Uranga & Associates Blog

Reported By Paul Menchaca of Financial Planning Magazine
October 27, 2009

SEC Chairman Mary Schapiro today reiterated her support for a universal fiduciary standard that would apply to all financial service professionals who provide investment advice about securities. Schapiro, speaking at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA) in New York, said that the standard should apply to both broker-dealers and investment advisors because “investors don’t make a distinction between the two—and neither should we.” The fiduciary duty, Schapiro added, is about advisors putting the investor’s interests above their own. Her remarks come on the same day that the House Financial Services Committee will begin discussing the creation of a universal fiduciary duty. Schapiro’s speech mostly focused on restoring investor confidence in the financial markets and in U.S. regulators. She stressed the need to create transparent financial products that do away with “complex fee arrangements or product descriptions.” Schapiro said the SEC is going to focus in the coming year on issues related to disclosure, product development and marketing for retirement products. She also created a task force to review the growth of the life settlements market, and also has target date funds on the commission’s “radar screen.” Schapiro said that in order to restore investor confidence, the SEC has to shore up several regulatory gaps. Hedge funds, she said, “have flown under the regulatory radar for too long.” Schapiro supports the Obama administration’s recommendation that advisers to private funds be required to register with the SEC. She also credited the recent passage of bills from two House committees to regulate OTC derivatives. Responding to an audience question asking for her thoughts about the “regulatory pendulum,” Schapiro said she does not think the pendulum has swung too far in the direction of over-regulation. She said many of the issues the SEC is addressing have been on its list for years—including money market reform and corporate governance—but were pushed to the side as the commission dealt with more pressing matters in the wake of the economic meltdown. Perhaps seeking to reassure those concerned about how the U.S. will compete on the global markets in the wake of new reforms, Schapiro added that the policies being considered here are also being considered by regulators all over the world. “We will not create a disjointed regulatory regime that for inappropriate reasons migrates business from one part of the world to another,” Schapiro said.

"The income limitation for single tax payers went up from $75,000 under the old rules to $125,000 under the new rules. For married tax payers, the income limitation went up from $150,000 to $225,000. "This means that more people will qualify for the credit - especially in parts of the country with higher costs of living," Nicholas said. "This should help stimulate parts of the housing market that may not have been impacted by the old version of the credit."

There are creative ways of structuring your home purchase transaction in ways that maximize the benefits of the credit. Here are a few examples suggested by Nicholas (www.CMPSInstitute.org):

• The credit applies to 1-4 unit homes as long as you live in one of the units as your primary residence - you could live in one unit and rent out the others
• If two unmarried individuals buy a home, and only one of the individuals qualifies for the credit based on their income or past home ownership status, the individual who qualifies for the credit can claim the full credit. (Note: In the case of married couples, both spouses must qualify for the credit.)

The credit applies even if you have co-signers on your mortgage loan

Case outline:  When Mr. Murphy became a client of Uranga & Associates he was 66 years old and in the process of buying a second home which would ultimately become the retirement home for him and his wife.  Mr. Murphy had the necessary down payment for the second home of his choice, but in order to afford the monthly mortgage payments it would be necessary for him to draw from his retirement fund. Mr. Murphy enquired at a local bank to find out if they could assist him with structuring his IRA for the purchase.  The Bank informed him it was outside of their expertise to structure IRA real estate purchases and referred him to our company, Lasaii of Uranga & Associates. Mr. Murphy consequently contacted us to learn how his retirement monies could be utilized for his real estate purchase. The OUTSIDE® method allows for non IRA monies to be coordinated with IRA monies and also allows legal occupancy for the purchaser of the real estate. Additionally the OUTSIDE® method structures the retirement monies dedicated to supporting the real estate purchase to avoid any loss of principal through investment exposure.  This precaution is important at any stage in life, but particularly in one’s latter years, where a substantial loss in the principal value of a retirement account has a high probability of never recovering to its prior value within the lifetime of the owner. The Lasaii division of Uranga & Associates structured a plan for Mr. Murphy placing approximately $1,100,000 of his IRA in a SAFE HARBOR® IRA account to create the structural foundation for his IRA real estate plan. This SAFE HARBOR® IRA account, guaranteed to earn a minimum of 3% with a potential of 4% – 5% as a ten-year average , was structured to provide an income stream to be used toward paying Mr. Murphy’s monthly mortgage payments. Any tax liability generated by this income stream was calculated to be offset by allowable real estate tax deductions. 

Summary:  This structure was implemented four years ago in 2005.  In the past twelve months many retirement funds exposed to stock market fluctuations have lost as much as forty percent of their value.  Mr. Murphy’s SAFE HARBOR® account lost no principal value whatsoever.  Had Mr. Murphy’s retirement monies not been protected by the vigorous safeguards of the SAFE HARBOR® directed program, the monies he had planned to have support the mortgage for his retirement home would have been diminished to the point where they would have been exhausted long before his home mortgage was paid off. He would now be faced with the difficult prospect of having to sell his dream home in a poor market environment and at a capital loss or to continue to support the mortgage with his remaining retirement monies and face the consequences of the cash flow running out at an accelerated rate in just a few years. However, since Mr. Murphy chose to apply the SAFE HARBOR® strategies to his IRA real estate purchase, his home purchase plan has been unaffected by the recent upheaval in the investment markets and so he and his wife can continue to enjoy their retirement lifestyle in the resort community they chose to retire in.

Case outline: Mr. Bennett is 46 years old and married.  Mr. Bennett has a high level sales position with an international company which requires extensive travel.  However, when he is not on the road, he is able to work from home.  This allows him and his wife to live anywhere that is within reasonable distance of an airport.  Because Mr. Bennett is away from home much of the time, his wife wanted to move closer to family.  They found just the home they were looking for on small acreage just thirty minutes drive from Mrs. Bennett’s sister.  Mr. Bennett liked the idea of dedicating IRA monies to support the purchase of the new home so that the tax free capital gains from the sale of his existing home could be applied to other investments. 

The Lasaii division of Uranga & Associates assisted Mr. Bennett in placing approximately $380,000 of his IRA in a SAFE HARBOR® IRA account - the structural foundation to his IRA real estate plan.   This SAFE HARBOR® IRA account insures against loss of principal value due to investment exposure during the life time of the contract.  Mr. Bennett’s SAFE HARBOR® IRA account was then structured to provide an income stream to be used to pay interest and principal on the home mortgage for their new home.  Any tax liability generated by this income stream was calculated to be offset by allowable real estate tax deductions.  Mr. Bennett’s IRA will continue to make these mortgage payments for a minimum of 18 years, with a potential of up to 27 years depending upon the interest he receives in his SAFE HARBOR® IRA account.  

Summary: The IRA real estate plan enabled Mr. & Mrs. Bennett to purchase their new home without the necessity of selling their existing home first, thereby facilitating a seamless transition to their new home in a different State. By structuring Mr. Bennett’s IRA to support the purchase of his new home, Mr. Bennett was able to benefit from tax free capital gains on the sale of the old home without having to reinvest it back into real estate.  The Bennett’s IRA real estate plan has been structured over a 14 year period to be in compliance with Federal IRA regulations.  During this time, they are free to turn their property, but it will be to their advantage to continue to apply the income stream generated by Mr. Bennett’s IRA to a real estate purchase.  After the 14 year term, Mr. Bennett may choose to redirect his IRA investment, or he can continue to apply it to real estate until either the IRA is fully utilized or the real estate is paid in full.  Additionally there are Estate Planning benefits to this IRA real estate plan that are not covered in this brief synopsis.

Case outline: Mrs. Dawson is 57 years old, she and her husband are recently retired. Prior to contacting Uranga & Associates Mrs. Dawson and her husband had been researching the possibility of purchasing a new primary residence to retire to in another state. After completing the Compatibility Form and consulting with Mr. Uranga, Mrs. Dawson, placed approximately $500,000 of her 401k rollover in a SAFE HARBOR® IRA account. This established the structural foundation for her IRA/real estate plan. This SAFE HARBOR® IRA account, guaranteed to earn a minimum of 2% with a potential of 5% or higher as a ten-year average, insures against loss of principal value due to investment exposure during the life time of the contract. Uranga & Associates then structured Mrs. Dawson’s SAFE HARBOR® IRA account to provide an income stream to be used to pay interest and principal on the traditional 30-year mortgage obtained to purchase the new primary residence. Any tax liability generated by this income stream has been calculated to be offset by allowable tax deductions on the real estate. Mrs. Dawson and her husband plan to relocate to their new primary residence and rent their old home until the housing market stabilizes and market conditions are more favorable to sell. At that time, they will be able to keep any capital gain up to $500,000 tax free on their old home and invest that gain in such a way as to supplement their retirement income. Mrs. Dawson’s IRA will continue to support the mortgage payments on their new home for a minimum of 18 years, with a potential of 27 years or more depending upon the interest she earns in her SAFE HARBOR® IRA account.  

Summary: The IRA/real estate plan enabled Mr. & Mrs. Dawson to purchase their retirement home immediately, allowing them to relocate to the community they want to live in without having to wait, possibly years, for their current primary residence to sell. By structuring Mrs. Dawson’s rollover 401k to support the purchase of the new home the Dawson’s essentially flipped the more conventional roll of their retirement monies and real estate equity. The equity they have accumulated in their current home, which they had always intended to use to purchase their retirement home, is inaccessible until the home sells. Mrs. Dawson’s retirement fund however, when structured by the OUTSIDE® method can be accessed immediately. 

By using the retirement monies to purchase their retirement home, the Dawson’s achieved several things. Firstly it enabled them to take advantage of attractive prices in the currently deflated real estate market. Secondly, by structuring retirement fund withdrawals to pay the mortgage on their real estate purchase they offset most, if not all, of the tax liability they would have, at some time otherwise, had to pay when they eventually withdrew from the 401k account. Thirdly, since the Dawson’s are now in the financial position to not having to sell their old home in order to purchase the new home, they can bide their time until the market is more favorable for a profitable sale and in the meantime benefit from rental income. And lastly, and perhaps most importantly, the OUTSIDE® structure allows the Dawson’s to move on with their life.  No matter what your age is, it is painful to feel trapped, unable to move ahead with your plans because of financial commitments that keep you from experiencing the change you are ready to make in your life. The OUTSIDE® method gives the Dawson’s the freedom to live the life they want, in a secure financial framework that makes sense for their future.

Additionally there are estate planning benefits to this IRA real estate plan that are not covered in this brief synopsis.

"Wall Street created the U.S. housing bubble and now it’s missing the real estate rebound."  Begins William Pantalon's editorial for Money Morning/The Money Map Report.  This well written view point of the cause, the effect and the recovery of the recent housing bubble makes for an excellent and educational read.  Full Story

Kiplinger's Personal Finance Adviser reports in the April 2009 edition: "If your job prospects are good and you don't plan to sell for at least five years, now's a good time to snap up a bargain on a home.  For a listing of foreclosed homes the Department of Housing and Urban Development is selling, visit HomeSales.gov. Or consider buying a "real estate owned" property-a house the bank buys back if bidders don't meet the minimum on a foreclosure - to avoid some of the hassles of a foreclosure.  Go to your local multiple-listing service's Web site to search for REOs. If you're not facing a deadline and aren't easily discouraged, you could try to buy in a short sale, in which a home is sold for less than the outstanding mortgage balance with the approval of the lender.  And if you want a new home, builders are offering a host of incentives, including price cuts, low mortgage interest rates and upgrades of cabinetry, flooring and other finishes."

Kiplinger's Personal Finance Adviser for April 2009 reports: "Vacation rentals generally offer better value than resort hotels, so tough times may mean you can squeeze more-not less- money from your second home.  The average rental brings in about $30,000 a year, and high-end homes in popular destinations can rake in $150,000.  Advertise on vacation rental Web sites, such as HomeAway.com, and in local newspapers and around the office (be sure to include high quality photos).  Consider renting out your home during the peak season, when you can collect higher rents, and shifting your own use to less pricey times.  If you rent out your home more than 14 days per year, you must report all the income to Uncle Sam, but you can write off expenses to hold down the tax bill."

Cases featured in this section are actual case histories of IRA/real estate plans structured by Uranga & Associates.  Names have been changed to protect the privacy of our client(s).

Case outline: Mr. Collins is 39 years old, married, owns a primary residence and is an institutional trader.  Believing real estate in Florida to be attractively priced he decided the time was right to purchase the vacation home he and his wife had dreamed of owning one day.  Mr. Collins first heard of the OUTSIDE™ method of investing in real estate from searching the web.  Having always believed an IRA could only invest in traded assets, (stocks, bonds, money market, and mutual fund shares), Mr. Collins was intrigued with the idea of being able to reallocate his IRA to support the purchase of real estate that he, his wife and family could enjoy now,  during their active years, rather than having to wait until retirement before gaining any benefit from their hard earned savings.  After completing the Compatibility form on the Uranga web site Mr. and Mrs. Collins had a telephone meeting with an Uranga consultant to more thoroughly understand how the OUTSIDE™ structure could apply to their scenario and determine if it was suited to their situation.

The Collins’ decided to allocate $100,000 of their IRA to the purchase of their $89,000 vacation home. Using $21,000 of non IRA monies for the down payment the Collins’ obtained a second home mortgage in the amount of $68,000 to finance the balance of the purchase price. To establish the structural foundation of the IRA real estate plan Uranga & Associates assisted Mr. Collins in transferring his allocated IRA monies to a SAFE HARBOR® IRA account.   This SAFE HARBOR® IRA account, with a potential to earn 5% or greater as a ten-year average, also insures against loss of principal value due to investment exposure during the life time of the plan.  Uranga & Associates then structured Mr. Collins’ SAFE HARBOR® IRA account to provide a reliable monthly income stream to be used to make the mortgage payments.  Any tax liability generated by withdrawals from the IRA was calculated to be offset by allowable real estate tax deductions, resulting in a zero tax outcome. 

Summary: The implementation of the OUTSIDE™ structure of IRA real estate has enabled the Collins’ to purchase a vacation home for their personal use within a secure financial framework.  Believing to have bought their real estate in depressed market conditions the Collins’ anticipate to eventually benefit from an attractive rate of appreciation while at the same time earning interest on the principal value of their IRA, a financial strategy they believe will help support their eventual retirement.  Additionally, the enjoyment they expect to experience from the use of their vacation home over the next many years is priceless.

An email we received from our client, Randy M. from Utah last week reflects the sentiments of many right now.

He wrote:“I have been reluctant (scared) to move forward since last Wednesday when I got my February IRA statement in the mail.  It showed that my IRA balance had dropped to $309,000 and that every day last week the market continued to drop.  This certainly would have been easier a year ago when my IRA balance was close to $450,000.  Do you have any advice?  I keep thinking that this market is going to turn around, and that I will recover some of these losses, but it only seems to be getting worse.”

Surely we must be close to the bottom – is the view of many investors and understandable they are reluctant to sell their stock portfolio at the bottom.  The investment manager for Yale’s endowment was quoted on NPR just the other day as saying “buying at the top and selling at the bottom is a tough way to make money”.  There is a huge media drive at the moment, in large part politically driven, to persuade investors to not only NOT sell equities into the falling stock market, but to buy – claiming now to be a terrific time to get in at a bargain price.  The incentive behind this media push is most likely an effort to try to stop the free fall and restore some confidence in Wall Street to the American public.  But wait a minute…..where are the housing lobbyists?  If it’s such a great time to buy into the stock market, would now not also be a good time to buy real estate?  After all history demonstrates that stocks and real estate tend to rise and fall together.

Now, back to the email received from our client.  The question I have for him is this.  What was the value of the real estate a year ago that you would like to buy today?  Has that real estate depreciated over the past twelve months, just as your IRA value has?

This particular gentleman has his eye on a home currently priced at $250,000.  A year ago its market value would have been at least $330,000.  He could buy it today for $80,000 less than he would have paid for it a year ago.  So this is where there has to be some soul searching.  Why does this client want the real estate?  Will it be a home for him and his family, or will it generate rental income for additional cash flow?  If he were able to remove the fear and regret of realizing stock market losses and look at the situation objectively he would have to admit that today is just as good a time to commit his IRA assets to supporting the purchase of real estate as it would have been one year ago, if not perhaps better.  Why better today than a year ago?  Because he can buy the real estate for substantially less and because of this he stands to benefit from a higher likelihood of future appreciation in the home’s value and he benefits from mortgage interest rates at an historic low.

OK, that all sounds good, so instead of waiting it out in the stock market, hoping the value of his IRA will recover at some point in the future, (read our Feb 6^th post “How Many Years to Recover Your Diminished IRA Value?), he transfers his investment into real estate with the expectation that he will eventually recover his stock market losses with the appreciation gained from the real estate while at the same time benefiting from the intrinsic value of occupancy or from rental income – case closed.

Not entirely case closed!  Those of you who have benefited from a consultation with Mr. Uranga will understand the OUTSIDE® method does not utilize the cash value of the IRA all at once for the real estate purchase.  Instead, the IRA monies are placed in SAFE HARBOR® while they are supporting the purchase of the real estate over a period of time.  So picture if you will, you now own two assets, the real estate and the IRA, independent from one another but at the same time mutually supporting.

Since the real estate is purchased with borrowed money, (a mortgage), supported by the SAFE HARBOR® IRA the potential return on investment is far greater than where the investment is purchased with 100% cash as is usually the case with equities.  Not only can you benefit from the advantage of cash-on-cash returns, from the real estate but at the same time you are earning interest in your SAFE HARBOR® IRA account.  For those of you who are reticent to realize your stock market losses take heart in understanding that one of the SAFE HARBOR® custodian choices offers several account strategies which allow you to earn interest credits that are linked to the performance of several different indexes allowing you to benefit from positive market performance while the principal balance of your IRA is protected from potential market losses.  So, if you really want that real estate but at the same time are bullish on the market and having a hard time deciding which way to go, the OUTSIDE® program offers you the best of both worlds.  Your IRA can have the opportunity for upside potential linked to a specific index or combination of indexes with built-in downside protection while at the same time you can benefit from owing real estate to either enjoy as a home or to generate income as well as have the potential for capital appreciation over the time you own it.