Using an IRA to invest in real estate provides the opportunity to generate income from rent, appreciation, fixing and flipping, and more. Your self-directed IRA can purchase any type of property such as residential and commercial real estate, raw land, agricultural property, and more. Your self-directed IRA can buy the property outright; meaning the IRA is the title holder. If your IRA does not have the funds to finance the full purchase price, your IRA can partner with another person, company/entity, or another IRA account. Your IRA can also secure a non-recourse loan (see below) to buy property.
Since the inception of IRAs, it has been possible to invest in real estate as an asset. What has not always been easy is finding an IRA provider willing to service self-directed IRA real estate investing.
The IRS requires an authorized IRA provider for all IRAs. Although few IRA providers handle real estate investments, New Direction IRA specializes in administrative services for all your self-directed IRA real estate IRA investments. You, the IRA holder, select the property, negotiate the terms, and direct us to send funds from your IRA to close the deal. We make sure the paperwork substantiates that the asset is purchased with your IRA, and therefore deserves the tax benefits associated with the account type.
Our knowledgeable staff will guide you through the self-directed IRA real estate investment process, and ensure that your transactions are prompt and accurate. We offer ongoing free education on self-directed IRA real estate investing and regulations.
Benefits of Self-Directed Real Estate IRAs
- Real estate in an IRA is a tangible asset.
- IRA real estate is an asset that you have experience with and understand.
- Investment properties can potentially yield a cash stream as well as market appreciation.
- You have strategic control over the properties that your retirement account owns.
- You can apply your knowledge and expertise of the real estate market.
- You can buy, sell, and exchange properties without tax consequences.
Important Things To Know
- A self-directed real estate IRA is its own financial and legal entity, and it is separate from your personal finances.
- As a separate legal entity, your IRA has it's own name:
- New Direction IRA, Inc. FBO (client name) IRA
- The IRA is the owner of the real estate, not the IRA holder. Therefore, purchasing 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 real estate acquisition to be complete and legal, they need to be signed by New Direction IRA (as the administrator for that account).
IRS Prohibited Transactions
- Neither the IRA holder nor any disqualified person to the real estate IRA may live in or use the property.
- You cannot work on the property yourself, for free or for pay. "Sweat equity" is not allowed. 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 other disqualified person. Similarly, you (or any other disqualified person) cannot sell the IRA real estate to yourself. This scenario constitutes self-dealing, which is not permitted.
- Neither you nor a disqualified person can guarantee a loan for an IRA property. This scenario constitutes self-dealing, which is not permitted.
- If you are a real estate agent and involved in the transaction, you cannot take a commission.
Leveraging Real Estate in an IRA
A self-directed IRA real estate 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 renumeration 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 net profits may be subject to UBIT. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the net profits derived from the debt financed percentage may be subject to UBIT. UBIT is paid by the real estate IRA and does not affect the IRA holder's personal taxes. Learn more.
After you have used your self-directed IRA to purchase 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 New Direction 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 self-directed IRA 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 real estate IRA. All expenses are paid directly from the IRA, free of charge through your myDirection® portal.
- 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 self-directed IRA real estate holder or any disqualified person.
Possible Structures for the Purchase of Real Estate with Your IRA
As mentioned above, there are several ways to purchase real estate with your IRA:
- Hold title to real estate - a real estate contract is written between the IRA (New Direction IRA, Inc FBO (client name) IRA) and the seller. Funds from the self-directed IRA are sent to closing for the purchase, and the IRA takes title to the property directly.
- Tenants-in-common with a partner entity - this is one of the ways that an IRA can participate in a real estate asset without necessarily having the entire purchase price. The partner can be a person (even a disqualified person), an IRA, a company, or other entity.
- Private equity in an entity (like an LLC, LP, C-Corp., etc.) that invests in real estate - in this case, private equity in your IRA takes the form of shares of a private company. However, the financial return of the investment is based on the performance of the real estate as well as the terms of the agreement with the company.
- Loan money to a borrower who uses real estate as collateral - you can think of your IRA as a mortgage lender. Your IRA can lend money to non-disqualified persons and secure the note with real estate holdings and/or other assets. You and the borrower decide on the term, the collateral, and the rate.