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IRA Financial Group Blog

Pocket Real Estate IRA

pocket real estate ira
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IRA Financial’s Pocket Real Estate IRA will allow you to use your retirement funds to invest in real estate directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party IRA custodian involved in every aspect of your real estate transaction. Buy, sell, or exchange real estate on your own directly from a mobile device or PC with IRA Financial’s Pocket Real estate IRA. You can also rollover, deposit, or transfer funds between your real estate investment and IRA seamlessly and without delay.

Why Real Estate?

Real estate is the most popular alternative asset investment for retirement account holders.

Ever since the advent of self-directed IRAs, the IRS rules have always permitted you to engage in almost any type of real estate investment, generally aside from investments involving a disqualified person.

Retirement investors are attracted to real estate as an investment for several reasons, including:

  1. Real estate has a high tangible asset value
  2. Investments in real estate can diversify your retirement portfolio
  3. Real estate is a hard asset and is said to be a hedge against inflation

Tax Advantages

The advantage of using retirement funds to make real estate purchases is that all income and gains generated by the real estate investment would not be subject to tax or penalty. Instead of paying tax on the returns of a real estate investment, tax is paid at a later date, leaving the real estate investment to grow unhindered. Generally, self-directed IRA real estate investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

Why Use a Self-Directed IRA to Buy Real Estate?

Unfortunately, the major financial institutions do not allow you to use IRA or 401(k) plan funds to invest in real estate or essentially anything outside of Wall Street. The reason for this is simple: banks do not make money when you buy real estate or gold. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Self-Directed IRA to purchase real estate.

What is the Pocket Real Estate IRA?

IRA Financial’s Pocket Real Estate IRA is essentially a self-directed real estate IRA with checkbook control. It is an IRS approved structure that allows one to use his or her retirement funds to make real estate and other investments tax-free and without custodian consent. The Pocket Real Estate IRA involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA custodian) and managed by you or any third-party. As manager of the IRA LLC, you will have control over the IRA assets to make the investments you understand – not just investments forced upon you by Wall Street.

How to Set-up the Pocket Real Estate IRA:

  1. Establish the self-directed IRA with IRA Financial Trust & Capital One online though our mobile app.
  2. Your IRA cash/assets can be rolled over to IRA Financial Trust tax-free directly from our mobile app.
  3. The assets will be transferred to a new Self-Directed IRA plan checking account with Capital One Bank. Your assigned specialists will help you open a self-directed plan account with Capital One seamlessly and with no wiring fees or minimum balance requirement. As a result, you can establish a self-directed IRA with checkbook control and never visit a bank or deal with bank opening documentation. Our relationship with Capital One Bank makes IRA Financial the only self-directed provider that can open a self-directed IRA plan bank account for our clients. This makes the process quick, easy, and cost-effective.
  4. As manager of the LLC, you will open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
  5. You, as manager of the LLC, will then have checkbook control over all the assets/funds in the IRA LLC to make the real estate investment.
  6. Since the LLC is owned 100% by an IRA, it will be treated as a disregarded entity for tax purposes. No Federal income tax return is required to be filed and all income and gains will flow back to the IRA without tax.

Unrelated Business Taxable Income

Most retirement account investments that generate passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.

The UBTI tax is only triggered if:

  • Retirement account uses margin to buy stock
  • Retirement account invests in an active business through a passthrough entity, such as an LLC

The UDFI tax is triggered if:

  • An IRA uses a non-recourse loan (real estate acquisition financing to purchase real estate)
  • Exemption for 401(k) plans
    • IRC 514(c)(9)

The UBTI & UDFI Trigger the Same Tax Rate

Because the UBTI and UDFI trigger the same tax rate, which is a maximum of 37% for 2019, if you plan to make real estate investments with a self-directed IRA and the underlying investment will not involve an investment into a business operated via a passthrough entity, such as an LLC, has debt or margin, the UBTI tax rules will likely not be triggered.

Your IRA Financial assigned specialists will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.

Act Quickly on Investments

With a Pocket Real Estate IRA, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your IRA funds, as manager of the Checkbook IRA LLC, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account. The Pocket Real Estate IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket Real Estate IRA structure, all income and gains from IRA investments will generally flow back to your IRA LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the IRA LLC will flow-through to the IRA tax-free!

The following real estate investments have been popular with our self-directed IRA clients in 2019:

  • Residential homes – for sale and flip
  • Vacation homes for rental
  • Raw land
  • Joint venture investments involving commercial properties
  • Mortgage notes

How to Get Started

We’re ready to assist you. Contact IRA Financial to establish the Pocket Real Estate IRA directly at 800-472-0646 or fill out one of our contact forms to speak with a tax specialist.

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