Entrust Learning Center > 5. Real Estate > Retirement Strategies - Don't Learn the Hard Way!

Retirement Strategies - Don't Learn the Hard Way!

We just has a visit with an individual who had lost $50,000 in uninvested cash from his IRA which had been trusted and administered by a failed financial conglomerate.

He was interested in knowing what would happen to the rest of his assets, and how he would be able to close a deal on an 18 unit apartment complex with his IRA.  In the process of the conversation we discovered how much misinformation there had been regarding his deal with the now-defunct administrator.

The First Transaction

The first transaction that he is involved in is a leveraged transaction for a twenty-four unit apartment building.  In a leveraged transaction, the underlying lien is paid by their IRA, including the expenses related to the maintenance and taxes of the property.  

The cost of administration of the IRA and administrative and accounting expenses related to the property as part of the administrative or custodial function may be tax deductible, provided they are paid by the account’s beneficial owner separately.  If the IRA administrator performs these functions, as part of the account administration and charges a fee for them and the IRA is charges for them, the amounts are not tax deductible.  Funds that are paid out of an IRA for fees mean that these funds are not available to be invested tax deferred.  

The Exchange

The next part of the deal was to do an exchange within the plan.  A ranch was to be exchanged for a sports recreation center. As part of the exchange, an additional $156,000 was to be included to be paid by the owner of the sports center to the owner of the ranch. 

Yes, this can be done with IRA funds and assets. The basis of both property assets was established by appraisal and mutual agreement.  Both individuals had these assets in their IRA, and traditional tax issues for exchanges were obviated, as there were no tax implications.  The exchange deal will also permit the recipient IRA owner to make the down payment on the apartment building.

The apartment building, ranch and sports center are in three different states.  The lender on the apartment building is in a fourth state, who is carrying back a note.  It is important to recognize that the exchange is based on an exchange agreement. 

The asset value of the exchange for both IRAs will be equalized, in this case $500,000 in each plan.  The $156,000 down payment for a $600,000 apartment building with a $444,000 carryback results in an asset value for the apartment building of $156,000. 

(The assumption that any administration of custodial fee should be based on the asset value of the purchase price is flawed, as the net asset value is, at it’s inception, just what was paid for it.  The now-defunct administrator was basing all fees on the purchase price, which was fairly high.)

The property administration and management can be done by any third party, as can the servicing of any mortgages.  The illusion that for control purposes this has to be done by the custodian or administrator is just that. Properly constructed contracts and agreements can accomplish such administration and management, and also maintain the integrity of any IRA or pension plan.

The $50,000 Loss

The loss of the $50,000 was due to the old administrator using the funds for purposes other than the benefit of the customer.  The best arrangement is to keep all uninvested funds invested as much as possible.  Be sure that these funds are maintained in a separate custodial or trusted arrangement to ensure that closely held companies do not use the funds without your permission.

Do Thorough Research

We strongly urge that each investor do complete research not only for the investments that they make, and the legality thereof, but also pursue a complete background examination of whom they do business with.  Most of all, be sure that you know what you are vested in and who has title.  Be sure that no action or any funds or fees are taken without your explicit written consent.

The deal made above with the exchange, sale and carryback is being made by several individuals who have knowledge in their field and know each other.  In all cases escrow companies and lawyers competent in their areas are being used.  This deal will be made and each of the parties will receive the benefit they are entitled to .  Each of them has carefully researched the deal, the custodian and the administrator.  Their caution is well warranted; after all, one of them lost $50,000 doing it the other way.

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