Entrust Learning Center > Keyword: real estate investing > Diversification and Tax Free Investing - Putting Greens to Foreclosure Auctions

Diversification and Tax Free Investing - Putting Greens to Foreclosure Auctions

Commercial brokers have discovered a wonderful investment opportunity: a putting green.

A Partnership

The brokers established a limited partnership for the purpose of real estate acquisition.  The main real estate purchases were to be investment properties.  Because tax deferred vehicles should not be used for the purposes of running a business, it was essential that the acquisition purpose of the partnership be so limited.  The partners, all members of the same firm, and otherwise unrelated parties funded the acquisition as follows:

Two transferred all of their assets to their self-directed plans with us.  One opened a SEP IRA with $22,500, as they had sufficient income to fund the maximum of their adjusted gross income.  Another opened a Money Purchase/Profit Sharing Plan, and funded $15,000. 

All of the members of the partnership share the same tax accountant, making the overall transaction from a tax point of view fully advised. (It is advisable for one to seek tax advice when making contributions to any tax deferred plan, if one is self employed and has the intent of sheltering a good portion of their income.  The tax advisor can help establish the amounts needed to fund self directed plans.)  Further. The partnership made the acquisition with tax deferred and non-tax deferred funds.  Some partners elected to use non-tax deferred funds.  The general partner in this case in not an investor.

The partnership had “pre-leased” the putting green to a professional operator.  The lessor pays a fixed amount as determined by the lease terms to the partnership.  The lessor pays a fixed amount as determined by the lease terms to the partnership.  The general partner, after paying minimal costs, distributes income to the limited partners.  This is a fairly straightforward use of a self-directed plan.  It is important to recognize that this type of partnership investment had different characteristics of many publicly offered limited partnerships: The partners all know each other.  They all have a commonality of interests and receive their information and administration from the same source.  Coordination of the entire transaction was, as a result, very straightforward and expeditious.  From beginning to end, the transactions took one week, and only that long because an express mail package with one of the partners’ funds was misrouted.

The return on the partnership net to the self-directed accounts will be in excess of 12 percent. The individuals who transferred all of their existing investments, and liquidate them when they feel they wish to make purchases which are not handled or managed by regular broker dealers.  In this case they have the advantages of both options, and they won’t be charged administration fees for stock, bonds and mutual funds.

Auctions

Moving from the organized and very structured partnership, the auction frenzy has also hit self-directed investments and investors.  Most recently, clients have needed to have the flexibility of having exact amounts at auctions.  Typically, Keogh and other qualified plans do not face any problems with this as they are usually self trusted, and the trustee takes the trust checkbook to the auction.  Not all government agencies accept such checks and many require cashier’s checks.  This has made going to auctions difficult for the retirement plan investor.  Particularly in the case of IRAs and SEP IRAs, the account holder cannot write a check and expect to be reimbursed without the IRAs calling the transaction a taxable distribution.

The answer to this problem is using what is now considered by many financial institutions as an anachronism, the certified check, or sight draft.  The approach allows the custodial institution to issue with flexible payment options acceptable in almost any auction venue.  Payment is predicted on the clients’ approval, and documentation is forwarded according to the requirements of the retirement plan.  It’s easy and convenient, even if it uses a low-tech solution.

In the here-we-go-again department: some regular dealers seeing that their customers want to get out of stocks and mutual funds, have been telling their clients that you can’t invest pension plans and IRAs in real estate, and if you do, the IRS will audit your account and disqualify your investment.  This is highly irresponsible rhetoric and untrue.  If you have any doubts about flexible investment options, don’t call your administrator or custodian; call the Internal Revenue Service for IRAs and Sep-IRAs and the US Department of Labor for Qualified Plans.  Your regional office may refer you to your tax preparer or administrator.  If that is the case, ask to speak with the administrator or CPAs source of information such as ERISA lawyer or other such a service provider.

Uninvested Cash

Speaking of such matters, be sure that you keep your retirement plan univested cash invested.  We have established that when a trustee or administrator invests in anything other than insured deposits, and receives payments from the investments, a prospectus must be provided to you.  We know that this is not always the case, and the value of your cash account is not what you think it should be or what is disclosed.  Ask about it, and ask how much your trustee gets paid for “managing” your cash, then ask for a prospectus.

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