Montana

With the stock market in the state it is in lately many people have been looking for alternatives. Well, since I am in real estate and real estate is what I know and trust we have looked into purchasing real estate using your IRA and have been very successful at it. To get us started I have below some of the most common questions people ask.

Questions and Answers

Using Your IRA to Purchase Real Estate

What is a Self-Directed IRA?

A self-directed IRA is legally no different from any other IRA. The term "self-directed" simply means that you, the client, choose your IRA's investments. What this means for you is MORE CHOICES & MORE FLEXIBILITY for your retirement savings plan.

What can a Self-Directed IRA invest in?

The rules governing what and IRA CAN invest in are exclusive - not inclusive. The rules only specify what you CANNOT invest in. Therefore there is an unlimited array of possible investments that fall within the permissible boundaries. The IRS defines that the following assets are EXCLUDED

Life Insurance contracts (e.g. a life insurance policy on the life of the IRA owner)

Collectibles (e.g. antique rugs, cars, stamps, furniture, etc.)

Capital stock in an "S" corporation

Can I buy real estate using my IRA?

Yes! You can buy real estate with your IRA, Roth IRA, Sep/IRA, Educational Savings Account, or 401-K, 403b, 457, ESOP, and other pension plan rollover accounts. Imagine not being confined to investing your hard earned money in the volatile stock market or limited return CDs. Your IRA can purchase raw land, rental properties, commercial property, condominiums, mobile homes, boat slips, and foreign real estate

How do I buy real estate with my IRA?

You will need to transfer your existing IRA(s) or rollover your pension plan accounts to a trust company that will allow you to direct what your IRA buys. Then you just find property and go through the steps of each trust company.

Why haven't I heard of this before?

The fact is that you have been able to buy real estate within your IRA since the first day IRAs were created 31 years ago. You haven't heard of it because until recently, the use of IRAs and other retirement plans to purchase real estate was an option that was not well known. Most custodians do not offer truly self-directed IRAs. They will allow you to invest in their approved list of investment options. The reason being, Brokers are compensated when they sell stocks, bonds and mutual funds. Therefore they are not trained in the details of performing real estate transactions.

How do I know that this is all legal?

You can go to the IRS website and search for Publication 590 which is the section which defines everything the IRS wants you to know about IRAs. It tells you what you CANNOT do within an IRA. You will notice that real estate is NOT mentioned as one of the asset types in which an IRA is prohibited from investing. There IS mention that you cannot borrow from an IRA or use an IRA as collateral for a loan. Because that would be a prohibited transaction, many have felt that real estate investing would be a problem. BUYING REAL ESTATE IN AN IRA IS PERFECTLY LEGAL AS LONG AS YOU AVOID SOME KEY PROHIBITED TRANSACTIONS.

Are there any downsides?

There are not any downsides per se, other than the fact that there are certain types of transactions that you cannot enact through an IRA, i.e. prohibited transaction.

How do I take funds out of my IRA to buy real estate, without paying taxes and penalties?

YOU DON'T take the funds out. Buying a 100 acres of ranch land in eastern Montana is the same as buying 100 shares of IBM stock. Buying real estate is just like a purchase of a different type of investment.

Can I use my IRA for a down payment?

Yes, in many cases you can. On the other hand, there are important rules and potential consequences that have to be considered when you do. One of the prohibited transactions for an IRA is to serve as collateral for your loan. Essentially, what this means it hat your IRA, by virtue of it being a down payment on your real estate purchase, would be serving as collateral for your loan to buy the property, whether you take the loan solely or guarantee it for your IRA.

So, I thought you said I could use my IRA for a down payment?

Your IRA can obtain a "non-recourse loan" when it puts a down payment on a purchase, and then finances or leverages the balance by taking out a loan or mortgage for the difference between the deposit amount and the purchase price. "Non-recourse" means that the only choice the lender has in the event of a loan default is to take back the property and sell it. Banks will generally require 30-35%+ down for a non-recourse loan to an IRA.

Are there alternatives to a commercial non-recourse loan?

A seller of a property can also extend a loan to an IRA by offering what is called a "seller carry-back loan", eliminating the need for a bank loan. This can work to your advantage because a seller may be willing to accept less money down if they want to sell badly.

Do I have any other options if my IRA doesn't have enough money, and I can't get a non-recourse loan?

Absolutely. You can partner with your IRA and combine your IRA funds with your personal funds to make an all cash purchase. Don't have enough cash? You can combine your IRA and personal funds with your wife's or husband's savings, her or his IRA, funds from your friends, children or other relatives in order to enter into the transaction together as tenants-in-common. Each investor appears on the grant deed as a percentage owner, based on the amount of each investor's contribution.

If I buy rental property with my IRA can I manage it?

Yes and no. You CAN perform ministerial functions for your property much as you would for any other asset. This could include making decisions such as to whom to rent, what plumber to contract with or what builder to choose when you make additions. You will have to instruct your trust company to pay these bills because you cannot pay them yourself. You cannot build a porch yourself, put on a new roof, etc. or in general add any material value to your property through transactions with it. It is a very thin line to walk and many people agree that it is better to be safe than sorry and hire professional management of your rental properties.

I plan on purchasing a property with my IRA that will generate rental income. Does the rental income have to go back to my IRA?

Yes, all income generated by a property owned by your IRA must be returned to your IRA, in order to retain the tax deferred or tax free status of the investment.

Can my IRA purchase real estate that I own presently?

No. This is considered a prohibited transaction. You may not purchase a property or interest in a property, which is presently owned by a disqualified person. Disqualified persons would include yourself and family members of linear descent.

May I live or work in a property that my IRA owns?

No. This is considered a prohibited transaction. You cannot have any personal use or benefit from the property while it is held by your IRA. This means you can't purchase your residence, time share or lake property that you intend to use during the summer and rent the rest of ht year. If you purchase a rental property, the tenants cannot be disqualified persons under Section 975 of the IRS Code. Disqualified persons are generally those of lineal descent of the account holder or the account holder's spouse.

Can my IRA invest in a newly formed entity (limited partnership, limited liability company, c-corporation, land trust) that will be involved in real estate?

Investments in newly formed private entities are not prohibited, with the exception of sub chapter S corporations.

May I use finds from my IRA to renovate property in order to sell it at a higher price?

Yes. Your IRA must pay any and all expenses (property taxes, insurance, appraisals, debt payments, etc.) associated with a property that is owned including renovation, improvement, and repair costs of the property. All profits that are associated with your IRAs investment in a renovated property must be remitted to your IRA.

Why should I use a Roth IRA for real estate investing?

IF you invest with your Roth IRA (and by the way, your Roth, SEP and regular IRA can all invest together in a real estate investment as tenants-in-common), all the income and capital gains will go back to your Roth IRA tax deferred. Because Roth IRAs are funded with after tax funds, if you leave the earning in the Roth for five years from the date the Roth was first established AND until you are 59 ½ the entire Roth INCLUDING THE EARNINGS, WILL BE TAX FREE FOREVER!

Can I buy a business using my IRA funds?

Yes. Few people realize that you can buy and operate a business with an IRA. Some people with full-time jobs will establish a new business just for their IRA account. Such businesses, whether they buy real estate or operate a gas station, restaurant or dry cleaner, are called operating companies where they provide goods and/or services. When your IRA owns and operates a business, it is subject to taxation just like any other business. Otherwise, the IRS says, the IRA could provide unfair competition to those businesses that have to pay those taxes. This tax is called Unrelated Business Income Tax (UBIT) - "unrelated" because and IRA is a tax-exempt entity.

Can my IRA invest in my existing business?

Yes. Let's suppose you are an owner of a company that is willing to take on additional capital. If the company is an "operating company" as discussed above, AND you own less than 50% (including the sum of the ownership positions of your "disqualified persons"), then your IRA can invest funds in the company if it is a good investment for the IRA and not made to protect your non-IRA interests.

Now that I know what I can and cannot do with a self directed IRA, where can I get one?

There are approximately 20 custodians in the United States that are dedicated to providing self-directed IRA services.

As always call with any questions. 406-253-0531.

Have a great 4th of July!

Good morning all! Here we are in the first weeks of summer for 2009. Things have been very busy here in Helena, Montana as far as real estate lending is concerned. We have been going gangbusters with refinancing over the past couple of months. Now that interest rates have crept up, we have begun to see the slow down.

Interest rates were at 4.50%....the lowest I have ever seen them but now they are at 5.25%. 5.25% is still a very good rate compared to what they have been in the past 25 years. Have applications slowed down becuase of interest rates rising or has it slowed down because everyone that has the opportunity to refinance has already done so?

With the increased pricing on 10 year bonds, the yield has come down slowly therefore reducing the mortgage interest rates. Unemployment is at an all time national high of 9.25% and it seems that Montana is seeing its share of it too. Fortunately, in Helena we are very lucky so far as to see pretty minimal unemployment while other parts of the state have shown higher signs.

We are seeing more purchases coming around as well as new starts on construction loans, including speculative. I don't believe the refinance boom is over either. Let's keep our heads up and keep working hard to help as many people as we can and hope Helena doesn't get hit by the recession! Talk to you soon!

WASHINGTON, D.C. (July 1, 2009) - The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending June 26, 2009. The Market Composite Index, a measure of mortgage loan application volume, was 444.8, a decrease of 18.9 percent on a seasonally adjusted basis from 548.2 one week earlier. On an unadjusted basis, the Index decreased 18.5 percent compared with the previous week and decreased 7.4 percent compared with the same week one year earlier.

The Refinance Index decreased 30.0 percent to 1482.2 from 2116.3 the previous week and the seasonally adjusted Purchase Index decreased 4.5 percent to 267.7 from 280.3 one week earlier. The Refinance Index is at its lowest level since November 2008.

The four week moving average for the seasonally adjusted Market Index is down 9.2 percent. The four week moving average is unchanged for the seasonally adjusted Purchase Index, while this average is down 15.2 percent for the Refinance Index.

The refinance share of mortgage activity decreased to 46.4 percent of total applications from 54.0 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 4.3 percent from 4.1 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.34 percent from 5.44 percent, with points increasing to 1.12 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.81 percent from 4.93 percent, with points increasing to 1.04 from 0.92 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs decreased to 6.52 percent from 6.54 percent, with points increasing to 0.13 from 0.11 (including the origination fee) for 80 percent LTV loans.

**SPECIAL NOTES**

The survey covers over 50 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100.

S. 896, the "Helping Families Save Their Homes Act of 2009" included some provisions to protect tenants from eviction as a consequence of a foreclosure affecting the property being rented.

Under the new law, which went into effect on May 20th, tenants will have to receive 90-days notice prior to being evicted, when their rental home is foreclosed upon. In addition, tenants must be allowed to stay in the property through the end of their lease, with two exceptions: * The new owner wants to occupy the property as a personal residence, and * There is no lease (month to month), or there is a lease but state law allows the lease to be terminated at any time upon notice. Even under these exceptions, the tenants must be given 90-days before they can be evicted. Notification must be provided by the "immediate successor in interest". In some cases, this notification will come from the bank (when they assume the home), and in other cases it may be the new owner. Much will depend upon state law. A number of states have existing laws protecting tenants. This law will preempt existing state law, except where the state law offers greater protection. The protections of this law apply only to "bona fide" tenants - who have a written contract, the lease was the result of an arms-length transaction, and the rent is not substantially less than the fair market rent for the property. Under any conditions, tenants may still be evicted if they violate the lease terms. These provisions expire on December 31, 2012.

So, summer is now in high gear with the big 4th of July weekend upon us.

Kalispell: Start of Thursday Fest - downtown street shut down for music, food and gallery openings

Farmer's market in the mall parking lot each Saturday morning - great to start with a panini breakfast at Bonelli's on First Ave East, sometimes we take our bikes and hit the bike trail afterwards

Wednesday concerts at Depot Park noon hour and Tuesday nights

Whitefish: Art Festival at Depot Park all weekend, always a great time with some awesome art

Gallery Nights first Thursday night of the month

Farmer's Market every Tuesday night with live music

Alpine Theater Broadway in Whitefish, 3 plays this summer

Disney Christmas train arrives on the 10th for tours as it crosses the country promoting Christmas film

Whitefish Mountain Resort opens Alpine Slides, Walk thru the Treetops, and zip line tours

Never a dull moment in the Flathead for summer! Just hard to fit it all in!

Augusta Montana rodeo June 26, 2009 on the eastside of the Rockies - REAL Montana!