I hadn’t heard of the term “land banking” before just recently, though I have been familiar with the concept. Couples of years ago I got into the personal investment business serving as a financial advisor, because that is what my father did and he mentored me into the vocation.
For most of the part, I helped people shift their capital out of high risk investments such as mutual funds and into lower risk vehicles that could have some guarantees, such as variable or index annuities. What we tried to help our clients do with their investments was to raise their return, lower their risk, reduce taxes, or perform all three if possible. I had one near-client who asked for how to “invest your IRA into real estate”, and as he didn’t use the term, he was referring to ‘land banking’.
It was the time I did some exploration into the financial concept and realized that while not well-known, the IRS has accepted for what are known as Self-directed IRAs. The vast majority of people who have Individual Retirement Accounts (IRAs) make use of their IRA “wrapper” (or IRA bucket as we called it) to hold certificate of deposits or simple saving accounts or mutual funds. However, with a self-directed IRA, you can put your real estate investments into your IRA.
Why would anybody want to do this? What probable benefit could come from placing land in an IRA? Well, think of what an IRA does tax-wise. It defers taxes till your retirement. It means, anytime you normally have taxable income throughout a year, with an IRA you do not pay tax on that earnings for that year, or any year till your retirement.
So think of when you sell your property (that is not your personal residence). If you make income on the sell of that property, normally you’d have to pay a capital gain tax for that year. Also think about the investor who is acquiring and selling multiple properties in a year. That’s a huge amount of capital gains tax.
Suppose if you could defer the tax on all that real estate profit? That’s exactly what happens when you prefer an IRA. You get to put the entire benefit back into acquiring another property, selling it, and keep repeating the procedure year after year. It is a way to grow your capital, earning a potentially fair return. In this way you perform “land banking”.
While you perform landbanking, you successfully be your own bank. But in such case, you have the potential to make a much higher return than what you’d get at a regular bank. As for those who want to build their retirement nest egg with the help of land or other real property (which is not a bad idea given the outlook for stocks and mutual funds), the plan of “invest your 401k into real estate” known as land banking can become a fine way to go, especially given the tax benefits.
Ace Capital Group offers their services which are geared towards using landbanking as a secure and safe alternative for building wealth. Their aim is to educate people about the benefits of Land Banking and how they can improve their retirement perspectives by using their 401(k), IRA and other retirement funds to purchase select California real estate.