Most retirement account holders are surprised to learn that even since the creation of IRAs, the IRS has always permitted an IRA to purchase or hold real estate or raw land. In fact, it states it right on the IRS website. By using a self-directed IRA to buy real estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property and much more tax-free and without requiring custodian consent!
The self-directed IRA is a retirement account vehicle that is best known for allowing investors to use retirement funds to buy alternative assets, such as real estate. A self-directed IRA is not a term of art and you will not find it anywhere in the Internal Revenue Code (“Code”). A self-directed IRA simply refers to an IRA account which is permitted to be invested in traditional assets, such as stocks, but also alternative assets, such as real estate. One major advantage of purchasing real estate with a Self-Directed IRA is that all income and gains are tax-deferred until the time when the IRA holder (you) takes a distribution.
There are two ways to use a self-directed IRA to buy real estate.
- Custodian Controlled Self-Directed IRA
A custodian controlled self-directed IRA offers an IRA investor more investment options than a financial institution self-directed IRA. With a custodian controlled self-directed IRA, a special IRA custodian will serve as the custodian of the IRA. Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms. With a custodian controlled self-directed IRA, the IRA funds are generally held with the IRA custodian and at the IRA holder’s sole direction, the IRA custodian will then invest the IRA funds into traditional as well as alternative asset investments, such as real estate.
A custodian controlled self-directed IRA is popular with retirement investors looking to invest in alternative assets which do not involve a high frequency of transactions, such as the purchase of raw land or private fund investments.
- “Checkbook Control” IRA
With a self-directed IRA with checkbook control, also known as a Real Estate IRA, making a real estate investment is as simple as writing a check. With a self-directed IRA with checkbook control, a special purpose limited liability company (“LLC”) is established that would be owned by the IRA and managed by the IRA holder (you). As manager of your self-directed IRA LLC, you have the authority to make real estate investment decisions on behalf of your IRA on your own without needing the consent of an IRA custodian. With a self -directed IRA LLC with “Checkbook Control’ you will be able to buy real estate by simply writing a check. Since all your IRA funds will be held at a local bank in the name of the IRA LLC, all you would need to do to make the real estate transaction is write a check straight from the IRA LLC bank account or simply wire the funds from the IRA LLC bank account. No longer would you need to ask the IRA custodian for permission to make a real estate transaction and have to deal with long delay and transaction fees.
A checkbook control IRA is popular with retirement investors seeking to invest in alternative assets, such as rental properties, fix and flips, tax liens, or cryptocurrencies that require a high frequency of transactions.