IRAs and real estate investment properties news
News you can use; market corrections; five continuing educations credits in one day.
Dear Subscriber,
Need five continuing education credits? I’ll be speaking this Friday as part of a five-credit day presented by Pacific Northwest Title at The Oregon Institute of Technology’s east Portland campus. Details are at www.thewritersgroup.cc/upcoming_seminar.htm. Meanwhile, here are a few quick updates related to IRAs and real estate:
News you can use – I scour magazines and newspapers for news that affects my readers. Here are two items recently covered in The Oregonian:
* Real estate funds scored some of the biggest returns on Wall Street in fourth quarter. At 21.57 percent growth, real estate has outperformed all sector funds, with the best five-year annualized returns. And real estate funds well outscored Standard & Poor’s 500 index, the most common benchmark for mutual funds, which was at only 8.99 percent as of Dec. 30. This bodes well for the overall future of real estate investing.
* United Airlines’ threat to terminate its four employee pension funds in bankruptcy is the largest corporate pension default in U.S. history, with other companies rumored to be contemplating scrapping their own funds to help remedy their financial ailments. Couple that with Federal Reserve Chairman Alan Greenspan’s September call to trim retirement benefits to baby boomers, and the public is frantically searching for alternatives. Already, 81 percent of corporate benefit plans are underfunded, including Oregon Steel Mills’ plan. “If your company has a strong future, then your pension plan will in all likelihood be there for you,” said John Hotz, deputy director of the Pension Rights Center in Washington. Employees can access their pensions at 59 ½ or even earlier, depending on the plan. To calculate existing pension benefits, turn to the Federal Administration on Aging or the Seattle-based Employee Benefit Security Administration help line, (206) 553-4244. (Additional reporting by Jennifer Meacham Dirks)
IRAs and Real Estate Q&A
Q: “The IRS Web site refers to UBTI (see link: http://www.irs.gov/publications/p598/ch04.html). Is there in fact a difference between UBTI and UBIT? Or is it semantics?” – Robert Powell, editor of CBSMarketWatch.com’s “Retirement Weekly” newsletter
A: I talked with the IRS at length to confirm the answer to your question. After a dozen transfers within the IRS, I was able to reach its IRA line, 1 (800) 829-1040, where I received this answer: Unrelated Business Income (UBI) is the income earned on the debt-financed portion of a property; hence a tax on UBI would be a UBI tax – Unrelated Business Income Tax or UBIT. The term Unrelated Business Taxable Income, or UBTI, has long been used within the IRS to describe the taxable portion of the IRA investment, but does not describe the tax itself. Therein is the difference. Here’s the link to UBIT info: www.irs.gov/charities/article/0,,id=96104,00.html. -- Jennifer Meacham Dirks, co-author of “IRA Wealth”
Send your question to jd@thewritersgroup.cc with “IRA and investment properties Q&A” in the subject line and yours may be the next question to be answered in this column. |
Market corrections – Just as markets need correcting, so does the information put out by news organizations – even venerable ones. On Dec. 8 CBSMarketWatch.com ran an article, picked up in brief by Investor’s Business Daily and Realtor Magazine Online, and followed by the Wall Street Journal, which tried to explain the concept of IRA investments in real estate, but often missed the boat. (It did, however, list “IRA Wealth” as one of three resources on the subject.) A few items that needed clarification:
* The cost of hiring an attorney to set up a business entity would remain the same whether or not this investment was done within an IRA. Additionally, buying real estate within an IRA does not require a business entity.
* The cost of doing your taxes year-in-and-year-out is the same whether you leave your pension funds in mutual funds or use it for real estate investments. Since traditional IRAs are tax-deferred until the time of dispersement, the IRAs for most account holders would not even appear on any tax forms until that time (it’s the same whether real estate is involved or not).
* Investors do not need to get annual appraisals on their property. Since the real estate is held within the IRA, the same rules apply as with any other IRA investment. For instance, you know that it doesn't matter how much you lost or gained in the stock market that year, since the amount doesn't have any tax consequences until dispersement. It would be the same with real estate. The value of the property in any given year is of no consequence -- until the time of dispersement.
* IRA accountholders do not need to petition the Department of Labor for an exemption to prohibitions. The ruling for prohibited transactions is simple and clear cut: don't deal with yourself, your immediate bloodline or the fiduciary of your IRA. Investors will have no need to get the Department of Labor involved if they just stick to those rules. The Employee Retirement Income Security Act of 1974 (ERISA) does, however, generally provide statutory exemptions for "loans to participants, the provision of services necessary for the operation of a plan for no more than reasonable compensation, loans to employee stock ownership plans, and deposits in certain financial institutions regulated by other state or federal agencies." Real estate transactions are not an area where the department generally gives exemptions.
* Income growing tax-deferred in a traditional IRA, with the dispersements taxed as ordinary income, is not a drawback. On the contrary, the inherent tax shelter of the IRA is its greatest asset. Retirees take the income any time they want after 59 ½, when their tax bracket in retirement would likely be at its lowest. Additionally, capital gains would not be something that would grow tax deferred, since capital gains in this aspect would only be influenced by the sale of the property (or on its valuation at the time the property is taken as a dispersement).
* UDFI, incorrectly referenced as the tax applied to the income and the gain, is actually a tax applied only to the income on any leveraged portion of the property. The UBIT, then, is the tax that applies solely to the gain on any leveraged portion of the property. (The UBIT no longer applies if the loan is paid off 12 months prior to the sale.)
* The article brought up a good issue related to real estate’s liquidity: the IRA has to pay the bills and if a tenant blows town – and there aren’t funds in the IRA to cover the expenses – the IRA accountholder may need to sell or finance the property (making the mortgaged percent of the income, in the latter case, subject the UBIT). However, another option would be to simply increase personal contributions to your IRA to make up for the IRA shortfall. SIMPLE plans, SEP plans and the new solo 401(k) or solo defined benefit plan allow for up to $42,000 in personal contributions in 2005. “IRA Wealth” reports that any contributions above that are charged a simple 6 percent “penalty” annually until paid back – a rate that’s about on par with today’s real estate financing interest rates.
I hope to see you Friday, Feb. 18, starting at 9 a.m. at The Oregon Institute of Technology. If not, then until next month’s news….
All my best,
Jennifer Meacham Dirks
Business Journalist
Phone: (360) 521-9908 E-mail: jd@thewritersgroup.cc
Co-author, “IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment” (Square One Publishers, New York)
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