What it boils down to is that anyone that has secured a loan by cross collateralizing using separate husband and wife real estate IRAs, needs to have the structure of the loan reviewed by a professional specializing in the real estate IRA.
Fairfax, VA (PRWEB) December 24, 2011
Richard Geller, CEO and managing director of FinancialSuccessInstitute.org, announced today that it just found a troubling new problem with the real estate IRA that it says jeopardizes the tax status of the real estate IRA.
Geller said, "As the Institute's expert panel continues to deeply research defects in the real estate IRA, it uncovered and is today exposing a common prohibited transaction many real estate IRA owners have unknowingly engaged in. The result can be the Internal Revenue Service declaring the real estate IRA fully distributed. The result can devastate their retirement accounts."
Tim Berry, attorney and advisory panelist to FinancialSuccessInstitute.org, says, "Loans from an unrelated party that are non-recourse to the real estate IRA owner are allowed. However, if the non recourse loan to the IRA is structured wrong it can result in the real estate IRA becoming fully distributed. The devil is in the details."
Berry continued, "what we found is that non recourse loans often involve husband and wife joining real estate IRA assets to secure a loan. That's fine as far as it goes. But what if the wife and husband each own separate real estate IRAs that are mutually invested in a piece of property with a single loan and a single deed of trust securing the loan. Although the loan is from an unrelated party, the husband and wife are related parties. Having the real estate IRA of each related party guarantee a loan involving the other's real estate IRA is a prohibited transaction and we found it is very, very common."
Berry adds, "The same thing happens when an individual owns separate real estate IRAs. Say a before tax real estate IRA and a Roth real estate IRA. Using both to cross collateralize a non recourse loan amounts to self-dealing. BOOM go both of your real estate IRAs."
Berry continues, "What it boils down to is that anyone that has secured a loan by cross collateralizing using separate husband and wife real estate IRAs, needs to have the structure of the loan reviewed by a professional specializing in the real estate IRA."
FinancialSuccessInstitute.org previously shared the ramifications when the IRS declares a real estate IRA fully distributed according to § 402 of the tax code. Those wanting the IRS official opinion may want to read IRS Publication 590 . Readers will also find more information on the subject in this Real Estate IRA article.
Geller emphasizes, "The reason the Institute is exposing this critical real estate IRA prohibited transaction is to also provide investors with solutions. The real estate 401K offers better asset protections on many levels. The institute provides details of why the real estate 401K is superior to the real estate IRA in the Expert Panel Special Report: Real Estate IRA and Real Estate 401K."
Geller goes on, "How important is this to real estate IRA investors? The institute expert panel has uncovered additional IRA fines that can be incurred when a real estate IRA is declared distributed. Today, these additional fines are being exposed for the first time. A typical real estate IRA prohibited transaction will go undiscovered by the IRS for many years. Once it's discovered, we already know the real estate IRA distribution leads to a 10% penalty if the owner is under age 59 1/2. All real estate IRA owners will have to pay taxes on the full distribution that likely puts them in a higher tax bracket for the year. The additional IRS fines caused by the real estate IRA distribution are applied to the multiple years the distribution went unreported. Say the real estate IRA prohibited transaction occurred in 2004 but the IRS doesn't discover it until 2012. The taxes were due in 2004 when the real estate IRA prohibited transaction occurred. The IRS can now impose late tax fines for the eight years between when the real estate IRA prohibited transaction occurred and the year the IRS found it."
Geller concluded, "The Institute's expert panel continues going deep into the details regarding real estate IRAs and 401Ks. The panel will find solutions for real estate IRA owners and publish the information at FinancialSuccessInstitute.org."
Disclaimer: Information here and at FinancialSuccessInstitute.org is not legal or professional advice for your real estate IRA or any retirement accounts. It's intended only as general information sharing. Seek professional assistance regarding your specific circumstances and applicable laws before converting real estate IRAs to 401Ks or taking any other retirement account action.
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