— Have you ever discovered an incredible real estate opportunity you wanted to buy but you didn’t have the necessary funds available to strike at the time?
Learn how you can use a little-known strategy on how to buy Hawaii real estate using a “60-Day rollover”. Before we discuss the pros and cons and how to use this handy tool, let’s first touch on a couple other better-known ways to access cash:
1) Home Equity Line Of Credit (HELOC)
If you own a home with enough accumulated equity, you might want to consider setting up a HELOC. It is like a checking account that allows you to tap into the equity of your home. You can write a check and borrow up to 80% of your equity in your home. Many US banks and credit unions charge little or nothing to set up a HELOC. I have seen recent HELOC rates in Hawaii as low as 0.5% for one year, 2.5% for three years, and 3.5% for five years. After the initial term, the rate will typically adjust to a preset premium above the going prime rate.
Remember this is short-term financing. You should only use a HELOC if you have sufficient resources or income to pay back the money in the near future. I personally have used my HELOC against my primary home as a way to temporarily finance another real estate purchase. Most of the time my HELOC serves as an emergency fund reserve. I no longer need a separate designated cash reserve account.
You may still deduct the interest of your ‘Home Equity Line Of Credit’ (HELOC) that you paid during the tax year, as long as you use your HELOC to buy or improve investment property.
Check related article: Real Estate Tax Benefits Guide.
— Perhaps you don’t own a home with built-in equity. Instead, you are just getting started as a first-time home buyer and you lack the necessary cash downpayment:
2) Penalty-Free Retirement Account Withdrawals – For First-Time Home Buyers
For first-time home buyers, the biggest hurdle to buy a home is often the lack of cash funds for a down payment. The IRS allows you to withdraw $10,000, or $20,000 for couples, from your retirement account penalty-free for the purchase of your first home. IRA and SEP IRA withdrawal amounts are still taxable. ROTH IRA withdrawals are tax-free, but only if you opened your ROTH IRA more than five years ago. Other restrictions apply.
By the way, 401(k) withdrawals are taxable and do not enjoy the 10% penalty exemption.
3) Take Out A Loan Against Your 401(k)
You could borrow against your 401(k), or similar employer-sponsored retirement plan, up to half the account value but no more than $50K max. That would be a loan with interest that you will need to pay back. However, you cannot take out a loan against your IRA.
– Note: Before cashing in or borrowing against your retirement account, carefully evaluate all pros and cons with your favorite qualified professional retirement adviser.
— Perhaps you have a sizable retirement account and you need a large amount of cash, but only for a short 60-day time period. Instead of taking out a loan against your nest egg, consider using a ‘60-day rollover’ as a tool to bridge the gap:
4) The 60-day Rollover
This is a little-known strategy to quickly access a lot of cash from your tax-advantaged retirement account, as long as you have the ability or resources to pay it back within a short 60 days.
The 60-day rollover rule allows you to take a distribution of all or a portion of your funds from your IRA, Roth IRA, 401K, or similar employer-sponsored retirement plan. You will owe no interest or penalties if the funds are redeposited into a qualified retirement account within 60 days!
The rule is commonly known as an ‘indirect rollover’ and is typically used when you receive your 401(k) retirement funds in form of a check from your employer when you change jobs, so that you may redeposit it within 60 days in a new retirement account of your choice. That new retirement account could be a rollover IRA, your new employer’s 401(k), or a similar retirement plan. Interestingly it could be the same account where the money came from!
It is treated as a rollover without owing taxes or penalties as long you redeposit the funds within 60 days!
Example: Imagine you have $1.5Mill in one of your retirement accounts and you happen to need $1.5Mill quickly to close on a modern Honolulu luxury condo. You may take the entire $1.5Mill distribution from your retirement account and use it to buy the property, without paying interest or penalties as long as you have the ability and resources to replace the $1.5Mill in the account within 60 days of taking the distribution.
The 60-day rollover could become handy in particular when buying an investment property via a reverse 1031 tax-deferred exchange, where you buy before you sell. That is if a.) you need the cash to close on your purchase quickly, and b.) you know with 100% certainty that you will have the funds from the soon to be relinquished property to redeposit within 60 days.
You must redeposit the funds within 60 days. There is no extension, except under special circumstances beyond your control, otherwise, the IRS will treat the disbursement as a withdrawal. If the funds were tax-deferred (like most 401(k)s and traditional IRAs), then the entire amount will be treated as taxable income. The funds might be subject to an additional 10% early withdrawal penalty if you are under 59 1/2 years old.
— There is one more important restriction:
You may complete only one 60-day Rollover during any 12-months period!
That also means you may use only one of your retirement accounts during any 12-months period!
Example: Let’s say you need $1.5Mill cash quickly and you want to use $1Mill from your 401(k) and another $500K from your SEP IRA. Danger! The second distribution will be considered a withdrawal and subject to taxes and penalty because it violates the ‘one per 12-months’ restriction. Be aware, the IRS will not accept your plea for forgiveness. You will not be able to undo the 2nd withdrawal. Check the official IRS page for additional rollover information.
A 60-day rollover is a great tool if you need cash quickly for a real estate purchase, or any emergency need, as long as you know with 100% certainty that you will be able to redeposit the funds within 60 days. You may use all of the funds out of one of your retirement accounts but only once during any 12-months period.
Disclaimer: I’m a real estate investor and a licensed real estate broker. I completed many 1031 exchanges as well as assisted countless real estate investors with growing their respective real estate portfolios. I’m not a professional tax adviser. For tax matters always check with your favorite qualified tax professional.
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