By Jeff Schneider CPA, PassportIRA
Especially if owned in foreign countries, the omnipresent hand of the U.S. government is not able to swipe foreign real estate away from you like they could basic equities.
Although the transactions can be relatively straightforward, the implications can be broad.
It?s easy to become confused without some specialists feeding you with the proper information.? The two most important decisions revolve around the type of rental to offer and the way to have it managed.
Rental types
A property owner is faced with two primary options.
Long-term rentals of six or twelve months provide stable cash flows and strong, predictable for returns within the IRA.
Not only that, management is less burdensome as ten ant searches and advertising remains an infrequent activity.? Typically expenses remain contained to repairs or improvements in between tenants.
Option two may bring in more profit.
Demand for short-term rentals has increased significantly.? Travelers are seeking more complete facilities than the simple bed a hotel has to offer.? Full kitchens and daily cleaning services may be offered.
Owners are striking deals with local corporations who have a fair amount of road warriors or advertising their sites with convenient new sites like VRBO.com, Homeaway.com, or Airbnb.com.
Although vacancy rates may go up and management requirements also increase, the profit margins in the short-term rental business are booming.
When property is owned in an IRA, it?s important to make a distinction between these two offerings.
Long-term rentals are effectively the leasing of an asset, while short-term rentals are a business providing these services.? To level the playing field with businesses subject to taxes, the IRS created a special tax to the short-term rentals.? It?s a piece of the tax code called Unrelated Business Taxable Income (UBTI).
This is an extremely aggressive tax that you may want to be aware of before making the final determination of your leasing strategy.
Property Management
As any other part of your portfolio, it is important to know what the strategy will be for managing the asset.? Once again, you have two primary options.
First, an owner may choose to do some of the management themselves.? Hiring contractors for improvements, advertising for tenants and other administrative tasks can be completed by the owner.
Doing this highlights a few areas of caution.? First, prohibited transactions are when the IRA deals with the individual owner.? The IRS has several tests on the time you spend doing the management, the tools you?ll use to do repairs (hint: they shouldn?t be your own), and any personal guarantees you may have made on behalf of the property.
Be aware of these so there are no accidental prohibited transactions created.
The easier way, whether owning remotely or local would be to outsource property management.? The rental type as mentioned above plays into how much a property manager will charge.
They?ll handle tenants, collecting rent, and repairs.? Ultimately, you sit back and let your money do the work for you.? Of course, you?ll need to select a property manager that is motivated and will keep the property filled.
Third party property management is definitely an easier solution for the IRS too.? No question of self-dealing or prohibited transactions, while your asset just earns a return.
As you review a property for purchase, these are two considerations to factor into your decision.
Unleash Your IRA discusses several other real estate and land strategies which provide solid returns and additional protection for your IRA.? Governments continue to inflate and markets remain volatile.? It?s time to consider finding real assets which are in your control.
Click here to get instant access to the report that will show you how.
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Source: http://assetprotection.escapeartist.com/newsletter/line-in-the-sand-for-real-estate
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