Struggling to Make Payments on Your Property? Think Outside the Box!

Are you making payments on a private note? The rates you may be paying might be outdated and not reflect the current market and economic circumstances. Additionally, your other liabilities may have placed excess burden on your ability to make payments on your property. Is there any way to seek relief? Of course there is, you just have to think outside the box!

A client of mine, let’s call him Joe, is a contractor who bought property in 2004 in Pinal County. He initially made a down payment of approximately 20% of the purchase price and has been paying interest on the note to the Seller at a rate of 8% for the balance of the purchase price. Ideally, Joe wanted to pay off the balance within a year of two so he committed to the high rate of 8%. However, several factors affected his source of income, which placed Joe in a bit of a quandary. His contracting business suffered severe losses in the last few years and all of his cash reserves were used just to keep his business from going under. Moreover, the value of the land dropped significantly since Joe purchased the property in 2004 and borrowing rates are currently at an all-time low. Why should he pay off the property at this antiquated rate? Since he could no longer make payments at the 8% rate, Joe was determined the find a solution that would get him out of the hole.

Although his cash reserves were running low, Joe had substantial money in his 401(k), just sitting in a money market account. With this source of funding, we were able to find a solution. Joe forfeited the property back to the original owner and reacquired the land from the owner in the name of his 401k with a new purchase price that reflected the current market value. Since he funded the property out of his 401k, he was able to pay off the land in full while saving $100,000. Joe solved his problem; he just had to think outside the box.

Using your 401(k) or other retirement plan can be a great option for investing in real estate. After all, your 401(k) is a long term investment and what is more long term than real estate? You can invest in just about any type of real estate and the income and appreciation will build up tax-free until you start to take withdrawals.

There are a few disadvantages to using a retirement plan to purchase your property. There may be a substantial amount of paperwork required to fund the purchase of your property through your retirement account, depending upon the type of retirement plan that you have. For example, you may need to find an independent custodian who offers real estate as an investment option. If your property is mortgaged, then you may be required to file Form 990-T with the IRS in order to allocate the income earned from the debt-financed portion of the property. The income from the debt-financed portion of the property, not sheltered by the retirement plan, would then be subject to ordinary income tax rates. In most cases, all-cash transactions are the easiest.

Using your 401(k) to invest in real estate is a creative way to utilize your retirement investment options. In Joe’s case, it was the perfect solution to get him out of a bind and saved him an enormous amount of money. If you are considering your retirement plan as a funding source for acquisition, a wrong step could result in a tax nightmare, so be sure to consult with a tax professional.