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Real Estate IRA Checklist

Real Estate IRA Checklist
4 Minute Read

Using a Self-Directed IRA to buy real estate has become the most popular alternative investment option for many American retirement account holders.  The ability to gain investment diversification, invest in a hard asset, as well as generate tax-deferred income/gains has driven the desire to hold real estate in a Self-Directed IRA. In the following, we’ll provide you with a Real Estate IRA checklist, so that you can better prepare yourself to start investing.

Key Points
  • Investing in real estate with IRA funds has become popular for millions of Americans
  • Real estate is a trusted, hard asset that can generate income for retirement
  • This handy Real Estate IRA checklist can prepare you for making an investment

Before purchasing real estate with a Self-Directed IRA, there are a number of matters to consider.

Do Your Homework

Buying real estate with a Self-Directed IRA typically requires a sizable investment.  Hence, it is crucial to understand the financial aspect of the investment. Spending time researching the property’s value is crucial

In addition, examining the location of the property and the trends within that neighborhood can also prove very useful. Of course, an investor should fully evaluate the financial terms of the transaction and research any potential financial responsibilities involving the investment.

For example, a Self-Directed IRA investor thinking about buying a home for investment purpose should make sure they have enough funds in their IRA to cover the purchase price, as well as any potential improvements. Furthermore, it is wise to give yourself a financial cushion to cover taxes and other basic property expenses in case you have trouble finding a tenant.

Consider the IRS Prohibited Transaction Rules

Internal Revenue Code Sections 408 & 4975 prohibit the Self-Directed IRA owner and any other disqualified persons from either directly or indirectly personally benefiting from an IRA-owned investment.

Essentially, only the IRA itself should solely benefit from the investment it holds. This means you, as the IRA owner, or another disqualified person (such as a spouse, parent or child) should not receive any additional benefits from the investment.

In the case of a Real Estate IRA, this means that you cannot reside in the IRA-owned property, or hire your father to manage the property. These are just two examples that show how a disqualified person could benefit from the investment.

If it is deemed the case, the investment would generally have to be distributed from the plan. Obviously, you would lose all the tax benefits an IRA affords you.

Be Careful of UBTI

In general, if an IRA invests in real estate that involves a nonrecourse loan (leverage) or is deemed a trade or business operated via an LLC or partnership, a percentage of the income associated with the business could be subject to tax. Unrelated Business Taxable Income (UBTI), which can go as high as 37%, may be levied against you, the IRA owner.

For example, if you take out a mortgage to purchase a property, the “debt-financed” portion of the income generated would be subject to UBTI. Say you purchase a property with 50% IRA funds, and 50% is financed. Half of the income generated by the property would be subject to the UBTI tax.

Hence, any Self-Directed IRA investor that will be using leverage, investing in a fund using leverage, or investing in a real estate business (multi-family development project), should consider the tax implications of the UBTI tax.

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    Real Estate IRA Checklist

    Now that you have a good understanding of some of the important factors to consider before electing to buy real estate with a Self-Directed IRA, it is also helpful to have a good understanding of the checklist of documents you will need to close on a real estate investment.  The good news is that your real estate attorney or title insurance agent will help you through the process and make sure your Real Estate IRA is prepared for closing.

    The most important item to remember when using a Self-Directed IRA is how title to the real estate property should be prepared.  In the case of a standard, custodian-controlled Self-Directed IRA, title would be in the name of the IRA custodian for the benefit of the IRA owner. For example: IRA Financial Trust Company FBO John Doe IRA.

    In the case of a Self-Directed IRA LLC, also called a Checkbook Control IRA, title to the real estate would be in the name of the LLC.

    The following is a checklist of the key documents involved in a Real Estate IRA investment:

    • Investment Authorization with funding instructions
    • Purchase Contract or Preliminary Settlement Statement in the name of the Self-Directed IRA or LLC.
    • Investment Authorization with funding instructions
    • Purchase Contract (without deposit)
    • Estimated Closing Statement
    • Preliminary title report
    • Escrow package (if applicable)
    • Loan package (if applicable). Note – the loan must be a nonrecourse loan, a loan not personally guaranteed by the IRA owner or any disqualified persons.
    • Proposed deed

    If the investment is made in the name of the Self-Directed IRA, a copy of the recorded deed should be sent to the custodian.  Whereas, if the Real Estate IRA is using an LLC, a copy of the recorded deed should be kept by the LLC manager.

    The following are the required post-funding documents for a Real Estate IRA:

    • Recorded Grant Deed
    • Title Insurance Policy

    Conclusion

    Buying real estate with a Self-Directed IRA has many investment and tax advantages.  Investment diversification as well as the ability to generate tax-deferred (tax-free for a Roth IRA) income and gains are the two principle advantages.

    From a Real Estate IRA checklist perspective, the most important item to remember before acquiring the real estate is to verify that the title of the real estate IRA is accurate. Your real estate attorney or closing agent will make sure the custodian or the IRA manager, as applicable, receive the necessary real estate IRA closing documentation.

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