Setting up your Self-directed IRA is easy, and we can show you how. For more information on purchasing Real Estate in your IRA, or for help on setting up a Self-directed IRA, please contact us at (772) 932-1444.
Please read below for a quick introduction on buying real estate with your self-directed IRA.
Buying Real Estate in your Self-directed IRA
Interested in an investment option other than the traditional stocks, bonds, and mutual funds? Using your Self-Directed IRA, or a previous employer's qualified retirement plan, you can buy various kinds of real estate. Your investment is secured by a piece of property and provides a method of diversifying your retirement portfolio that can be safer than the traditional investment vehicles mentioned. However, this direction requires perseverance. For those with drive and determination, buying property with your IRA can be a worthwhile investment. Over time, the returns you gain are worth the wait, and your retirement account will benefit from both the appreciation of the investment property and the income-earning potential it offers. You might choose to purchase a property, renovate and flip it for a quick return or hold the property for several years in your account to make a profit through rental income. There are many types of real estate options you can add to your plan.
Rules for Holding Real Estate in Your Self-Directed IRA
Your IRA owns the property, not you. All documents, legal or otherwise (including the offer, contract and title), must be written to reflect the IRA’s ownership of the real estate asset.
Your IRA may partner with another IRA, person or entity to purchase real estate. Provided the partner is not a disqualified person, pooling funds to invest in real estate this way eliminates the need for acquiring other loans, increases purchasing power and lowers the risk factors that are present with any investment.
Your IRA may obtain a loan to help purchase real estate. Loans taken for this purpose must be non-recourse, meaning you (the IRA owner) are not allowed to personally guarantee the loan, thus, your IRA is not eligible for traditional mortgage loan financing. When leveraging a mortgage this way, your IRA may become subject to Unrelated Business Income Tax (UBIT). Discussing this with an income tax professional is crucial before making this decision.
You may not personally perform any repairs or maintenance of property held within your IRA. Doing so would be considered “sweat equity” and a contribution to your account. Sweat equity cannot be properly measured in value, and the IRS only permits contributions to an IRA to be made in cash. Repairs and maintenance must be paid for at current market rates and must be performed by a third party who is not a disqualified person.
Property management can be handled by the IRA owner. However, you must not perform sweat equity or pay for expenses out of your own pocket. You can decide who performs maintenance duties on your own. Or you can hire a 3rd party property manager to perform these duties for you. Again, all income and expenses flow directly in and out of the IRA funds, not your own.
All income and expenses associated with the real estate investment must flow directly in and out of your IRA. Rent checks and other income must be written to the IRA and deposited directly into the IRA account. Expenses must be paid by the IRA and not by you personally. Income or expenses are not allowed to flow through the IRA owner for any reason. It is crucial that you plan for any expenses in advance, so your IRA is prepared to cover them. If you have partnered on a purchase with other parties, then the IRA must only pay for its percentage of repairs, and must receive only its share of income.
Your IRA is not allowed to purchase the property from you or from another disqualified person. Your IRA is also not allowed to sell the property to you or a disqualified person. Such actions are deemed prohibited transactions and doing so could cause your IRA to suffer heavy penalties or even disqualification.
Investments made by your IRA are to be realized at your retirement and not before. You (or any disqualified person) are not allowed to utilize the real estate investment in any manner. For example, if you have purchased a rental property in a popular vacation area, you may not vacation in that property. Doing so would be deemed as your receiving a current benefit and can cause penalties or disqualification of your IRA.
