Investing in Rental Property with Retirement Funds

Rental property in a self-directed IRA includes residential homes, condos, townhomes, commercial buildings, and even foreign real estate. Rentals can provide steady, monthly income as well as the potential for property appreciation over the years. Your IRA owns the property and all income is deposited into the account on a tax-sheltered basis, which is the goal when investing for retirement.

You can partner your IRA’s funds with other individuals (or their IRAs) to invest in rentals. Income and expenses are determined based on the percent of ownership of each party. This works well if you have limited funds to invest or when investing in more lucrative assets with a group of investors.

Lean how to invest in rental properties with your retirement funds.

If you have a property that qualifies for a 1031 exchange, we can help you complete the procedure. Not sure what a 1031 Exchange is? A 1031 Exchange is a transaction whereby an owner of an investment property is allowed to sell the property and purchase another property without a tax consequence. A 1031 tax-deferred exchange allows an investor to reinvest the federal capital gains received from the sale and defer the payment of the tax that would normally be due on the sale. We work with you and a “qualified Intermediary” on the sale of your property as well as locating and acquiring a “like-kind” property within the 180-day time limit. The term “like kind” may be a little confusing but for this purpose, it means real property i.e.: you can sell a single-family home and purchase another single-family home, warehouse, or vacant land, etc. As long as the property being sold is not a primary residence, and there is a tax liability to selling, a 1031 exchange should be considered.

Here are some key points while considering a §1031 Tax-Deferred Exchange:

Choosing a “Qualified Intermediary”: This is probably the most critical choice you will make in a §1031 tax-deferred exchange transaction! Paramount to every exchange is the safety of funds held by the Qualified Intermediary.

Interview several and take special note of their “fund management program”.

• In whose name are the funds held?
• What are the requirements for deposit and withdrawal?
• Where are the exchange funds held?
• Is the Qualified Intermediary insured by a much larger company, (i.e. title company)

Qualified Intermediaries are not regulated by the state of Florida. Your care and diligence is crucial because losing your hard-earned money is not an option!

Plan in Advance:

The Qualified Intermediary cannot give tax or legal advice. However, they will work closely with your RE Broker, CPA, accountant, attorney, financial planner, lender, etc. to ensure your best interests are considered. Therefore it makes sense to contact all the parties involved ahead of time rather than risking losing the opportunity due to poor planning!

Understand the rules:

You must spend all the proceeds from the sold property on the newly purchased property to qualify for full deferment. Of course, there are some exceptions. Contact your tax professional for advice. Remember, real estate can only be exchange for other real estate. It cannot be exchanged for jewelry, stocks, bonds, etc. Also, you cannot spend the proceeds on property you already own. This is considered “goods and services” rather than “like Kind” property.

Time is of the Essence:

Written Identification of the specific replacement property must be within 45 Calendar days. The closing must occur by the 180th calendar day or the tax filing date-whichever is earlier.

This checklist is intended to provide a brief overview of the steps involved in an IRC §1031 tax deferred exchange. This checklist does not address all issues involved in an exchange.

REVIEW:

Review the entire transaction with tax and/or legal advisors.

SALE CONTRACT:

• Enter into an “assignable” contract to sell the relinquished property.
• Execute contract with the exchanger’s name and/or assigns.

CONTACT QI:

Before closing, contact QI to initiate the exchange transaction.

EXCHANGE SET-UP:

QI will prepare the exchange documents for the relinquished property sale.

• The original documents will be forwarded to the closing officer who will coordinate the signatures.
• Copies of documents are forwarded to the exchanger.

RELINQUISHED PROPERTY CLOSES:

QI is assigned into the transaction as the seller and sale closes.

• Pursuant to the assignment agreement and exchange documents, QI instructs the closing officer to directly deed the relinquished property to the buyer.
• Exchange proceeds are transferred directly to QI.

IDENTIFICATION PERIOD:

Both the 45 Calendar day identification period and exchange period begin.

PROPERTY IDENTIFIED:

Exchanger properly identifies replacement property by midnight of the 45th day.

• Specific written identification, signed by the taxpayer, is forwarded to QI.
• Written identification can also be made to a party involved in the exchange transaction who is not a disqualified person.

PURCHASE CONTRACT:

Enter into an “assignable” contract to purchase replacement property.

Execute contract with the exchanger’s name and/or assigns.

CONTACT QI:

After signing the replacement property contract, contact API.

EXCHANGE PAPERWORK DRAWN:

QI will prepare the exchange documents for purchase.

• The original documents will be forwarded to the closing officer who will coordinate the signatures.
• Copies of documents are forwarded to the exchanger.

REPLACEMENT PROPERTY CLOSES:

QI is assigned into the transaction and purchase closes.

• Pursuant to the assignment agreement and exchange documents, QI instructs the closing officer to directly deed the replacement property from the seller.
B) QI transfers exchange proceeds to the closing officer.

• COMPLETION: If all exchange funds are used to acquire the replacement property or properties, and all the exchange requirements are met, the exchange is complete.

This information is a brief illustration and is not all inclusive. Contact us so we can discuss your particular scenario. We will gladly do all we can to make investing in real estate as trouble free as possible.

Foreign Owners of U.S. Rental Property

All foreign investors owning U.S. rental property are responsible for paying taxes on any and all rental income they earn in the U.S. regardless of any tax treaties that may exist. You can either pay a flat tax of 30% of your gross rental income, or elect to file an annual US tax return and reduce your taxes by claiming deductions relating to ownership and management of the property. (I.e. Property Taxes, Insurance, Management Costs, etc.) With either method of taxation, you must have an

Individual Taxpayer Identification Number (ITIN).

Obtaining a Taxpayer ID

As soon as possible, you need to obtain a U.S. ‘Individual Taxpayer Identification Number’ (ITIN) for each owner of the property (Each person listed on the property deed). The application is done with IRS Form W­7, and you must provide original certified identification documents.

Get IRS Form W­7 HERE: http://www.irs.gov/pub/irs-pdf/fw7.pdf

Get IRS Form W­7 Instructions HERE: http://www.irs.gov/pub/irs-pdf/iw7.pdf

The IRS has ‘Certified Acceptance Agents’ who are authorized to certify your original documents and process the application. The W­7 form may look easy and you may want to process it yourself, but save yourself time and visit an agent. Certified Acceptance Agents are located worldwide. Contact an agent in your country of residence. It normally takes 4­6 weeks for your W­7 to be processed by the IRS.

Find Certified Acceptance Agents HERE: http://www.irs.gov/Individuals/Acceptance-Agent-Program Upon receiving your ITIN number from the IRS, you must provide us with a copy of the IRS letter showing your new Individual Taxpayer Identification Number (ITIN).

Note: We will not manage rental property for foreign owners who do not acquire an ITIN number.

Form W­8ECI

The Internal Revenue Service (IRS) requires us, the property manager to withhold 30% of your Gross rents to ensure you will file a tax return at year end. This is obviously very costly to you and also cumbersome for us. However, there is an alternative that will exempt you from the mandatory 30% withholding.

After obtaining an Individual Taxpayer Identification Number (ITIN), submit to us Form W­8ECI.

Note: Do not send the Form W­8ECI to the IRS. You send it Arrico Realty & Property Management

Get IRS Form W­8ECI HERE: http://www.irs.gov/pub/irs-pdf/fw8eci.pdf

Get IRS Form W­8ECI Instructions HERE: http://www.irs.gov/instructions/iw8eci/index.html

By filing Form W­8ECI you eliminate the mandatory 30% tax withholding as it notifies us as the property manager (and the IRS) you will be filing annual tax returns to report your income and your expenses related to the rental property.

Most generally, you will file Form 1040NR (Nonresident Tax Return) with the IRS. Those tax returns are due by June 15th of each year and you should consult with your tax professional. Currently IRS Form W­8ECI Form remains in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any of the information on the form incorrect. For example, a Form W­8ECI signed on September 30,

2015, remains valid through December 31, 2018. Upon expiration of the 3­year period, you must provide a new Form W­8ECI. If you do not file a form W­8ECI with us, your property manager, we are REQUIRED by law to withhold 30% of your income from the rental and forward the funds to the IRS.

Note: We will not manage properties for owners who do not file the W­8ECI form with us.

FORM 1042­S

At the end of each year we provide you with a year-end statement of your income and your expenses related to the management of your property. Along with the year-end statement you will receive a copy of IRS Form 1042­S that reports your income to the IRS. You will then use your copy of Form 1042­S to file taxes through your tax professional.

Disclaimer: We are not tax professionals. This information is a only a brief overview. Please consult your tax professional for advice concerning the Foreign Investment in Real Property Tax Act (FIRPTA).