then you have, in effect, taken a distribution from your IRA. That is a "taxable event." It is also a big mistake. Because it could trigger the IRS' opinion that the entire IRA is now taxable.

Also, while your IRA holds the real estate, you cannot use non-IRA assets as collateral co-mingled with your IRA in a loan. You can use a "non-recourse loan" for your IRA to borrow against its own internal assets, for example to build on to a vacation rental cottage." The nature of the non-recourse is that the lender cannot persue your assets outside your IRA to cover debt delinquincy inside your IRA. (In some states, such as California, even the first mortgage is non-recourse to unrelated assets. Hmmm.....)

The third factor is "how you dispose of it:"
If you hold the asset in a pre-tax IRA, then when you sell the real estate you will have to pay income taxes if you take the cash and live on it (i.e., take a distribution). For real estate held as a pre-tax asset there are numerous ways to defer taxes even if you sell the real estate. These include structured sales, 1031/Starker exchanges, and others. You could also arrange legal subdivision of the property and then distribute ownership to you from the IRA (for later resale), one parcel at a time.

If you hold the asset in taxed form, then there are fewer and simpler rules. But then you will have been investing less in your favorite real estate all that time because the IRS will have already reduced what you have to invest.

Finally, I should emphasize how important it is to obtain professional advice from tax and accounting experts. "Don't attempt this at home."

Still, if you have basic questions don't hesitate to contact me. I will share how I am doing it personally, and refer you to some top experts.