Self-Directed IRA's

Background:

An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.

• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.

• The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.

• Contributions, except for rollover contributions, must be in cash.

• You must have a nonforfeitable right to the amount at all times.

• Money in your account cannot be used to buy a life insurance policy.

• Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.

• You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.

Advantages to Self-Directed IRA:

One of the main advantages of a self-directed IRA is it allows account holders to achieve diversification; account holders can make both traditional and alternative investments within self-directed IRAs.

Many people who purchase real estate within self-directed IRAs buy with cash, therefore the rental income generated is profit back into the IRA, and allows for consistent cash flow for these retirement investments. People may engage in lending by originating mortgages for homeowners or lending money to 3rd parties for business activity or things of that nature.

Prohibited Transactions:

Any transaction that can be construed as providing immediate personal financial gain to a self directed account holder is not allowed, and is often referred to as ‘self-dealing’. Examples of self-dealing would include: borrowing money from your IRA, selling property to your IRA, receiving a current benefit outside the IRA from assets in the IRA, or using the IRA as security for a personal loan.

In addition, direct investments of self directed funds in any of the following categories are prohibited:

• Life insurance;
• Collectibles such as works of art, rugs, antiques, metals (other than gold, silver and palladium), gems, stamps, coins (except certain U.S. minted coins), alcoholic beverages, and other tangible property; and,
• Sub-Chapter S Corporations or any other categories as may be defined by the Secretary of the Treasury.

Examples of prohibited transactions with an IRA include: borrowing money from it; selling property to it; using it as security for a loan; or buying property for present or future use with IRA funds.

For IRAs, a disqualified person is:

• The IRA holder and his or her spouse;
• The IRA holder’s ancestors, lineal descendants and their spouses;
• The IRA holder’s investment advisors and managers;
• Any corporation, partnership, trust or estate in which the IRA holder has a 50 percent or greater interest; and,
• Anyone providing services to the IRA such as the trustee or custodian.

(There are entire books written on the Prohibited Transactions)

Safety at Arm's Length:

Direct Buying/Selling of Real Estate to and from non-family;
Lending to non-family;
Investment in private equity not held by family.

More creative ways to enter into transactions have been thought of, but its always good to steer clear of the gray area, especially with the IRS. (You've been warned!)

Does it make sense?

If you are looking for just tax savings consider these tax issues on top of the prohibited transaction rules.

UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long-term investing, and when it purchases an asset that produces income unrelated to the intent of the "plan," then that income is subject to taxation – which means your IRA will be paying taxes on profits generated from your business purchase.

UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).

These two types of taxes are somewhat more complicated, and a tax specialists should be consulted before engaging in active income based investments, or debt leveraged income based investments.

Have you investigated the additional cost for administration? ($1,000/year is possible)

Consider that the 1031 exchange transaction could yield a tax savings, and offer less complicated tax analysis and less fees.

SUMMARY:

The self-directed IRA can be a useful tool for expanding your investment portfolio, but consider the administrative and compliance cost before you leap.

Property Tax Time!

January brings new hope for the new year, and the tax collector:

City property taxes. How its done.

§ 21-33-1. Property subject to assessment.

All lands and other taxable property subject to assessment, held by any person within the municipality, or in added territory, on the first day of January, shall be assessed, and ad valorem taxes thereon levied and collected for the ensuing year, excepting motor vehicles as defined by the "Motor Vehicle Ad Valorem Tax Law of 1958."

When is the assement done?

§ 21-33-23. Filing assessment rolls.

The assessor shall complete the assessment of both real and personal property and file the rolls with the municipal clerk on or before the first Monday in September. The governing authorities may, by an order entered upon their minutes, allow the assessor additional time within which to complete and file the assessment rolls. The assessor shall attach his affidavit to each roll in the form required of the county tax assessor.Municipalities operating under a private charter, and having a different time for the assessment of property than fixed for municipalities operating under a code charter, shall provide the time when the assessor shall make and file the assessment rolls.

What if I disagree with the assessment?

§ 21-33-10. Amending roll; objections; appeals

The governing authority of any municipality which adopts the part of the county assessment roll containing the property located within the municipality as provided in sections 21-33-9 and 27-35-167 shall not correct or revise such assessment roll except for the purpose of conforming the municipal assessment roll to corrections or revisions made to the county assessment roll. The governing authority of such municipality shall not meet to hear objections to the assessment roll.

All objections to the municipal assessment roll shall be heard by the board of supervisors at the time and in the manner that objections to the county assessment roll are heard. The board of supervisors shall notify, in writing, the municipal governing authority and the municipal tax assessor of any corrections or revisions made by them to the part of the county assessment roll adopted as the municipal assessment roll. Any taxpayer feeling aggrieved at the action of the board of supervisors in equalizing his assessments shall have the right to appeal to the circuit court as provided in section 27-35-119.

That objection didn't work now what?

§ 27-35-119. Notice of adjournment of meeting at which final approval of roll entered; right of appeal(1)

The clerk of the board of supervisors shall mail notice of the adjournment of the meeting at which final approval of the roll by the State Tax Commission is entered to any taxpayer who objects to an assessment. Such notice shall be accompanied by an affidavit from the clerk stating the date upon which such notice was mailed.(2) Any taxpayer who feels aggrieved at the action of the board of supervisors in equalizing his assessments shall have the right of appeal to the circuit court in the manner provided by law, within twenty (20) days after the date the notice is mailed as provided for in subsection (1) of this section.