Thursday, September 18, 2008
The housing crisis has brought home prices way down, and the Wall Street crisis is making investors more than a little nervous. So now that mortgage rates are down, it could be an opportunity to take some of your retirement nest egg and invest it in real estate.
We talked to two financial experts on what you need to know if you're considering such a move.
Paul Burkemper, president of Burkemper Group in St. Louis, Mo., says it's important to keep tax consequences in mind if you're interested in investing your IRA in real estate.
IRA Taxes Higher Than Capital Gains
If you are swinging for the fences with depressed real estate, keep in mind that gains in an IRA will ultimately be taxed as ordinary income versus the more preferential capital gains rate.
One of the benefits of real estate investing is the tax benefits (i.e. development and depreciation write-offs). These are moot inside of an IRA.
So Convert to a Roth First
Consider converting to Roth first and using Roth money to invest in real estate for tax FREE growth. If you are betting on real estate to rebound over the long run, then this approach makes sense. And, Required Minimum Distributions are not required out of a Roth.
IRA Less Liquid
Take into consideration the illiquidity of the investment and how it might impact ability to take RMDs. (May want to consider a REIT for greater liquidity/diversification)
Use Separate IRA for Real Estate
Use separate IRAs for each non-traditional investment. Whether it be real estate or another asset, you are better off separating them out. This way if the real estate investment violates the stringent IRS rules & regs regarding self-directed IRAs, only that investment amount becomes taxable versus all IRA assets if held in the same account.
Don't Violate IRA Rules
Watch how you use/handle real estate purchased in an IRA. Caution needs to be taken to avoid self-dealing which could render entire IRA taxable and subject to potential penalties.
Examples of prohibited transactions:
If you purchase a "fixer upper" and do the rehab work yourself (or even hire a relative to do it), that is considered self-dealing resulting in a full distribution of the entire IRA, which will be subject to tax and 10 percent penalty if you are younger than 59 1/2.
If you buy an investment property in Hawaii and rent it out but stay there one week of the year, that is self-dealing.
James Cox, managing partner of Harris Financial Group in Colonial Heights, Va., suggests looking at a more diversified approach.
Buy REITS Not Real Property
If you want to get into real estate with IRA dollars, look at more efficient means to diversify with real estate (think REITs) versus lack of diversification with the purchase of real property.
Don't Buy Your Own Home
IRA real estate purchases make the investment properties ineligible for depreciation benefits, capital loss deductions and for your own personal use (so no primary residence or vacation home!)
Don't Buy a Home For Your Child
With mortgages tough to come by, parents might find themselves tempted to serve as the bank for their kids and use their IRA dollars to buy a house outright. As an investment, their kids would make mortgage payments to them. BUT, this would very likely be considered a prohibited transaction by the IRS since family members would be using the house.
It's Best as an All-Cash Purchase
Keep in mind that use of leverage is a no-no, which means 100 percent capital for the real estate purchase - no mortgage! (taxes are payable on income/capital gains on leveraged portion-UDFI)
Don't Violate IRA Rules
It's easy to short circuit the IRA through "prohibited transactions" - so, if you decide to use IRA dollars, use Roth or split your IRA so you can use a separate IRA for your real estate investments.
posted by Real Estate Agent @ 6:22 AM permanent link | Post a Comment | 0 comments 
Thursday, September 11, 2008
A big part of Lehman Bros. Holdings Inc.'s plan to save itself is to spin off to shareholders the bulk of the investment bank's commercial real estate portfolio.
Would that be a gift -- or a bomb?
The commercial real estate market hasn't suffered on par with the worst of the residential real estate market's decline, but there are growing signs of weakness on the commercial side.
Lehman has been a huge player in financing commercial projects. Now it proposes to move up to $30 billion of its $32.6-billion portfolio of commercial mortgages and other real estate holdings into a new entity to be called Real Estate Investments Global -- REI Global, for short. That entity then would be spun off to Lehman shareholders and would trade publicly.
The spinoff would include the company's mortgage investments tied to California land developer SunCal Cos.
In effect, Lehman is taking a page from one crisis to try to overcome another: The firm is proposing a restructuring technique known as "good bank/bad bank," which was used by other battered institutions with real estate problems during the savings-and-loan crisis of the late 1980s and early 1990s.
The idea is to segregate worrisome assets into a subsidiary (the "bad" bank) and then legally separate it from the main company (the "good" bank).
In Lehman's case, the goal is to revive investor confidence in the firm by shearing off assets that could fall further in value.
"You're basically bringing some closure to a mess," said veteran bank analyst Bert Ely. "You've gotten [faltering assets] off your books. You're no longer on the hook and you've capped your downside."
Lehman could have tried to sell its commercial assets at a loss in the market -- as rival Merrill Lynch & Co. is doing with certain real estate securities. But Lehman has bent over backward to avoid a fire sale that would result in further balance-sheet write-downs.
From shareholders' perspective, the question is whether they would be getting something of real value in REI Global, or an investment that could collapse as soon as it begins trading.
Lehman sought to paint its commercial assets as fairly valued now, after the write-offs the firm already has taken. "We do not envision large write-downs in the commercial mortgage portfolio given the present market," Lehman CEO Richard Fuld told analysts on a conference call Wednesday.
"REI Global will own a high quality portfolio of assets, which is diversified by geography, property and lien type," Lehman said. "REI Global's primary focus will be to maximize shareholder returns by selling assets or holding them to maturity, whichever provides the greatest return."
The catch is that the good bank has to pour in capital to finance the bad bank. Lehman signaled that it would inject at least $5 billion in capital into REI Global.
The spinoff "has to have enough equity capital that it can stand alone," Ely said.
Yet Lehman's core problem has been that it needs fresh capital for itself, and has been unable to find a deep-pocketed investor to step up. The breakdown of talks with a South Korean state bank triggered the 45% plunge in the brokerage's shares on Tuesday -- and forced the firm to move up its restructuring announcement from next week.
The market's verdict on the restructuring plan on Wednesday wasn't encouraging: Lehman's shares stabilized for much of the session but finished down 54 cents to $7.25 -- a new 10-year low.
Source:http://latimesblogs.latimes.com/money_co/2008/09/a-big-part-of-1.html
posted by Real Estate Agent @ 9:58 PM permanent link | Post a Comment | 0 comments