The common thinking for many real estate investors so far in 2018 is that that high real estate prices, increasing mortgage rates and low inventory are making home ownership harder for individuals and families which will lead to more well-off Americans becoming renters.
Wall Street seems to have the same thoughts. According to a Wall Street Journal article, the number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year. Stronger home prices coupled with higher mortgage rates and low inventory are making home ownership harder. Well-to-do families who might have bought a single-family home in another time are more willing to rent a house now, especially if it means access to a good school system. All of this has helped self-directed IRA investors who have cash and are looking for attractive real estate opportunities.
A Self-Directed IRA for real estate, also called a real estate IRA with checkbook control, is an IRS approved structure that allows one to use their retirement funds to make real estate and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the Roth IRA custodian) and managed by the IRA holder or any third-party. As manager of the IRA LLC, the IRA owner will have control over the IRA assets to make the investments he or she wants and understands.
The IRS has always permitted one to use retirement assets to purchase real estate rental properties. With a self-directed IRA LLC solution, investors can make real estate purchases and generate tax-deferred rental income or tax-free rental income in the case of a self-directed Roth IRA. One of the major advantage of buying rental properties with a self-directed IRA is that all rental income generated by the property is tax-deferred or tax-free in the case of a Roth IRA, until a distribution is taken. In other words, instead of buying real estate with personal funds and being subject to tax on the income or upon the disposition of the asset, a self-directed IRA real estate LLC with Checkbook Control will allow one to buy real estate, including rental properties without paying tax immediately.