South Dakota

Happy Halloween Everyone from our home to yours

Have a safe and Happy Halloween

Richard Ives Realtors, Inc.

Make An Intelligent Move

Richard Ives, ABR, e-PRO, AHWD, SRES

Broker/Owner/Instructor

Rapid City, South Dakota

The 1031/Starker Exchange is one way to avoid or defer capital gains on property. But the IRS also recognizes the "Reverse-1031." We believe the Reverse-1031 can become more attractive in this real estate market, particularly if you suspect the valuation outlook for your next property is rosier than your current property.


The more familiar ("regular") Delayed-1031 exchange involves selling your current investment now, then replacing it within 180 days with like-kind property(s). If all the criteria are met the IRS recognizes this sale as a non-taxable capital gain (for now). The IRS Publication 544 gives more details. The Internal Revenue Code itself provides more guidance (see Section 1.1031, the identifier from which the policy gets its name).

In a Reverse-1031/Starker Exchange, Internal Revenue Procedure 2000-37, you don't have to wait until you sell your current property before finding the replacement property. But when you find the replacement property you'll need to involve an "accomodation titleholder" to take possession until you sell your current property. (You cannot own both properties simultaneously.)

This seems to be a very handy way to handle a situation where you suspect you've already found the next, replacement property and you're concerned about it's purchase price escalating faster than your presently held property while you try to sell the present property.


And then, there's the risk that you'll have difficulty selling the current property, in which case the IRS plays arson on your 180-day burning platform.

Posted by Lee Alley, www.BHhomes.INFO, Rapid City, Black Hills, SD at 10:25 AM

Labels: Retirement Investments

And the rush is on!

With just over 30 days left to get a home bought before the expiration of the tax credit (pending extension, of course), activity has been high and deals have been flying. Our inner office sale board is full. (which means a pizza party!)

As for the September Market...look at the total residential graph below - you'll see last month sprang ahead from last year on the number of homes under contract. The active listings are just under last year's numbers, showing that sellers are ready to put their homes on the market and move on. The rest of the stats remain quite similar to the rest of the year - a bit behind, but holding steady...with the exception of the new construction market. We will see how long it takes before that scenario corrects itself.









I've sold a number of homes the past months to first time homebuyers and am working with another on a get-it-in-before-the-bell-rings deal. I certainly can't complain, and I don't see any reason for anyone to be!

It's a winter storm watch. Again. Already. Maybe we'll get our normal warm winter in December...

Take care!

- Tristan

Tristan Emond
Prudential Kahler REALTORS
www.rapidhomesonline.com

Most people assume that an IRA is synonymous with stocks and mutual funds. Not true. When Congress set up the IRA tax deferral concept, they deliberately left it wide open for us to invest our IRA's in many kinds of assets other than stocks. But most stock brokers sure don't tell you about this.

In fact, when Congress established the IRA tax-avoidance/deferral program, Internal Revenue Code 4975, they said we could invest in any type of asset, except for five very specific things:

1. Collectibles such as art, antiques, jewelry


2. Life insurance


3. Coins


4. "Party-in-interest" transactions


5. Most sub-chapter 'S' stock.
   

So that means Congress intended we could invest our IRA's in just about anything else, such as French gas stations, American fast food resturaunts, or...Black Hills real estate. (Full disclosure: I have transferred much of my lifelong retirement savings out of gambling in the stock market, over to investing in Western-U.S. real estate. And done very well, thank you.)

As it turns out, real estate is one of the easiest forms of asset to invest in with your IRA. And buying real estate with my IRA was no more complicated than buying my last home.

However, keep in mind that the IRS is real persnickity about not violating a few specific "prohibited transactions", which they enumerate very clearly in IRS Publication 590, Individual Retirement Arrangements. The IRS penalties for violating one of these prohibited transactions can be severe. But it is not difficult to steer clear of problems if you don't play games against the IRS.

It has helped me to think of it this way (I hope this is right). The IRS seems to treat my IRA account as the domain of virtually another person, separate from me. The IRS knows that my "Lee's IRA" does not pay taxes. So the IRS gets real interested if this guy "Lee's IRA" starts slipping assets to the real Lee. Reason is, the real Lee is not tax exempt. And if a tax exampt entity has avoided paying taxes, then if that entity (my IRA) starts shuttling money or beneficial use of assets to me, then the IRS regards it as a "taxable distribution.

In fact, that is why it is important to invest in things that will not transfer virtual benefits directly to you. For example, if your IRA invests in a campground, don't go camping there without paying. Or if you invest in a gas station, don't get caught with the gas station giving you gas. Otherwise, it a taxable event, to transfer assets from your non-taxed IRA to your taxable self.

However, it's not that difficult to avoid these violations. In my case, I pay a small fee to my bank's trust department (Great Western Bank in Rapid City) to help me manage my self-directed real estate IRA account. I make all the decisions, to buy or sell or select or enhance a real estate holding. But I run it by the trust officer ("custodian" in IRS parlance) first, so that he can make sure I'm not violating an IRS rule. This has been a simple and convenient relationship. In fact, for the fee involved, I have greatly appreciated having a partner on my side to talk over investment ideas.

If you are contemplating a switch from gambling in the unruly stock market, and moving in to investments in Black Hills real estate, you are welcome to call me to chat. But keep in mind, you really need to consult with professional tax advice and engage the services of a custodian for your account. You could also consult with one of the self directed/real estate IRA services companies such as Pensco Trust Company. You may also be interested in the IRA Association of America.

Now, just for fun, let's start considering the matter of leveraged investments within your IRA. That is, borrowing part of the purchase price of an investment in a real estate oriented business, such as strip malls. That gets much more interesting, due to the IRS' prohibition agains the IRA using collateral from outside itself, or relying on your personal income for securing the loan. That's where "non-recourse loans" come in. In a non-recourse loan, the lender has no recourse to go outside the IRA to recover bad debts (to your IRA). In fact, when I talked with Roger St. Pierre of First Western Federal Savings Bank here in Rapid City, he had surprisingly minimal interest in my personal credit record or FICO score, because if my IRA were to default on the non-recourse loan, the bank would not have recourse to my personal assets.

Posted by Lee Alley, www.BHhomes.INFO, Rapid City, Black Hills, SD at 5:58 PM

Labels: Retirement Investments

How can you draw value from your home to pay critical expenses without selling? The rising press coverage and skyrocketing use of government-led reverse mortgages might seem at first to offer a solution for you or your parents. Yes, but a furry rattlesnake could feel cuddly at first, too. A reverse mortgage can bail you out of a genuinely unpredictable jam. But it can also bite you back. Painfully.

The U.S. Department of Housing and Urban Development offers a reverse mortgage program that is insured by the U.S. Federal Housing Administration. But others have characterized the reverse mortgage as the seniors' own sub-prime swamp.

There are several alternative ways to start drawing cash from your home to pay critical living expenses:

• Sell the home for cash


• Second-mortgage cash loan


• Home Equity Line of Credit


• Reverse Mortgage.

The reverse mortgage is available only to seniors over age 62. And the government even makes you get financial counseling before securing the reverse mortgage. The reverse mortgage has been characterized as "the self-funded bailout for Baby Boomers' parents." In a sense, it's somewhat like borrowing money from yourself. It is generally a program only for people who have high percent equity in their home, with little balance on the mortgage.

The concept of a reverse mortgage is simple. Some one, such as a bank, loans money to you in exchange for "equity interest" in the eventual sale of your home. It may be on a graduating scale so that the equity interest is fully transferred piece by piece over time. A reverse mortgager can withdraw value from their home's equity in alternative ways, including:

• A loan of one lump sum amount


• A monthly recurring payment


• A line of credit.

There are two categories of reverse mortgage sources:

1. Home Equity Conversion Mortgage (HECM)
   Offered by the U.S. HUD, and insured by the U.S. FHA. These account for the great majority of reverse mortgages.
   
2. Proprietary Reverse Mortgages
   Offered by banks, credit unions, etc.

Some of the complaints against reverse mortgages mention high pressure sales tactics, including otherwise-optional products (such as long term care insurance) as if required to accompany the loan, and just plain high fees for originating and servicing the loans.

And these "gotcha's" can seem overwhelmingly complex for elderly people. For example, if someone takes a lump sum payment in the form of a reverse mortgage for home repairs but fails to spend it in the same month as the distribution is taken, then the left-over money may be counted next month as an asset against net-worth limits for medicaid eligibility.

Because of the rough image some people have of reverse mortgage lenders, the National Reverse Mortgage Lending Association offers a code of ethics for reverse mortgages. The NRMLA reports over a 1,000 percent increase in the number of reverse mortgages in recent years. The NRMLA lists two reverse mortgage lenders for the Black Hills and Rapid City areas. These are the Financial Freedom Senior Funding Corporation and Wells Fargo Home Mortgage. These folks are prepared to offer advice on reverse mortgages.

For related information, contact me or ask me for a copy of the booklet "Use Your Home to Stay at Home," or a copy of the study "Tapping Home Equity in Retirement."

But what ever you do, or your aging parents, please proceed very, very carefully when getting the government involved in lending your own money to you. That's got big amber caution-flags all over it.

(For more information about the Black Hills and Rapid City real estate market for homes for sale and land investments for retirement, or for green homes, and real estate for Baby Boomers, see http://www.hillswatch.com/).

Posted by Lee Alley, www.BHhomes.INFO, Rapid City, Black Hills, SD at 7:27 PM

Labels: Boomers, Financing, Retirement Investments