I did not have any idea of the term “land banking” before just recently, although I have some familiarity with the concept. Couples of years back I got into the personal investment business as a financial advisor, because that is what my father did and he mentored me into the profession.
For most of the part, I helped people shift their capital out of high risk investments like mutual funds and into lower risk vehicles that had some guarantees, like variable or index annuities. What we tried to help our clients do with their investments was to raise their return, lessen their risk, decrease taxes, or perform all three if it is possible. I did have one near-client who asked about how to “invest your IRA into real estate”, and while he didn’t use the term, he was actually referring to ‘landbanking‘.
It was the time I did some research into the financial concept and understood that while not well known, the IRS has accepted for what are termed as Self-directed IRAs. The majority of people who have Individual Retirement Accounts (IRAs) use their IRA “wrapper” (or IRA bucket as we called it) to hold simple saving accounts or mutual funds or certificate of deposits. Still,Yet, with a self-directed IRA, you can place your real estate investments into your IRA.
Thus why would anyone want to do this? What possible advantage could come from putting land in an IRA? Fine, think for what an IRA does tax-wise. It helps to defer taxes till your retirement. It means, anytime you generally have taxable earnings during a year, with an IRA you do not pay tax on that earnings for that year, or any year till your retirement.
Therefore, think for when you sell property (that is not your personal residence). Suppose you make money on the sell of that property, generally you’d have to pay a capital gain tax for that year. Think of the investor who is purchasing and selling multiple properties in a year. That means a lot of capital gains tax.
What if you could defer the tax on all your real estate benefit? That means precisely what happens when you prefer an IRA. You get to put the total profit back into purchasing another property, selling it, and repeating the procedure each year. It’s a way to grow up your capital, income a potentially nice return. In this way you perform “land banking”.
The time when you perform land banking, you effectively become your own bank. But in this case, you have the capacity to make a much higher return than what you would get at a regular bank. As for those who want to build their retirement nest egg with land or other real property (which is not a bad idea given the outlook for stocks and mutual funds), the policy of “invest your 401k into real estate” known as land banking can prove to be a fine way to go, particularly given the tax advantages.
Ace Capital Group is a real estate company which purchases and sells carefully selected California pre-developed real estate. The buyers of their properties build wealth through the proven long-term appreciation strategy of landbanking.