Self-Directing Your IRA Funds into Real Estate Investments

As we all know, an IRA fund is a great way to invest in your future by deferring taxes and building equity for retirement. The fluctuating state of the stock market has many people feeling unsafe with their current investments. As a result, more and more people have begun taking advantage of a little known section of the internal revenue code which allows IRA funds to be invested in real estate. While this could provide a more stable investment opportunity, investors still need to research and understand this option to ensure it’s done properly.

Investors can use the funds in a traditional IRA, Roth IRA, and SEP-IRA to purchase most types of real estate, including: land, commercial property, condominiums, and residential properties. The down-payment, taxes and insurance must come from the IRA and all rent and profit from the sale feed back into the IRA. If there are not enough funds available in the IRA account, investors can buy a share of the property with a friend, relative, or business associate.

In many cases, financing is available up to 65% of the property’s LTV (loan to value) when purchased within the IRA, but there are restrictions. The loan must be non-recourse, meaning you cannot personally guarantee the loan in your IRA. Also, the IRA will pay tax on UDFI (Unrelated Debt Financed Income), which is the income and/or capital gains attributable to the leveraged portion. UDFI is taxed at the trust tax rate because an IRA is treated as a trust for this purpose. Be sure to use a lender who is experienced with self-directed IRA financing.

While most types of real estate are included in this type of sale, there are also several restrictions on what property can be purchased. You cannot purchase any property that you, your parents, or your children have owned at any time. You also cannot use property you purchase as your residence, vacation house, or place of business. The property must be treated as a pure investment.

Investing your IRA in real estate can be confusing and can result in penalties and tax issues if not done properly. That’s why it’s important to have the proper guidance from experienced professionals. For example, the self-directed IRA must be held with a qualified custodian. This custodian will buy and sell real estate for you in their name. Most IRA options don’t include real estate, so you must search for a custodian who specializes in real estate and self-directed IRA’s. In addition to your custodian, you must hire a property manager to collect rent and perform all maintenance on your properties.

Adding real estate to you IRA fund can be a great way to counter market fluctuations. When real estate investments are not leveraged, both income and capital gains can flow back to IRA’s tax-deferred (or tax-free if the IRA is a Roth IRA). Keep in mind that some of the tax advantages of owning real estate do not apply to real estate owned within the IRA since the income is already tax-deferred (including depreciation expenses.) This and other tax issues are the reasons you should work with experienced tax advisors and real estate professionals before making the investment.

(The foregoing is a general discussion. It is not intended, and should not be relied upon, as an opinion or advice on any legal, tax or investment aspects of IRAs. An IRA owner considering an IRA investment in real property should consult with his or her own advisor.)

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