One of the most cherished part of the U.S. tax code is the provision that allows sellers to exclude up to $250K or $500K if they file a joint return of profit they make when they sell their homes. Not to worry. That's still around if you own just one property and have lived in it as your primary for at least two of the last five years before you sell it.
With the passing of the Housing Assistance Act of 2008, the bill designed primarily to provide relief to some homeowners facing foreclosure, will cost some folks who have a vacation homes, other type of second property including investment properties.
Effective this year, even if they convert their second piece of real estate or investment property into their primary home, they'll owe tax on part of the sales money based on how long the house was used as a second or investment, rather than their main, residence.
How it used to work?
The reason the law was changed? Money. The U.S. Treasury generally lost some every time a second home was sold by the owners who took advantage of the primary-home sale exclusion.
Under the old rules, if you owned your main home and place in the mountains that you used for family vacations, you could sell both and keep up to $250K or $500K, in profit out of IRS hands as long as you sold them in the correct order.
First, you would sell your primary residence and pocket that profit. Then you would move into the vacation place, live there for two years and then sell it. Because it had been your primary residence, you could exclude profit from that subsequent sale too.
There was no limit on the number of properties for which you could use the home sale exclusion. As long as you were able to make each place your primary residence and not claim the tax break for at least two years between each sale, you were in the tax clear.
How it now works
With the closure of the conversion loophole, now the seller of a second home or investment property, even if it's converted to primary residence status, will owe taxes for the time that the home was a second or investment property after Jan. 1, 2009.
You will take the number of years the property was your main home and divide that by the number of total years you owned it. That gives you the percentage of time that the house was your primary residence. You can exclude that much gain, up to the $250K or $500K limits, from your taxes.
The major determinant here is Jan. 1, 2009, effective date.
Example 1: Buy a second home or investment property in 2009
Let's look first at the tax ramifications if you buy a second home or investment property this year and use it for vacation getaway or a rental for 10 years. Then you sell your main home and move into this property full time, where you live for another 15 years before selling.
Your total ownership is 25 years, 10 as a vacation home, and 15 as your primary residence. Fifteen divided by twenty-five equals 60 percent, the amount of time it was your main home. So if you made $250K profit on this sale, under the new law you can only exclude $150K from tax. You have to pony up capital gains taxes on the remaining $100K profit.
But what if you've owned a second home for years? Let's find out.
Example 2: Second home or Investment property you already own
Using the same circumstances as before, we'll shift the ownership and sale calendar a bit.
This time, you owned your home for five years before the new law kicked in and five years after Jan. 1, 2009. You still have 10 years of vacation ownership and 15 years of living there as primary residence. But the new law doesn't count those five pre-2009 years of ownership as use that does not qualify for the exclusion.
So for tax purposes, your ownership calculation is five years as a second home or investment property and 20 years of use that are eligible for the exclusion. During those 25 years, the property was your primary residence or otherwise eligible for the exclusion for 80 percent of the time, meaning now you can exclude $200K of your $250K profit, with a balance of $50K in capital gain tax.
As of 2009
With the closure of the conversion loophole, now the seller of a second home or investment property, even if it's converted to a primary residence status, will owe taxes for the time that the home was a second or investment property after Jan. 1, 2009. Do note that for investment property sale; there is the additional recapture of depreciation tax which will apply at closing.
Please feel free to visit my company's website at www.AdelphiRetirement.com to learn about our company's services. You can also contact me at wlam@AdelphiRetirement.com. Thank you.
If you are a self-employed business owner, a solo-401(k) may be just the right retirement option for you. The solo-401(k) or Individual (k) gives self-employed business owners the same great retirement benefits that large corporations have enjoyed for years. The solo-401(k) is significantly less complex than a typical 401(k) or other profit sharing plans and in many cases, it allows for much greater tax-sheltered contributions than other traditional types of small business retirement plans.
There are many advantages to having a solo-401(k) over other small business retirement plans, such as SEPs and SIMPLES. First, the contribution limits can be much higher. As the self-employed business owner, you can set aside up to 25% of your income as a tax-deductible, profit sharing contribution. You can also contribute up to $16,500 for 2009 ($22,000 if you are age 50 or older) as a salary deferral. The maximum contribution for an solo-401(k) plan for 2009 is the lesser of $49,000 ($54,500 if age 50 or older), or 100 percent of compensation.
Another advantage to the solo-401(k) is the Roth contributions that you are eligible to make. You can designate some or all of your deferrals as Roth contributions. Roth contributions are after-tax dollars, so those contributions will grow tax-free.
Unlike an IRA, you may take loans from your solo-401(k). Make sure to check with your tax professional to find out the limitations and amounts that you can borrow from your solo-401(k) plan.
Who qualifies? To be eligible to have a solo-401(k), you must be a self-employed business owner with no full-time employees other than your spouse. Employees that work less than 1,000 hours annually, employees under the age of 21, Union employees and Nonresident alien employees are generally excluded from coverage under your company's solo-401(k) plan.
Last, the solo-401(k) is very low in administrative costs. Like an IRA, you will need to first open the plan with a qualified custodian for your solo-401(k), you may act as trustee for your own plan. Once the account is opened, you simply open another checking or savings account in the name of your solo-401(k) plan trust and work with your tax professional to determine how much you can contribute each year. You may also choose to not contribute in any year, for any reason. The solo-401(k) gives you complete flexibility to contribute when you would want. Once your account accumulates $250,000 you'll have to start filing a Form 5500-EZ, which your tax professional should be able to help you prepare.
Feel free to call me and I will be happy to explain in detail how we can set up your solo-401K account. At Adelphi Retirement Management, Inc., we've helped thousands of investors over the years in truly diversifying their retirement proceeds into non-traditional investments in to real estates, businesses, private notes, tax liens, and much more. Why would you put all your eggs in one basket?
Wai-Yew Lam is the founder of Adelphi Retirement Management, Inc., based in Oakland, California. He can be reach at 925-212-1727, please visit our company's website at www.AdelphiRetirement.com.
You'll be hearing a lot in the next six months about Roth Individual Retirement Accounts - but not as much as you should about a long-term threat that hangs over them.
Starting Jan. 1, you'll be able to take a regular IRA, say, one that you have in a brokerage account after having rolled an old 401(k) into it, and turn it into a Roth. You'll be able to do this no matter how much money you make, though you'll have to pay income taxes at your current rate on whatever you move. Currently, you can't make the conversion at all if your household has more than $100,000 in modified adjusted gross income.
Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular IRA.
With a Roth IRA, you pay no taxes on your earnings in most instances when you take money out; distributions from regular IRA's are taxable the same way that income is, though the basic IRA does offer a tax deduction when you first deposit money into the account. The Roth offers no such deduction when you contribute money to it.
So if you think your tax rate will be higher during retirement than it is now, say if you're fairly young for instance, making the conversion early in 2010 looks sensible.
It all seems pretty simple, until you consider this: The tax laws might change substantially, throwing all of your careful planning into utter disarray. We're currently staring down years of federal budget deficits and decades of looming Medicare and Social Security obligations. If wealthy people convert their retirement funds to Roth IRA's in large numbers, won't all of that newly tax-shielded money look tempting to government officials years from now?
There is no way to know, and admitting the futility of making a specific prediction is where you have to begin this analysis. After all, if you get serious about your money at 40 and live until you're 90, that's a half-century for which you need to plan.
Still, many financial planners are concerned enough about the possibility of huge changes in the Roth rules that the looming opportunity in 2010 has inspired an orgy of spreadsheet creation and client outreach. Think all of this activity is simply an attempt to stoke fear among investors and charge fees for alleviating it? That would make you as cynical as all of the people who are certain that Roths are a big lie and the tax-free earnings simply cannot stand for more than another few years. Neither is likely completely correct, so let's take a quick look at both arguments before trying to figure out what to do with your own IRA.
How Roths Might Change
At the most extreme end, the federal government might try to tax the earnings on a Roth after all, say through the capital gains tax, which is currently at 15 percent for long-term gains but could go up in the next few years. Or it might levy some sort of an excise tax on excessive balances, however those might be defined.
Roths are especially useful for estate planning purposes. Regular IRA holders have to start taking money out once they reach the age of 70 and a half, but Roth owners don't have to take money out during their lifetimes. Heirs of Roth holders, meanwhile, pay no income taxes when they cash out of the inherited account and can spread those distributions over an entire lifetime, allowing for decades more of tax-free growth thanks to the wonders of compound interest. Some part of this could certainly change.
Why Roths Won't Change
Those who think the taxes on Roths won't change anytime soon point first to politics. Given the trouble that President Obama is already having getting parts of his agenda through a Congress controlled by his own party - Democrats have big majorities in the Senate and the House - it's hard to imagine him successfully making substantive changes to the Roth. After all, many of the lawmakers who voted for it are still there.
Others make a fairness argument (It would be double taxation!), or a legal one (The no-tax promise of Roths is a contract!) or a practical one (No one, including the IRS, would want to be the record keeper or track the details, because grandfathering everyone would be so complicated!).
What You Should Do
If you're considering a conversion - and just about everyone who has an IRA ought to think about it - start with a handful of basic questions. First, can you afford the income taxes you'll have to pay on whatever amount you convert? If you can't come up with the money, you can stop right here. Taking it out of the IRA before turning it into a Roth is a terrible idea, given potential penalties and the loss of tax-free future growth that would result from using some of your IRA savings to pay for the taxes.
If you can get over that hump, how much money do you think you'll have come retirement? How much do you think you'll need to live on? How much might you want to pass on to heirs? And are you close enough to retirement to have any clarity on how the answers to these questions might affect the amount of taxable income you'll have?
This is simply a starting point, and it can quickly get more complicated for any number of reasons. If you want to fiddle with your own numbers, there's a decent calculator at rothretirement.com (click the "Calculator" tab), though it doesn't allow you to adjust for possible Roth tax changes. But given the size of the balances involved for many people, this would be a good moment to get some professional advice, preferably from a certified financial planner with deep tax knowledge who agrees to work as a fiduciary (i.e. in your best interest).
Even with possible tax changes, the path may be clear for some investors, especially older ones who might be spared any big alterations that occur two decades from now. For everyone else, however, it's best to think about tax diversification in the same way you think about asset allocation. It's about spreading your risk and your money.
As always, you can reach me at wlam@adelphiretirement.com or contact number at 925-212-1727. Please visit my company's website at www.AdelphiRetirement.com.
Wai-Yew Lam, Principal
How to invest in Real Estate using retirement funds to generate more mortgage and real estate transactions
Mortgage brokers and agents now have a new way to generate business: showing people how to purchase real estate in an IRA or retirement account.
The concept is simple, and is a great way to generate new mortgage business AND Realtor referrals! You simply use the free marketing materials we provide you to tell clients, prospects, and your local realtors that they can use IRA and retirement funds to purchase real estate (surprisingly, most don't know they can), and reap the benefits of new loans and Realtor referrals!
How To Participate In Today's Up-And-Coming Market Niche
Investing in real estate through an IRA is poised to be one of the hottest new areas of investment. Why? Because the stock market has tanked and investors have lost confidence! Even with the recent rallies, it will be a long time before investors regain their confidence completely.
With foreclosures everywhere and real estate prices now at bargain lows, why not show your clients and prospects how to buy some under-valued real estate with their IRA or retirement plan funds?
Here Are Five Reasons Why Using IRA Funds To Purchase Real Estate Makes Sense:
Keep in mind that by purchasing real estate in their IRAs, clients and prospects are not changing what their retirement plan funds do (building tax-free value for use at some future date); they are simply changing the type of investment in their retirement account (from stocks, bonds, and mutual funds to real estate).
How To Take Advantage Of This In Your Mortgage Business
Buying Real Estate using your IRA is a great new way to open up a new marketing niche for yourself. And - it's EASY! Simply do the following four things:
Simply tell your clients and prospects about this hot new idea - and you've created a new stream of income!
Ancillary Benefits
Most mortgage brokers have the contact information for hundreds of customers for whom they have previously provided mortgage services. Calling or sending them your newsletter means you will be getting phone calls on how to take action, and many of these callers won't have a real estate agent.
Thus, this program now becomes a great way to great bigger, more beneficial reciprocal agreements with local realtors. Essentially, you send them some of your people who want to buy properties in their IRAs, and the realtor sends you some of his or her customers who need mortgages.
Thus, you've built several new revenue streams: one from your existing customers, and many others from each of the realtors for whom you have now become their preferred mortgage broker!
About Buying Real Estate In An IRA
There are a couple of technical requirements that allow people to purchase real estate in an IRA. Though mortgage brokers are not financial advisors, they should know the following:
How To Follow-Through On This Idea
This is a great new way to open up a new marketing niche for yourself. And - it's EASY! Because the "paperwork" for setting up this program is facilitated for your clients by an outside party, all you have to do is connect the buyers with my company and then set them up with your Realtor partners to find the properties.
Everything else is handled for you! It's as simple as adding a link on your website and marketing materials to your client packages and you've got a new stream of income!
And this is just for the people you already know or who visit your website. Think about the possibilities if you decided to offer seminars on this topic! Or you went to an investor's meeting with this idea. Or you talked to your CPA's and Financial Planner's clients. This is NEWS. And when you have news, it's worth putting you in front of people - people you would never have had access to before. It can open up whole new worlds in your business.
Summary Of Benefits
In closing, I am happy to explain and share with you on how our top mortgage consultants and realtors are currently using this program to generate more revenue in a down market. It's no secret, Self-directed IRA has been around for over 30 years, and this concept is just now taking off!
Sincerely,
Wai-Yew Lam, Principal (925) 212-1727
Adelphi Retirement Management, Inc.
Wai-Yew Lam is the President of Adelphi Retirement Management, Inc. We specializes in managing Self-directed IRA accounts for investors by diversifying in to other invevstments such as real estates.
ActiveRain Corp. is not responsible for the accuracy of the site's content (which is written by members of the ActiveRain Real Estate Network) and does not endorse the views of the real estate agents, mortgage brokers, and others listed here.
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