A Self-Directed IRA allows for alternative investments, including real estate. However, are you allowed to use seller financing when buying a property with your IRA? In the following, we will discuss the benefits of the Self-Directed IRA, why real estate investing is popular and whether or not you can use seller financing to make an investment.

What is a Self-Directed IRA?

A Self-Directed IRA, or in this case, a Real Estate IRA, allows you to invest in any type of asset which is not prohibited by the IRS. The only prohibited transaction that you need to worry about with a real estate investment is the disqualified persons rule. Essentially, you (the IRA owner), your spouse, your lineal ascendants and descendants, their spouses and entities controlled by such persons are not allowed to benefit from the investment. The Self-Directed IRA should be the only thing that receives a benefit, which are the tax advantages of the plan.

The Self-Directed IRA is one of few choices for those wishing to invest in alternatives. Traditional plans offered by banks and other institutions limit your investments choices. Typically, you can only invest in stocks, bonds, mutual funds and the like. Therefore, you must first set up a Self-Directed IRA in order to make real estate investments. Further, when using the right custodian, such as IRA Financial Trust, you can gain checkbook control of your funds. You never have to ask IRA Financial when you wish to make an investment. Other custodians require custodial consent for every investment you wish to make. This is very bad for real estate investors. Delays in the process could cause you to lose out on a property you wish to purchase.

Read More: Types of Self-Directed IRAs

How it Works

Obviously, you need to first set up a Self-Directed IRA with your chosen custodian. Once it is established, you can then fund the plan. This can be doing by rolling over previous retirement plan funds, or by directly contributing to the plan. Note that the annual contribution limit for an IRA for 2023 is only $6,500 ($7,500 if you are at least 50). These numbers will increase by $500 for 2024. Therefore, it’s best if you have accumulated savings in another plan that you can move to your new Self-Directed IRA.

Time to Invest

Once the plan is created and funded, it’s time to find your investment. Of course, this is up to you and any professionals you may hire, such as a realtor, financial advisor or planner. Once you find the ideal property, you are ready to make the investment. Since you have checkbook control, you can use a checking account, bank wire or debit card associated with the account to purchase the property. Once the investment is made, you can choose what to do with it. Will you fix and flip? Use it as a rental property? Is it a commercial space you will lease out? Or maybe you will develop a new real estate project. Whatever the case may be, the advantages of owning it with your IRA are huge.

All gains and income generated from the property flow back into your Self-Directed IRA. This means you pay no taxes until you start withdrawing funds from the plan during retirement. In fact, if you have a Roth IRA, all qualified distributions are tax free!

Related: Self Directed IRA Investments

Be Careful!

Again, it’s important to be mindful of the prohibited transaction rules. Never utilize the services of a disqualified person. Also, never sell, rent or lease the property to such persons. For example, you cannot rent a vacation property to your son for the week. Since he is a lineal descendant, he is a disqualified person. However, you can rent it to your sister, cousin, friend or neighbor. They are not disqualified persons under IRC 4975.

Related: Solo 401(k) for Real Estate

What is Seller Financing?

As defined by Investopedia, seller financing is a real estate agreement in which the seller handles the mortgage process, instead of a financial institution. Instead of going to a bank to apply for a mortgage and all that entails, a buyer can come to the seller directly. The two parties come to an agreement on all of the particulars, including sale price, down payment, possible balloon payments and terms of the sale. This is a great option for buyer’s who otherwise might not qualify for a bank loan. It’s great for the seller, since fees are kept to a minimum and the process can be completed quickly. No one wants long delays when making an investment!

Of course, seller financing comes with drawbacks as well. The worst of which is finding the right buyer, who will make timely payments. Legal fees could kill your profits if you need to take a buyer to court for nonpayment. It might be best for both sides to have an attorney present at the time of sale. On the buyer’s side, the big drawback are the interest rates. Since banks are competitive with those rates, you’re likely to find a better rate there. However, if you can’t receive the financing by conventional means, the point is moot. Both sides should be aware of both the benefits and risks with seller financing.

Is Seller Financing Allowed with a Self-Directed IRA?

Yes, so long as no IRS rules are broken, you can absolutely use seller financing with your Self-Directed IRA. To reiterate, no disqualified persons should be a part of the process. Therefore, the buyer should not be disqualified! If you have a property owned by your IRA that you wish to sell, seller financing may be considered. The speed in which the transaction can be completed is attractive to many investors. Setting favorable terms is another plus of seller financing. Obviously, you will want to work with an IRA custodian who is knowledgeable in this area, along with a real estate attorney and financial advisor to make sure this is right for you.

The best part of this is that the interest paid by the buyer goes back to your IRA. Taxes are deferred and you are free to reinvest that money in a new investment. Bear in mind, you want to make sure you are properly diversified. In may not be the best strategy to use seller financing with all your investments. You are better off spreading your IRA savings across multiple investments, and/or multiple properties. As they say, don’t put all your eggs in one basket!

Related: Self Directed IRA for Real Estate

Real Estate Investing: Work with IRA Financial

Of course, we here at IRA Financial believe we’re the best Self-Directed IRA providers around. Our professionals are knowledgeable in all facets of the process. We ensure you remain IRS-compliant and all necessary documents are completed. Further, we’re there for you whenever you need us. Plus, there are never any transaction or account balance fees! Know you are in good hands when you work with IRA Financial.

If you would like to speak with one of our experts about seller financing, please contact us @ 800.472.0646. Also, be sure to check out our YouTube page for tons of interesting videos and podcasts about all things self-directed!