You might not realize it but your IRA can invest in real estate instead of stocks and bonds. The rental income generated by IRA owned real estate, and/or any profit from sale of that property all goes right into your IRA just like dividends and gains from stocks or bonds. Your IRA doesn’t even have to have the entire purchase price of a property; it can secure a non-recourse loan to buy real estate. And any account type has this investment ability: Traditional IRA, Roth IRA, HSA, SEP IRA, or SIMPLE IRA.
There are a few important things to know. First and foremost, you need to have a self-directed IRA provider that is expert at handling this type of asset. At LRA, we have teamed up with New Direction IRA, a leader in Self Directed IRAs and HSAs, to give you the ability to generate returns for your retirement account by purchasing real estate.
Also, note that the IRS does not allow the IRA holder and certain family members to live in, work on, or use real estate assets while they are held by the IRA. For a complete discussion of Disqualified Persons and Prohibited Transactions, please contact us or New Direction IRA for a free consultation or just click here to receive your free guide!
Can I buy real estate in my Retirement Plan? Yes! The IRS has had this question so many times they answer it directly on their website (www.irs.gov). In their retirement Q & A section they say, “IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option”. Therefore, to invest in real estate your IRA custodian must allow it.
Why haven’t I heard about real estate investment in IRAs before? Retirement investing has been dominated by the securities industry since 1974 but real estate has always been available to IRAs. The opportunity to invest IRA funds directly in real estate is an option that many people are just learning about.
I have a 401(k). Can I invest that in real estate? Your 401(k) plan may, at your direction, be invested in real estate if the investment provisions of the plan permit it. The employer establishes the plan for the benefit of the employees, and that employer will have language incorporated in the plan document which states what investment options are available to the employee. If you have a 401(k) from an employer for whom you no longer work, those funds can be rolled over to a traditional IRA with no tax consequence. From there, you can invest in real estate.
What about borrowing? Can my IRA get a mortgage? Yes, the IRS requires that the loan be a non-recourse loan. The lender can be a bank or a private lender. IRA non-recourse loans tend to require a higher down payment than those for personally guaranteed loans.
What are the restrictions for the purchase? The primary requirement is that the purchase be for investment purposes only. The IRA owner, certain family members, and plan fiduciaries cannot use the property while the IRA owns it. Your IRA is not allowed to buy property you already own personally.
What can I invest my IRA and qualified plans in? There are two broad asset categories that are not allowed: life insurance and collectables. Beyond that, the IRS does not approve any specific investments. Usually limitations on asset types are a result of the IRA provider’s business model, not IRS regulations.
What are “alternative” investments? “Alternative” investments are assets, such as real estate, that are not publicly traded securities. Almost anything you can invest in outside of your IRA can be purchased inside your IRA.
Do I need an LLC to purchase real estate with my IRA? An LLC may be used to purchase real estate, but it is not required. See Above.
Where do I find an investment property? It’s up to you and your real estate agent to find the property. There are no limitations or restrictions other than the property cannot be something you or any disqualified person currently own.
Do I need to use a special broker and title company? No special broker or title company are required, you can use the same ones you used to buy your current home.
Can I repair the property myself? You may not personally do any work on the property and neither can any other disqualified persons or any company you or they own. Work can be done by anyone else and you still have control over what you want them to do. Basically, you can’t personally put the paint on the walls but you can choose the painter and the paint.
Can I partner my IRA with my personal funds? Who else can I partner with? If you cannot afford the investment property you are interested in you have many options. One option is to partner with yourself. For example your IRA can own 50% and you can personally own 50% (note: even if you personally own 99% of the property you are still prohibited from living in it or using the property.) You may also partner with someone else’s personal or IRA funds, the disqualified persons rule does not apply here so you may partner with your spouse, parent, child, friend, or whomever. There is no limit to how many people you can partner with.
How are the expenses paid on an IRA-owned property handled? Expenses are to be paid directly from the IRA. If the IRA owns 100% of the property it is responsible for 100% of the expenses. If your IRA is a partner, it is responsible for its portion of the expenses. Because the IRA must pay the expenses it is important to make sure there are sufficient funds in the IRA to cover the expenses. When purchasing the property don’t forget to take expenses into account.
Where does rent income go? Rental income from the investment goes directly into the IRA.
How long must my IRA own a property before selling it? There are no time restrictions or limitations on buying or selling a property.
Do I have to pay capital gains taxes if I sell the property? Because the property is owned within a tax deferred (Traditional IRA) or tax free (ROTH IRA) plan, no capital gains taxes need to be paid as long as there is no outstanding debt leverage for 12 months prior to the sale. If there is outstanding debt leverage, UBIT may apply to the percentage of that leverage.
Can I take property as a distribution and then live in it? Yes, after you reach 59.5 years of age you may choose to take the property as a distribution from your IRA. Once the property is 100% distributed, it is in your possession and you are free to use the property as you wish.
What exactly is UBIT? Unrelated Business Income Tax applies to debt financed property in IRAs and also applies to operating income received from companies owned by IRAs and qualified plans. Typically the debt financed income is taxable under UBIT rules for the percentage of property that is debt financed.
For more information contact Rob or Cory at firstname.lastname@example.org.