Month: April 2019

Real Estate in Your IRA: A Good Idea?

Real estate can be a great investment, and many people don’t know they can also put the property into their IRAs.

real estate and your iraHowever, they have to be careful: one small mistake and an IRA’s tax advantages disappear.

So what are the rules to follow to have a qualified real estate purchase?

  • You can’t mortgage the property.
  • You can’t work on the property yourself — you’ve got to pay an independent party to do any repairs.
  • You don’t get the tax breaks if the property operates at a loss. You can’t claim depreciation either.
  • All costs associated with the property must be paid out of your IRA and all income deposited into the IRA. You can find yourself in a bind if there isn’t enough cash in the IRA to deal with a major property expense.
  • You can’t receive any personal benefit from the property — you can’t live in it or use it in any way. It has to be strictly for investment purposes. So that vacation property you’re considering buying or a house to rent to your kids — not allowable.

More rules for real estate in IRAs

Any investment made by your IRA must be considered an arm’s-length transaction: You can’t use money in your IRA to buy or sell real estate to or from yourself or family members. You can’t receive any indirect benefit either — you can’t pay yourself or a family member to be the property manager.

For a traditional IRA, you must take required minimum distributions at 70 1/2 and that applies with real estate as well. It can be awfully hard to sell real estate off in portions, so then how do you cover the required distributions without cash? These are problems you need to solve before you start your retirement investing. However, you can roll over money from the sale of one property to the purchase of another without any tax consequences, inside the IRA.

Three more points to weigh when thinking about investing in real estate IRAs:

  • Your IRA cannot purchase a property that you currently own. IRS regulations don’t allow transactions that are considered self-dealing. They don’t allow your self-directed IRA to buy property from or sell property to any disqualified person — including yourself.
  • A real estate investment needs to be titled in the name of your IRA, not to you personally. All documents related to the investment must be titled correctly to avoid delays.
  • Real estate in an IRA can be purchased without 100 percent funding from your IRA. You can use undivided interest and partnering with others.

For more, see my post, “Using a Self-Directed IRA to Buy Real Estate.”

We’ve got your back

There are a lot of working parts to keep in mind if you want to hold real estate in your IRA, and it might not be right for everyone. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership Interests

Take advantage of this window of opportunity for tax-free wealth transfer

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership InterestsThe Tax Cuts and Jobs Act of 2017 expanded the federal estate and gift tax exemption to $11.2 million per person, or $22.4 million for a married couple.

Under the Act, these higher limits are applicable through December 31, 2025.  On January 1, 2026 the limits return to $5 million per person, adjusted for inflation.

These changes present a significant but temporary opportunity for tax-free wealth transfer, including gifts of ownership interests in the family business.  Also, in certain circumstances valuation discounts may further reduce the value of the gifted business interest, which would facilitate larger gifts while remaining within the exemption amount.  These gifts will also qualify for the annual exclusion, which currently stands at $14,000 per recipient and may also be split with your spouse, resulting in $28,000 per recipient annual gifts that do not reduce your lifetime exemption.

Gifting strategies

Business owners are often reluctant to gift business ownership interests because they are concerned about losing control of the business, or do not want to make gifts to minor children.   There are many ways to overcome this problem.  The most common solutions are to gift only non-voting shares and include restrictions on their sale or transfer, or to gift the shares to a trust of which you or your spouse are trustee.

Conventional gifting strategy is to transfer assets that are likely to appreciate in the future.  That way, the asset is transferred at a low value and appreciates in the hands of the recipient.  The first step in this process is to identify the assets to be transferred and determine their value.  If you are considering transfer of an ownership interest in a business, it would be prudent to have that business valued by a qualified business appraiser.

We’ve got your back

Although 2025 seems like a long way off, you never know what changes may occur.  Although it is unlikely that tax laws will change after the mid-term election, you never know what the tax law changes will be after the 2020 presidential election.  This is great opportunity to transfer assets at little or no estate and gift tax cost.  If this is interesting to you, there is no reason to delay.  Contact your attorney or CPA and start the process now, before this opportunity is gone.

Capital Gains and Losses: How Do They Work?

Selling a capital asset results in a gain or loss and impacts your income taxes.

How do capital gains and losses work?A capital gain is a profit made when you as an individual or business sell a capital asset — investments or real estate, for instance — for a higher cost than its purchase price. A capital loss is incurred when there’s a decrease in the capital asset value compared with its purchase price. Almost everything you own and use for personal or investment purposes is a capital asset: a home, personal-use items like furnishings, and collectibles.

A capital gain may be short term (one year or less) or long term (more than a year). The capital gain must be claimed on income taxes. While capital gains are generally associated with stocks and mutual funds due to their volatility, a capital gain can occur on any security sold for a higher price than the price that was paid for it. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but haven’t yet triggered a taxable event.

The profit you realize when you sell a capital asset at a profit is your gain over basis paid. Basis is often defined as the original price plus any related transaction costs; basis also may refer to capital improvements and cost of sale. Capital losses are used to offset capital gains of the same type: short-term losses are deducted against short-term gains, for example.

Capital gains and losses for businesses

A business may gain or lose money in two ways: It can make a profit on its sales activities or lose money by spending more than it brings in from sales. And, of course, it can gain or lose money based on its investments or sales of assets — items of value that the business owns.

Each type is taxed differently. Profits are taxed as ordinary income and at regular business or personal tax rates. Gains or losses on investments or the sale of assets are taxed as capital gains or losses, but it can depend on the type of business. When expensive equipment is involved, businesses have to consider depreciation, which takes into account the equipment’s declining value over its useful lifetime.

Capital gains and losses can come into play when a business writes off an asset, taking it off its balance sheet. That might be the case with accounts receivable when a debt is owed to the business but is unlikely ever to be paid.

Individual shareholders or business owners who sell their capital shares or owner’s equity in a business also incur capital gains or losses from those sales. Note the following distinction: Operating profits and losses result from the ongoing operations of the business; sometimes called net operating losses for tax purposes, they result from day-to-day operations.

We’ve got your back

Whether you’re buying or selling as an individual or as a business, be sure to keep track of your sales and discuss them with a qualified financial professional. The experts at KRS can help you determine whether you have a gain on loss and its tax implications. Contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.