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What You Need to Know About the Self-Directed IRA For Real Estate
A self-directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Not all self-directed IRAs are the same. The self-directed IRA is the most popular way to use retirement funds to make alternative asset investments, such as real estate, notes, cryptocurrencies, gold, investment funds, private businesses, and much more without tax or penalty.
Why Work With IRA Financial?
We help our clients take control of their retirement funds and gain the ability to invest in almost any type of investment tax-free. We have helped thousands of clients invest in foreign and domestic assets. You receive direct and unlimited access to our in-house tax and ERISA professionals to ensure that all established tax structures are IRS compliant. We offer a full IRS audit guarantee and stand by the legality of our structures and will fully defend their merits against any IRS audit.
“What about your IRA, including rollover IRA? You need to look at state law, advises tax attorney Adam Bergman of New York’s IRA Financial Group.”
“Adam Bergman…gets several calls a day from clients like McDermott looking to invest their retirement funds in real estate. ‘Our average client has retirement accounts of about $150,000 and is looking to buy one or two properties.'”
“Jeff Brown…transferred roughly $50,000 from his workplace 401(k) to purchase homes to fix up and sell…He uses a self-directed IRA that he set up through IRA Financial Group in Miami Beach.”
5 Things to Consider
Do Your Research
Real estate can be a complex investment that involves various components. Therefore, it is important to do your research and diligence on the real estate asset your IRA will be purchasing. You should be familiar with the specific real estate asset your IRA will be purchasing, its locality, as well as understand the costs involved.
Unlike stocks or mutual funds, which typically do not involve ongoing costs, the purchase of real estate often involves ongoing costs, such as repairs and taxes. Thus, it is vital that you make sure you are purchasing a real estate asset that your IRA can afford. It is good practice to keep a reserve of at least 5-10% of the value of the asset in case of emergency.
IRA Custodian Options
Most traditional banks and financial institutions do not allow IRA holders to buy real estate with their IRA since it does not generate any profit for the institution. However, there are a number of special self-directed IRA custodians throughout the United States that allow their clients to make alternative asset investments, such as real estate, using retirement funds. Hence, when purchasing real estate with a self-directed IRA, an IRA holder has generally two options: (i) “Custodian Controlled” Self-Directed IRA or (ii) “Checkbook Control” Self-Directed IRA.
Understand the IRS Prohibited Transaction Rules
The Internal Revenue Code (“Code”) does not describe what a self-directed IRA can invest in, only what it cannot invest in. Code Sections 408 & 4975 prohibits “disqualified persons” (as defined under Code Section 4975(e)(2)) from engaging in certain types of transactions. In general, as long as the self-directed IRA does not purchase life insurance, collectibles, or engage in a transaction directly or indirectly benefiting the IRA holder or a lineal descendant of the IRA holder (“disqualified person”) then the investment can be made.
Using Leverage Can Create Tax Issues
The IRS prohibited transaction rules prohibit an IRA holder from personally guaranteeing a loan associated with his or her IRA. However, if an IRA holder is able to secure a non-recourse loan (a loan which is not personally guaranteed by the IRA holder) to purchase real estate with an IRA, the unrelated business taxable income (“UBTI”) rules could be triggered and a tax rate reaching as high as 37 percent could apply. Note – an exemption from this tax is available for 401(k) plans pursuant to IRC 514(c)(9). If the UBTI tax is triggered and tax is due, IRS Form 990-T must be timely filed.
Do You Have Questions? Give One of Our Specialists a Call.
How It Works
Set-up an IRS compliant “Checkbook Control” Self-Directed IRA LLC with IRA Financial Group.
Rollover existing retirement funds from the current custodian to the new IRA passive custodian.
IRA passive custodian transfers rollover retirement funds to the newly established IRA LLC bank account at any local bank.
Identify the real estate investment property for purchase.
As manager of the IRA LLC, purchase the real estate investment property by writing a check or executing a wire transfer from the new IRA LLC bank account. No need to seek the consent of the custodian with a Self-Directed IRA LLC with “Checkbook Control” solution.
Title to the real estate investment property and all transaction documents should be in the name of newly established IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager.
All expenses paid from the investment property go through the IRA LLC. Likewise, all rental income checks must be deposited directly into the IRA LLC bank account. No IRA related investment checks should be deposited into your personal accounts.
All income or gains from the real estate investment will generally flow through to the IRA without tax!