Using a Self-Directed IRA LLC to Purchase Real Estate
A Self-Directed IRA LLC to Purchase Real Estate is a wise choice. As you know in Self-Directed IRA LLC – How it Works, there are many benefits to establishing this type of retirement plan. Again, with the Self-Directed IRA, you can invest outside of traditional investments. Traditional investments include stocks, bonds, mutual funds and ETFs. However, a Self-Directed IRA allows you to make non-traditional, or alternative asset investments. This includes cryptocurrency, tax-liens and, of course, real estate
.A Self-Directed IRA allows you to diversify your portfolio and better protect your assets/funds. As you may know, in the 2008 financial crisis, many retirement holders lost almost 25% of their retirement assets. As a result, more diverse retirement portfolios are steadily growing in popularity. IRA holders realize that they don’t have to invest in solely in Wall Street if they don't wish to make such investments. However, the option to make traditional investments is still possible with a Self-Directed IRA.To point out, IRA holders were always able to make Self-Directed IRA real estate investments, as well as other alternative investments. Yet prior to 2008, very few people knew about Self-Directed retirement plans and alternative assets. There was a small group of investors who did know, and made alternative asset investments prior to the financial crisis. As a result, they weren't hit as badly in 2008.
Use Your Self-Directed IRA LLC to Purchase Real Estate
Real estate has become one of the most popular forms of non-traditional assets to invest in. There are many reasons for this. One primary reason is that IRA holders want to invest in assets they know and understand. Many individuals have more knowledge and confidence in real estate, and choose to use their Self-Directed IRA for real estate investments. Another reason is because investing in a real, material asset can protect your retirement savings from the threat of inflation.And did you know that all income and gains from real estate is tax-free
? That’s right. Real estate owned in a self-directed IRA LLC is tax-exempt. To fully grasp the financial benefits of this aspect, let’s look at an excerpt from Self-Directed IRA in A Nutshell
.“…If you purchased a piece of property with your self-directed IRA for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-free. Whereas, if you purchased the property using personal funds (nonretirement funds), the gain would be subject to federal income tax and, in most cases, state income tax.”Here’s another example of how you can use your IRA to make real estate investments tax-free:
So, as you can see, another benefit of using your IRA for real estate is because of the tax advantages. You can benefit from tax-deferred gains until you make a distribution. Of course, if you use a Self-Directed Roth IRA, the gains on your real estate investment grow in your IRA tax-free, even when you make a distribution. Even in the case of a Self-Directed IRA, you have to wait until age 59 1/2 to make a distribution without incurring penalties.
Checkbook Control Self-Directed IRA LLC
Most financial institutions don’t allow real estate investments. In the end, the IRA custodian makes the decision about what you can invest in with your retirement plan. However, with a checkbook controlled self-directed IRA LLC, you are the manager of the LLC, and can make decisions on what to invest in. Of course, this includes real estate.For reiteration (you can find this information in our other Self-Directed IRA LLC pages), making investments with checkbook control is quick and easy. You no longer pay high custodian fees or must wait as custodians approve (or deny) your investments. With checkbook control self-directed IRA LLC, you write a check or wire funds from your IRA LLC bank account, and the investment is yours.
Self-Directed Roth IRA LLC
The fundamentals of a Self-directed IRA LLC and a Self-Directed Roth IRA LLC are virtually the same. The difference is, with the Roth option, you pay taxes upfront. Then, once you withdraw at retirement age, you won’t have to pay taxes no matter what the amount. Whereas, with a traditional Self-Directed IRA LLC, your taxes are deferred
, therefore when you reach retirement age and make a withdrawal, you will be taxed.
Real Estate Investments
Below, we provide a partial list of domestic or foreign real estate investments you can make with your self-directed IRA LLC.
- Raw land
- Residential homes
- Commercial property
- Mobile homes
- Real estate notes
- Real estate purchase options
- Tax liens certificates
Tax is Due on Profits from Leveraged Real Estate
Following Code Section 514
, if your Self-Directed IRA LLC uses non-recourse debt financing (for example, a loan) on a real estate investment, some portion of each item of gross income from the property are subject to Unrelated Business Income Tax (UBTI
).“Debt-financed property” refers to borrowing money to purchase the real estate, such as a leveraged asset that is held to produce income. In such cases, only the income payable to the financed portion of the property is taxed. Gain on the profit from the sale of the leveraged assets is also UDFI. That is, unless the debt is paid off more than 12 months before the property is sold.There are some important exceptions
from UBTI. Those exclusions relate to the central importance of investment in real estate, such as:
However, rental income from real estate that is “debt financed” loses the exclusion. That portion of the income becomes subject to UBTI. Therefore, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.For example, if the average acquisition owed is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI.A Self-Directed IRA LLC subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2018, a Self-Directed IRA LLC subject to UBTI is taxed at the following rates.
- $0 – $2,550 = 10% of taxable income
- $2,551 – $9,150 = $255 + 24% of the amount over $2,550
- $9,151 – $12,500 = $1,839 + 35% of the amount over $9,150
- $12,501 + = $3,011.50 + 37% of the amount over $12,500
Invest in Real Estate with a Self-Directed IRA LLC Today! When you purchase real estate with a Self-Directed IRA LLC, it’s very similar to when you purchase real estate personally. Let our IRA specialists establish your self-directed IRA LLC.
- Set-up a Self-Directed IRA LLC with the IRA Financial Group.
- Identify the investment property.
- Purchase the investment property with the Self-Directed IRA LLC (No need to seek the consent of the custodian with a Self-Directed IRA LLC with “Checkbook Control).
- The title to the investment property and all transaction documents must be in the name of the Self-Directed IRA LLC. The LLC manager must sign the documents pertaining to the property investment.
- All expenses paid from the investment property go through the Self-Directed IRA LLC. Likewise, all rental income checks go directly into the Self-Directed IRA LLC bank account. No IRA investment checks will deposit into your personal accounts.
All income or gains from the investment flow through to the IRA tax-free!
Get in Touch
Do you have questions about using your Self-Directed IRA to purchase real estate? If we didn't cover it in the article, contact IRA Financial Group at 800-472-0646
. Or fill out the form and speak with an IRA specialist. Let’s get started today!
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