Starting in 2010, the existing income test for converting a traditional IRA to a Roth IRA that kept many commercial real estate investors from ever contemplating a Roth IRA no longer applies. Singles making more than $95K and couples making more than $150K are now eligible for this tax friendly program. As a result, the regulators have offered commercial real estate investors a great tax strategy going forward.
Conversions that occur in 2010 will be able to split the tax liability. Why does this apply to commercial real estate? Investors now have the ability to invest excess money in a property by themselves (if they have the capital) or do so with a group a fellow investors, similar to a TIC. Unfortunately, this knowledge gap stops many advisors and their clients from taking advantage of the opportunity to own commercial real estate.
Roth IRAs are powerful tools. Withdrawals are generally tax-free, but not always and not without certain stipulations (i.e., tax free when the account has been opened for at least 5 years for principal withdrawals and the owner's age is at least 59½ for withdrawals on the growth portion above principal). An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside the Roth IRA account (including capital gains, dividends, and interest) do not incur a current tax liability.
For the IRS’s official word, click here.
The limitations of self-directed IRAs are often (i) the amount of money people have in IRA accounts is limited and (ii) the treatment of debt inside an IRA is less attractive triggering an additional tax.
Therefore, many investors are left with a decent amount of money $200,000-$2,000,000 that they have willing to allocate into real estate. If you do not like to flip residential properties, you often self-select yourself out of this self-directed investment. However, there are two important opportunities investors often miss:
1) The ability to combine 1031 proceeds with Self-Directed IRA proceeds and bifurcate a purchase; and,
2) The ability to syndicate investors and buy one larger commercial asset with tenant-in-common ownership (often 2, 3, or 4 partners).
Note: For those of you needing background on these two strategies, you can find applicable FAQ’s here.
If investors plan carefully, they can now open a tax friendly Roth IRA and acquire commercial real estate while its prices remain low. One can never be sure how long opportunities like this will last, as they are subject to the legislation of Capitol Hill and whims of the IRS. However, for those acting now, benefits can surely be had.
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