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The recent increases in the real estate market has sent more and more first time real estate investors to Drive Planning. One of the common questions that we receive is centered around purchasing real estate (either to flip or rental/buy and hold) inside of a Qualified Retirement Plan, such as an Individual Retirement Account (IRA) or other types of plans.

This is most common for those who do not have funds which are outside of their Retirement Plan. So, a better question is, Where else can I get funding for my real estate deal? There are numerous sources for funds if you know where to look, regardless of credit!

Real Estate - Retirement Plan

Let’s Take a Look at The Problem

For the remainder of this blog I want to focus on why purchasing real estate inside of an IRA is a poor idea.

An IRA is a tax shelter. Tax on the income is either deferred (Traditional IRA) or eliminated entirely (Roth IRA).

Rental real estate is an example of a type of real estate investment that can be a tax shelter on its own. Rental real estate often generates losses for tax purposes even when there is positive cash flow. This is because of the depreciation deduction that can be taken on the investment.

With proper tax and accounting, rental losses can be used to offset other income which effectively shelters that other income from income tax. This can result in significant tax savings.

If an IRA has rental losses, the IRA is generally not paying tax so there is no tax to shelter.

If an individual has rental losses, there is an opportunity to shelter other income, including W-2 or business income, from income tax. This results in not paying tax on that other income and those tax savings mean cash in your pocket.

Lastly, in retirement any proceeds from real estate inside of an IRA (Traditional) comes out as ordinary income!

In addition, these problems also come along with Real Estate purchased within an IRA/Qualified Plan:

  • Lose 1031 Tax Free Exchanges
  • Lose “Step Up in Basis” at Death
  • No Capital Gains Tax Rates
  • Potential Increase in Tax Rates
  • Lose enjoyment/use of funds prior to age 59 1/2 (Proposed/Potentially to be age 70 1/2 in the future)

The Bottom Line

Our team at Drive Planning has over 250 years of experience with situations like we’ve described above; therefore we believe that the tax savings are too significant so the property should be purchased outside of a qualified plan. Let us help you to find the money.

We would love to assist you with any financial decision and making sure that you are coordinating it into your overall financial plan.

Tax planning and advice should be reviewed by your personal tax advisor. The staff at Drive Tax and Accounting and Tom Wheelwright, CPA contributed to this article.

Happy Advicegiving

November 22, 2017 — 29 Comments

The Thanksgiving and Christmas holidays are, by far, my favorite time of the year. There is cheer in the air and an overall feeling of generosity. Being in the financial field for the past 20 years I have also learned that this is the time of the year when advice is handed out most freely.

So take this as a word of caution for this “Advicegiving Season.”

Most of this advice is well intentioned however often unsolicited. It typically happens when the large meal of the day is finished, politics has been exhausted and the football games are winding down. Now enter the “rich uncle”, you know the one, everybody has one. (And they aren’t always rich) I can say everybody has one regardless of your economic situation or even knowing you. The rich uncle or relative is the guy that likes to tell you all of his huge successes throughout the year, whether they are real or not.

It almost always starts with a philanthropic tone of, “you should get into _________.” It starts this way so that everyone in the room feels like, wow! He is looking out for me or I am getting an inside tip. Then this person drones on and on about how well it has done. If it were to stop there I probably wouldn’t be even mentioning this non-event. Unfortunately, it doesn’t always stop there.

As I mentioned being in the financial field; Now I get to hear about all of these huge successes in the weeks following each of the holidays. It has happened repeatedly for the past 20 years. Which is both great and unfortunate?

It’s great to hear about these ideas/investments because I love to hear new ideas. Great because there are things out there that genuinely successful people do that I want to know about and be involved. Trust me, I certainly don’t claim to know it all and I also spend a great deal of time each year researching and learning anyways.

The unfortunate part is when it derails a financial plan that was totally on the right track. Unfortunately many of these proclaimed investment ideas aren’t always entirely true or even understood. Never does the afore mentioned rich uncle take the time to understand if his idea, be it good or bad, is appropriate for the season of life of the recipient or fits in to their overall goals.

So this holiday season take the advice and be gracious. However, I would caution you to think through who is giving the advice. Have they been successful? Are they in a different phase of life than you? Are their values in line with yours? Most importantly make sure that you overlay this advice with your well-coordinated plan to ensure that it fits into your families’ hopes and dreams.

Best of luck this Advicegiving season! I would encourage you to stick with throwing the football with the kids after lunch.

 

Do you have that Uncle? Let us know, maybe it would be even be fun to tag them on twitter or facebook as you respond:) 

 

Happy Holidays!

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Vision vs Trust

August 13, 2017 — Leave a comment

Something is holding you back from achieving at a greater level! Its possible that it is either vision or trust. Vision and Trust aren’t mutually exclusive entities. However, it is helpful to have at least one of them present at all times.

 

vision vs trust 1

Images Credit: Accenture Images / Drive Media

 

Lacking vision or the ability to look beyond current reality can lead to missed opportunities. A great example comes from a story my father often tells about himself….. Now, somewhat laughingly.

Years ago, I believe I was about 4 at the time, my dad was wanting to invest into Real Estate. He mentioned to a poker buddy that he was looking at land and had his eye on a neighborhood lot in Conyers, GA; $16,000. The Poker Buddy, a much older man and very successful, said that he had a lot for sale on Lake Lanier and that he’d sell it to my Dad for a better than normal deal; $9,000.

So, Dad being excited about the opportunity went to take a look at the Lake Lanier lot. As he approached the lot there was an unsightly old bus, rusted out, over grown with weeds located right in the middle of the property. His excitement for the investment quickly waned. All he could see was that bus! All he could think was that he was going to have to do something with that bus! He also laughs about the thought of telling my Mom that he had spent their savings and they now had this bus to deal with. Their future dream spot, next to the bus:)

He ended up choosing the more pristine, more expensive neighborhood lot in Conyers. For those of you not from Atlanta; Conyers is a fine community but has never materialized into its full potential. Some of my childhood memories are of us as a family reluctantly driving down to see our lot and just look at it, in Conyers….. in the middle of this Ranch style community. Dad ultimately sold it for a modest profit.

And now the rest of the story……

There is a good chance that you may have visited that same Lake Lanier Lot. Quite a bit later it sold for several million dollars. It is now the location of the entrance to Lake Lanier Islands. A large lake resort with hotels, conference center, restaurants, marinas and golf course.

A lesson that our family repeats often, Sometimes you have to look past the bus.

 

Vision Seeing Beyond The Bus

Image Credit Drive Media – (Not actual Photo from lot in story)

 

No disrespect to my Dad because he has been successful over the years but not in this particular instance. He didn’t have the vision to see the possibilities. His entire focus was on the bus not the opportunity. In my profession its a common condition that I see often; focusing on the worst case scenario more than the best case scenario.

Trust

It is important to have a team of people around you who are successful. Tony Robbins says that you are the sum of your 5 closest friends. Having a relationship with them as friends or advisors provides you with resources and experience in areas where you may be lacking. Having resources and trusting in them will allow you to have success when there are times of uncertainty. Trust in the wisdom of someone who has gone before you.

Practical Application

Most Americans have a majority of their Net Worth tied up in a retirement account or their home. Most do not have huge investment accounts yet. Either way, they have never seen, first hand, the massive impact that taxes have on an investment. Their IRA/401(k) investments are still being deferred; therefore, the tax problem which exists has yet to be realized.

Over my 20+ years in business I have always stressed to our members the importance of investing into Tax Free Opportunities.
Yet, in the early stages of life it is common for investors to lack the vision of a time when they will have massive accounts. Later in life when accounts are huge; the tax ramifications can also be huge. However, most ignore the Tax Free message since they do not have the experience of it being a major problem (and neither do their friends).

To reference our earlier example the bus in this case represents today’s problems or desires which may be avoiding the tax today on small investments. Thus also lacking the trust and vision to avoid the tax on the massive amounts down the road.

The Intersection of Vision and Trust

A lack of vision and trust is a recipe for never reaching your full potential.

The Encouragement

As you invest have the vision to “look past the bus” towards a time when you could reap millions from your investments.

Trust in your diligent investing and in the knowledge of those ahead of you. Have faith that you will win longterm.

Plan accordingly.