By: Joseph E. Seagle, Esq. President of PCS Title

November 21, 2021

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1160 words…5 mins. 48 secs.

1 Big Thing: Build Back Better passes House and will affect IRA’s used in (big) real estate investing

In September, the Internet was teeming with urgent warnings to call Congressmen to object to portions of the Build Back Better Plan that would allegedly harm small-time Individual Retirement Accounts that many real estate investors use to buy real estate investment properties, provide private mortgage loans to other real estate investors, and to invest in start-ups through private placement offerings to such accredited investors. 

Self-Directed IRA custodian companies focused warnings on Sections 138312 and 138314 of the Bill that were being discussed in hearings before the Ways & Means Committee. 

  • The sections were part of the “pay for’s” expected to be used to pay for the universal pre-K, climate change, and family leave provisions of the bill. 
  • If passed, they would have done away with self-directed IRA’s wrapped inside of LLC’s (checkbook-control IRA’s). The revisions would have also required that IRA’s worth over a certain amount ($5 million? $10 million?) to immediately disburse half of their value to their owners as taxable income to raise money for the Treasury. Further, the bill would have prohibited investments in any investment that required any type of accreditation of the investor. This would have chilled the crowd-funding of startups and other high-risk investments by IRA’s and 401K’s. Further, the statute of limitations to go after such IRA violations would expand to give the IRS more time to go after them.
  • In my opinion at the time, I doubted that many of these provisions would make it into the final bill. The provisions appeared to be a response to the “Peter Thiel $5 billion IRA” story that ProPublica exposed  this past summer. Congress wanted to prevent such abuses in the future and use it to raise money at the same time to pay for new social programs. Doing away with self-directed IRA’s completely, what they can invest in, or how they’re simply structured inside of LLC’s raised no tax revenue, so why bother? 

Where we landed: The House, this past week, passed its version of the Build Back Better bill

What didn’t make it into the bill: 

  • Self-Directed IRA limited liability companies are safe as is the ability to continue investing in “riskier” investments that may permit only accredited investors. 

What didn’t make it into the bill:

  • The “Peter Thiel” provisions (sections 138301 and 138302) limit the amount of contributions that high-net worth individuals. No contributions to accounts that are already worth at least $10 million if the taxpayer makes over $400K per year. If the account is worth over $10 million, and the account owner makes over $400K per year, then they must take a taxable distribution to get the account valuation down. But these provisions don’t take effect until the 2029 tax year. 
  • The “roll-over” loophole will close. This loophole allows high-net worth individuals who aren’t allowed to make ROTH IRA contributions to make a regular IRA contribution and then convert it to a ROTH after the fact. The loophole will be eliminated for all income levels by prohibiting conversions of any traditional IRA to a ROTH IRA for any contributions or roll-overs made after December 31, 2021; and ROTH’s are eliminated completely for taxpayers making over $400K per year starting in 2032. 
  • The statute of limitations for the IRS to pursue violations of IRA limitations and rules is extended from three years to six years. 
  • Finally, again in response to the Peter Thiel issue, the bill reiterates and clarifies that the IRA owner is a “disqualified person” under “prohibited transaction” rules. Thiel had used his IRA to hold founder stock in Paypal, a company he founded, which is typically a prohibited transaction with a disqualified person. So this just clarifies that founders can’t do this. 

Bottom line: The calls to Congress worked. As expected, the provisions that survived to the final bill aren’t as bad as others had predicted. Investors will still be able to wrap their self-directed IRA’s inside of LLC’s and use those to lend money to real estate developers, or even use the funds directly to buy and hold real estate or other investments, keeping this source of funding flowing for real estate development, construction, renovations, and financing. Jumbo retirement accounts will be slimmed down to smaller sizes which may affect how those are used for large real estate projects, but the bill is now with the Senate where it may change even more. However, the chances that more restrictions are added to the bill at this point are very slim.

2: Homeownership perks in Build Back Better

The Build Back Better bill passed by Congress, has a lot of provisions to encourage homeownership.

State of Play: At its heart, the bill has been sold as a “soft infrastructure” bill that would help lower and middle income citizens to climb the financial ladder. Part of that is encouraging home ownership for those whose families may have not been able to enjoy that part of the American Dream yet. 

  • First-generation homebuyers will have access to $10 billion via HUD over the next 10 years to cover 10% of the purchase price or $20,000.00, whichever is greater, in financial assistance for down payment assistance, closing costs, and costs to reduce the interest rate.
  • Another $5 billion is included for 20-year mortgages for first-generation homebuyers.
  • $100 million for a HUD-insured small dollar mortgage demonstration pilot program to make small mortgages to homebuyers purchasing affordable homes under $100,000.00.
  • Another $100 million through the Department of Agriculture to assist low-income homeowners in rural areas with repairs, upgrades, and preservation.

The take-away: The “soft-infrastructure” of homeownership is a cornerstone of society. When citizens own a parcel of the country, no matter how small or large that parcel may be, it contributes to the stability of neighborhoods and families, towns, counties, states, and the country as a whole.  

A Word from TRSTE – Sponsor’s Message

Florida tax collectors mailed out the 2021 real property tax bills this month.

If your property is held in trust with a third-party land trustee, like TRSTE, to maintain anonymity and asset protection, be sure to pull the tax bill or call your trustee’s office for a copy of the bill.

Bills paid before the end of November receive a four percent discount, so the earlier you pay, the more you save!


3: Other news we’re watching this week

  • FinCEN renews the Geographic Targeting Order through April, 2022:  Title insurance companies are required to identify the humans behind shell companies when those companies use all cash to purchase properties for $300,000 or more in certain geographic areas. Plans are in the works to develop a nationwide beneficial ownership database where companies would self-report the identity of their owners. 
  • Home prices are overvalued in 70% of metros: Fitch estimated prices at the national level are overvaluing homes by 10.5% in the third quarter, which included 70% of metropolitan areas. Further, the report showed 40% of markets overshot their value by 10% or more, compared to a 4% pre-pandemic share.” – National Mortgage News

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PCS Posts is a blog from PCS Title President, Joe Seagle. Each edition, Joe presents details from the top of the news feed that affect our industry. This info ranges from real estate closing form changes to updated laws to trending topics. Joe breaks each idea down into manageable pieces and highlights the facts you won’t want to miss. Please subscribe to our email list for the latest blog.

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