Real Estate IRA
What is a Self-Directed Real Estate IRA?
Many people hear the term "Self-Directed" IRA and think that it is a special type of IRA. However, in reality, the IRS does not recognize a "Self-Directed" IRA as a type of IRA. Any IRA, whether it be a Traditional, Roth, SEP, or SIMPLE IRA can be "Self-Directed". We use the term "Self-Directed"
How does it work?
The IRS requires an authorized IRA provider for all IRAs, This custodian, or administrator will act on your behalf to aquire the property(s). You, the IRA holder, will select the property, negotiate the terms, and direct the custodian to send money from your IRA to close the deal. The custodian will be be responsible that the paperwork substantiates that the asset is part of your IRA and, thus, deserves the tax benefits associated with the account type. The custodian will guide you through the IRA investment process and ensure that your transactions are accurate. I recommend Advanta IRA as an IRA Custodian/Administrator.
Real Estate IRAs
Real estate prices in Berks, Chester county and Southeastern PA are at historic lows and now is a good time to consider adding this type of alternative investment to your retirement portfolio. Over time, the returns you gain are worth the wait, and your retirement account will benefit from both the potential appreciation of the investment property and the income-earning potential it can offer. Your investment is secured by Real Estate and provides a method of diversifying your retirement portfolio that can be safer than traditional investments, such as stocks or mutual funds. 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 choose. The point is, with a self-directed real estate IRA, the choice is yours to make.
Retirement account rollovers
Rollovers may be able to be made from one or more of the accounts listed below. Check with your tax advisor to make you sure you comply with IRS regulations.
Real Estate in an IRA
The IRS allows any IRA, Individual 401(k), HSA, or ESA to acquire real estate as an asset without penalty and while keeping the tax benefits associated with that account type.
An IRA can purchase any type of real estate, including residential, commercial, vacant land, agricultural, and more. The IRA can buy the property outright, meaning the IRA is the title holder. If the IRA does not have the full purchase price, the IRA can partner with a person, company/entity or another IRA, or it can secure a non-recourse loan to buy real estate. Real estate in an IRA provides the opportunity to generate potential income from rent, appreciation, fixing and flipping and more.
What Are The Benefits Of Having Real Estate In An IRA?
- Investment properties can potentially yield a cash stream as well as market appreciation
- You have control over the properties that your retirement account owns
- You can apply your knowledge and expertise pertaining to the real estate market
- You can buy, sell and exchange properties without tax consequence
Real Estate IRA – Important Things To Know
- An IRA is its own financial and legal entity, and it is separate from your personal finances
- As a separate legal entity, your IRA has its own name: XYZ Custodian trust FBO Client’s Name IRA # 1234567
- The IRA is the owner of the real estate, not the IRA holder. Therefore, purchase and maintenance costs are paid by the IRA and all income (e.g. rent) goes back to the IRA
- All legal documents related to an IRA-owned asset must be in the name of the IRA, not your personal name
- For the documents associated with your IRA’s real estate acquisition to be complete and legal, they need to be signed by the custodian (as the administrator for that account)
IRS Prohibited Actions for Real Estate in an IRA
- Neither the IRA holder nor any disqualified person to the IRA may live in or use the property
- You cannot work on the property yourself, for free or for pay. Any remodeling, repair, improvement, and even maintenance must be performed by a paid third party company at market rate
- Your IRA cannot purchase a property from you or any disqualified person. Similarly, you (or a disqualified person) cannot sell the IRA’s property to yourself. This constitutes self-dealing, which is not permitted
- Neither you nor a disqualified person can guarantee a loan for an IRA property. This constitutes self-dealing, which is not permitted
- If you are a real estate agent and involved in the transaction, you CANNOT take a commission
3 Easy Steps to Purchase Real Estate in an IRA
- Open and Fund your IRA – Fill out the forms as may be required by your Custodian. Then you will fund the account with a rollover, transfer, and/or contribution. This may take several weeks; so, plan for that in your timetable.
- Find a property and make an offer – The offer needs to be made in the name of the IRA (as it is the buyer) and earnest money needs to come from the IRA or a non-disqualified person. Do not use your personal funds to pay the earnest money
- Work with your Custodian to assemble the paperwork for the purchase
Leveraging Real Estate in an IRA
- An IRA may acquire a loan to purchase property but it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for remuneration is the property itself). Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender.
- When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property’s profits may be subject to UBIT. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profits derived from the debt financed percentage may subject to UBIT. UBIT is paid by the O and does not affect the IRA holder’s personal taxes. Consult your tax advisor for additional details on these taxable events
Property Management of Real Estate in an IRA
- After your IRA has successfully purchased real estate, the IRA holder makes the management decisions. That may include the hiring of a property manager (or other non-disqualified person or entity) to handle the day-to-day cash flow and operations, or you may choose to work directly with your Custodian to have vendors and other bills paid. You are allowed to make decisions for your IRA-held asset, but there are limitations that the IRS imposes.
- Income generated by the IRA-owned real estate must go back into the IRA. Rent checks are made out to the IRA (or the management company if there is one), not the IRA holder.
- You cannot pay for any property related expenses with your personal funds on behalf of the IRA. All expenses are paid from the IRA.
- As the IRA holder, you have the ability to choose tenants, plumbers, repairmen, etc. for your IRA-owned property.
- Maintenance and Improvements cannot be performed by the IRA holder or any disqualified person
DISCLAIMER: Mark Shanaman and RE/MAX of READING do not offer investment, tax, financial, or legal advice nor do we endorse any products, investments, or companies that offer such advice and/or investments. All parties are strongly encouraged to perform their own due diligence and consult with the appropriate professional(s) licensed in that area before entering into any type of investment.
*All investments involve risk. There are no guarantees that alternative asset investments will increase returns and minimize losses. Like traditional investments, there are inherent risks of investing in alternative assets and many hold the opportunity to lose most or all money invested.