From HW:
A bill introduced in the U.S. House of Representatives would waive early distribution penalties on certain qualified retirement plans if the funds are used to buy a house that has been in foreclosure for a year or more.
Bill Posey (R-Fla.) introduced H.R. 1526 — the Housing Recovery Act of 2011. It has been referred to the Committee on Ways and Means.
“It’s not an end-all fix,” Press Secretary George Cecala said. “It’s just another idea to help the housing market.”
The idea is to add stability to neighborhoods by promoting purchases by owner-occupants or those seeking a second home rather than investors who immediately “flip” the home. Under the bill, the purchaser must agree to hold the property for at least two years to be exempt from early retirement plan distribution penalties.
The bill is expected to apply to distributions from Roth IRAs, 401(k) plans and company pension plans. It would require the person to use the retirement distribution within 120 days of receipt by buying a home that “has been in foreclosure for a year or more.”
Cecala said Posey, a Realtor, anticipates that the one-year period would begin at the point that the foreclosed property is listed for sale, but said the congressman is open to amending the bill to be more specific about when the clock would start ticking.
Several states have extremely drawn-out foreclosure processes. Foreclosures in judicial state average about 13 months from start to finish. But once foreclosures are repossessed by the lender and enter what is known as real estate-owned status, or REO, it is not uncommon for them to be snapped up once listed for sale.
In Posey’s home state, his district covers Florida’s “Space Coast” not far from Orlando area. He is owner and founder of Posey Realtors & Co. in Rockledge, near Cape Canaveral.
You can already purchase real estate using funds from your self-directed IRA, it sounds like this bill would open it up to all retirement accounts.
Jim… I think all current RE purchases with IRA funds need to be investment properties. You can’t make an IRA-funded property your primary residence can you?
Correct, no primary or second homes, just investment properties.
If you are self employed, you can already purchase a foreclosure property using 401K funds. A Solo 401k / Individual 401k allows you to borrow up to $50K max from your retirement account for any purpose and you will repay yourself principal + interest. I suggest revising the proposed bill to get rid of the two year flip rule and any REO or short sale should be eligble for this program.
I think this is a good Idea especially for primary home purchase, only they should not have the year long wait for REO’s, I don’t think there is a single REO that has been REO in SD for more than a year, I guess you would have to move to Detroit or Vegas.
The bill states the early distribution penalties are waived. It appears that the withdrawal would be a taxable event. If you have to immediately pay income taxes on the withdrawal it negates the savings you might get on buying a foreclosure. Alex is correct. I have already bought 2 forclosures in a self directed IRA which is part of my 401(k).
John, just curious, who is the custodian you use for your IRA?
I think the problem is the bubble exhausted most potential buyers savings. We have buyers with money out in the market, investors of low end properties and trophy seekers but the average guy thinking about buying the average house doesn’t have the downpayment required (they might have the income). This looks like just another attempt at solving the downpayment problem.
There is already FHA, so who knows how successful this will be but maybe it gets a couple people off the fence. It does provide a bit of a cushion against job loss. 401K loan is rough if you get laid off, this would remove that fear.
i’m an investor NOT AN IMMEDIATE FLIPPER. What do they care, just as long as it sells.
Kingside – about 80% of my clients/investors who are using self directed IRA/401k’s have used Equity Trust Company. I’ve found that they’ve provided us with the best combination of service and low price/fees.
Our specific account manager has been terrific about returning clients calls asap every time.
ps: a few have used Pensco and Entrust but the fees are much higher.
It is my understanding that with using IRA/401K’s for investment property, all of the income from the property must go directly back into the IRA/401K. It this true?
I would like to use this approach but I would need access to the income from the property to make it work.
Great, another new way to flip houses.
osidebuyer – yes, all the income must go directly into the IRA, just like any other IRA investment (stocks, bonds, etc).
However, you pay all the expenses for the property with your IRA funds too. So the income can be used to pay for the bills/cap-ex. You don’t have to pay for those with your own post-tax funds.
I think that was the core of your question.
Clearfund,
I went with Equity Trust myself when I converted my defined benefit pension plan to a Roth IRA last year.
What led me to go with Equity Trust was their free bill pay feature. It was uncomfortable for me to give up check book control, but the bill pay feature takes some of the inconveience out of managing rental real estate from an IRA.
Heres a funny trip down memory lane:
http://bubbleinfo.s020.wptstaging.space/2009/06/10/do-lower-rates-help-recasts/
Back then the dreaded OPTION ARM TSUNAMI was all the rage. Post a chart like this, and the sheeple on this blog went into a FRENZY – envisioning massive price drops in the most tony of coastal areas.
Just wait! They said, by 2011 we sitters will be swimming in an ocean of high end, coastal inventory, all marked at 40% off peak prices…ITS GONNA BE EPIC!!!
Well here we are people. Its early/mid 2011 — peak of the so called option arm tsunami. Hows that one working out for ya 🙂 Wow, I look back on those comments now and just laugh and laugh and laugh…
Kingside – I agree with their free bill pay. it is one of the features that makes them very attractive relative to the other custodians.
If your rental properties are financed, have you had any consequence of having to pay tax on your IRA income due to UBTI issues?
I know most people are unaware of it, or choose to be unaware of it as its a very unrecognized, but important issue.
My IRA situation was complicated enough without financing so that it took Equity Trust a couple months to get my account set up right. I am an all cash buyer in my IRA, financing is to much brain damage for me.
I am learning as I go though, and am interested on hearing from others who own rental properties in their IRA. For instance:
It took some doing to get my insurance agent to get a policy issued at personal line rates. I am still not sure that what I am doing insurancewise is completely kosher under IRS rules. It seems to be a very gray area.
Using a credit card to pay property expenses even if paid by the IRA is a big no-no. It is considered a loan by a disqualified person. So that has been a bit of an adjustment.
I sure hope I don’t have to do an eviction. It would take some explaining to a Court on how the property is technically owned by Equity Trust, but you are there as “account owner”
Good job going all cash in the IRA. Often times we will establish “common” shares and “preferred” shares in our partnerships. The preferred shares function like debt as they get a preferred yield. Common shares get the balance of the income and 100% of the depreciation plus most of the upside.
Goal of that is to be 100% cash and have zero debt concerns for our IRA investors and no UBTI issues.
I will ask my insurance guy about self directed IRA properties and pricing.
Sounds like more of the same from Washington. The same old perfect storm of financial disaster. First the republicans pass laws to encourage people to convert relatively safe savings into free market crapshoots, then the democrats pass laws to bail out the losses at taxpayer expense.
“Just wait! They said, by 2011 we sitters will be swimming in an ocean of high end, coastal inventory, all marked at 40% off peak prices…ITS GONNA BE EPIC!!!”
Maybe north country coastal has held up a bit better, but latest case shiller number do put san diego county at about 37% below peak pricing right now. At the bottom in March 2009 it was 45% off peak pricing. The market has been roughly flat and stable for 2 years, with no real edge going to bulls or bears. Smart educated flippers and investors have been able to make some good deals, some patient buyers have been able to make good deals.
The bears were wrong about a flood of inventory but so far a lack of well price market hasn’t done much to push buyers towards optimistic seller pricing.
“The market has been roughly flat and stable for 2 years”
Precisely! Yet consider when that TSUNAMI call was made – 2009. So here were the bears at the BOTTOM of the market still calling for blood in the streets! Unbelievable…
Orb,
Don’t forget about the massive government intervention that essentially shifted that recast graph out to the right. That essentially delayed, postponed the time line another 2 years. Additionally, almost no one would have figured the banks would allow people to squat in the purchased homes for up to two years without making payments and without the banks taking back the homes.
“Additionally, almost no one would have figured the banks would allow people to squat in the purchased homes for up to two years without making payments and without the banks taking back the homes.”
This is probably the most unexpected thing that happened in the past 2 years. Government intervention, of course government to the rescue. Banks not foreclosing took a bit of insight to see that as servicers and not investors it was in their best interest to rack up late payment fees and other processing fees.
just to be clear:
may i move funds from a “non-self direcred” IRA into an escrow account to purchase a non-owner occupied income producing real property? with ot without penalty?
Helpful ideas . I learned a lot from the specifics , Does someone know if my assistant might be able to obtain a template CA 460 document to use ?
No – check with tax pros.