| Our Contact Info: |
13951 N. Scottsdale Rd. Suite 222
Scottsdale, Arizona 85254
Phone: (480) 563-9808
Fax: (480) 563-3724 |
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Although a pension plan is permitted
to acquire real estate, there are an alarming number
of issues to consider. Our intent is to make you aware
of the considerations before you purchase real estate
for your pension plan, so you can ask the appropriate
questions, and then make a more educated decision. |
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Are the transactions properly
structured? The pension plan trust must
be the owner of the real estate, with the plan’s
Trust ID# used as the appropriate Tax ID#. All income
and expenses associated with managing the property
must pass directly into and out of the plan trust.
Financing can be obtained, but once again, the plan
trust must be the note holder. However, since a
financial institution is not permitted to stake
a claim against assets of a pension plan, collateral
for the loan will likely need to be provided from
a source outside of the plan. |
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Is there a Prohibited Transaction
(or “self-dealing”)? Transactions
between a pension plan and any of: you, your business,
or most of your family members, business partners
and financial advisors, are prohibited. Similarly,
these people can’t make use of your plan-owned
property, either. For example, your parents can’t
live in a house owned by your pension plan, even
if they pay reasonable rent. Further, since property
cannot be “contributed” to a pension
plan, once you personally own the real estate, it’s
very difficult to get it into the plan. |
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What happens when the plan
terminates? You’ll probably roll
your pension account over to an IRA once you terminate
your plan. However, due to complicated requirements,
you won’t likely find a financial institution
willing to be the trustee for an IRA that holds
real estate. While it may be possible to simply
keep the pension plan intact (a Defined Benefit
plan, however, would have to be rolled into a different
kind of pension plan to do this), the IRS discourages
the existence of a pension plan solely for this
purpose. Further, since a business, as opposed to
an individual, must sponsor a pension plan, you’ll
need to sponsor a business for as long as you’re
maintaining your plan. |
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Can an accurate market value
be periodically assessed? At least once
annually, there needs to be an accurate accounting
of all plan assets, to ensure that all participants’
interests can be properly evaluated. All assets
must be reported at market value, which may be difficult
to assess for some properties. Although getting
an independent appraisal every year would satisfy
the government, that could be impractical and costly.
However, if the IRS successfully challenges the
accuracy of your reported property values, you could
be subject to penalties and excise taxes. |
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How will gains be taxed?
Funds that will eventually be withdrawn from your
pension plan (or your subsequent IRA) will be taxed
as ordinary income. Thus, although you’ll
likely be in a lower tax bracket when you start
drawing down your pension than you are now, the
capital gains rates will probably be even lower.
Thus, consider the tax implications of purchasing
real estate inside the plan, as opposed to keeping
it outside of the plan. |
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Is there Unrelated Business
Income Tax (UBIT)? Another tax consideration
depends on what you do with the real estate your
plan purchases. For example, if your plan purchases
raw land, then you develop the land and sell houses,
then you’re essentially running a business
through your pension plan. To keep you from gaining
a competitive advantage, solely due to the tax advantages
of running the business through your plan, your
income will be subject to UBIT. |
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Will your plan assets need
to be independently audited every year?
If you have plan participants other than you and
your spouse, you must ensure that you maintain fidelity
bond coverage for at least as much as the combined
value of all of your “non-qualifying assets”,
such as property, limited partnership interests,
mortgages and other notes, etc. If you fail to keep
up your fidelity bond coverage, you lose your “small
plan” exemption from requiring an annual audit
of your plan’s assets. |
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Does your plan discriminate
against employees? If you have the type
of plan in which each participant can direct how
their account will be invested, then, technically,
all investment options available to you must also
be made available to all participants. Again, this
is an impractical situation for owning real estate
in a pension plan. |
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In summary, although investing in real
estate has increased in popularity over the past couple
of years, a wide array of issues must be considered that
don’t typically factor into the decision to purchase
stocks, bonds and mutual funds. Please address these issues
before purchasing real estate for your pension plan.
These guidelines are not intended to provide a detailed
analysis of the laws affecting pension plan investing.
Although we’re available to discuss how the relevant
issues impact your particular situation, if there’s
any uncertainty as to the legality of your situation,
we recommend you contact a pension attorney for a second
opinion. We also recommend that you contact your accountant
for tax advice.
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