A 1031 exchange allows tax payers to defer taxable gain on exchanges of like-kind assets, such as real estate for real estate. Because money in an IRA can generally flow tax-free from one asset class to another, retirement account holders rarely need to employ a 1031 exchange.
However, some IRAs may have taxable income (and taxes) when assets are purchased with debt financing. In this case, IRA owners may want to take advantage of the 1031 rules, and exchange their first debt-financed property for another. The result of this exchange is that all or most of the IRA income taxes are deferred.
Debt financing allows an IRA to borrow money to purchase property so that the IRA can have more buying power, and thus purchase a pricier property or more properties in general. For example, with debt-leverage, an IRA with $100,000 can have the buying power of $300,000 or more. Leverage is seldom available with securities investments in IRAs, which is why non-traditional self-directed IRAs provide so many benefits for retirement investors.
To engage in a 1031 exchange, real estate IRA owners will need to utilize a qualified intermediary. Once the sale of your property is complete, the qualified intermediary will receive the cash. The IRA cannot receive the cash, or else it will not be seen as a 1031 exchange to tax courts.
1031 exchanges must also be performed in a timely manner - you must close on the new property within 180 days of the sale of the old property. Within 45 days of the sale of the IRA property, the IRA holder must designate a replacement property in writing to the qualified intermediary.
Many of our clients believe that investing in a cash-flowing real estate property with funds they have available in their IRA maximizes the value of their account. Consequentially, these clients select real estate as an asset after being unsuccessful with traditional retirement investments, like stocks and bonds. Self-directed IRAs allow account holders to make their own best investment choices by utilizing their persona knowledge and experience within the real estate market.
Like all investments, due diligence is required to decide what will work best for your IRA and its investments. New Direction Trust Company can help with the administration and bookkeeping of your IRA, and will ensure your transactions and/or conversions are done according to IRS code.