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This information is provided as a resource to explore alternative investments for your Self Directed IRA. It is presented with the understanding that the provider of the information is not engaged in the rendering of legal or accounting advice or service & is not a financial planning professional. If legal advice or other expert assistance is required, the services of a specialist or professional should be obtained.

Gaining Ground -- Self Directed IRA's and Real Estate

Historically, real estate investments have offered stability and provided both income and appreciation.

One of the greatest tools available to real estate investors is government sanctioned retirement plans such as IRA's and 401(k)'s.

However, most investors are unaware that there are alternatives to the "traditional" IRA investments found in bank CD's, the stock market, and mutual funds. Few people realize that they have the option to self direct their IRAs and other retirement plans to include an investment in real estate -- and that they can benefit from the tax advantages those plans provide. IRA investments earn tax deferred/tax free profits as well as the benefit of compound interest, a reduction of taxable income (if applicable) and estate planning.

Whether you are a savvy real estate investor, or simply looking to diversify your retirement portfolio, the combination of real estate and your IRA can be a very powerful tool.

How Do I Purchase Real Estate in my IRA?

Purchasing real estate in your IRA is very similar to a standard purchase of an investment property. There are slight, but important, differences that establish your purchase as a "qualified" investment.

The first step is to locate a Trust Company who will establish an account on your behalf, in which you would fund your account through a contribution, transfer or rollover. The registration of the account would be something similar to: XYZ Trust Company, Custodian FBO (for the benefit of) John Smith IRA.

Identify the investment property you would like to acquire utilizing your IRA funds and verify that it qualifies under Internal Revenue Service regulations. If you do not follow the rules set forth by the Internal Revenue Service, you can jeopardize the tax-deferred status of your account. This could lead to the disqualification of the IRA and severe tax consequences.

Complete the necessary paperwork from the IRA Custodian/Trust Co who will proceed with the purchase and sign all documents on your behalf in the name of the IRA.

Confirm that all documents, (i.e. deed/title, purchase agreements, closing documents, etc) have the account registration name of the IRA Custodian/Trust Co for your benefit.

Ensure that all payments made to and expenses paid from the investment are associated with the IRA.

What Happens When I Want to Sell Real Estate Held in my IRA?

When you are ready to sell the property, the IRA Custodian/Trust Co will provide the necessary paperwork and coordinate efforts between you and your title company to complete the transaction. All proceeds from the sale are tax free and go back into your IRA.

What Kind of Real Estate Investments are Available for a Self-Directed IRA?

Each Trust Company will specialize in different types of real estate investments for which they will be able to act on your behalf. The typical IRA Custodian/Trust Company will offer some, all, or even more investments than reflected on the example listed below:

Raw Land
Single Family Homes
Commercial Property
Apartments
Duplexes
Condos/Townhomes
Mobile Homes
Real Estate Notes
Second Mortgages
Partial Notes
Real Estate Purchase Options
Tax Liens Certificates

Important things to remember when investing in Real Estate with a Self Directed IRA!

Your IRA cannot purchase property owned by you or a "disqualified" person. IRS regulations would consider this "self-dealing" (either buying the property from or selling the property to any disqualified person) and it is not allowed. At this time, a disqualified person is categorized as: Your fiduciary and members of your family (spouse, ancestor, lineal descendant and any spouse of lineal descendant.) Please consult IRC 4975 for a complete list of disqualified individuals.

You cannot receive "Indirect Benefits" from property owned by your self-directed IRA. You may not purchase a vacation home that you would occasionally like to use or rent office space for yourself in a building that your Self-Directed IRA owns. The purpose of your IRA is to provide for your retirement and is not intended to provide benefits to you (or any other disqualified person) today. If your IRA were to participate in such activity, it is considered an "indirect benefit."

Real Estate IRA investments are distinct in the Account and Title Registration. You and your IRA are separate entities. All documents related to the investment must be titled correctly to avoid delays and maintain the integrity of the IRA.

You may purchase Real Estate in your IRA without 100% funding of your own money.
1. Obviously, you can purchase a property outright if you have sufficient funds to cover the purchase price, closing costs, taxes, insurance, etc. All ongoing expenses are paid from your self-directed IRA and all income/profits are returned in total to the IRA.
2. If sufficient funds aren't available in your IRA to make the purchase, you may purchase an undivided interest in a property. For example, your self-directed IRA could partner with a family member, friend or business associate to purchase a property. Your percentage ownership would be established by determining the amount of your funds used to purchase the particular property in relation to the total cost of acquiring the property. All ongoing expenses must be paid in relation to your percentage ownership and likewise, any income generated by the property would be allocated according to your percentage ownership. Keep in mind you will have to prove that you've received no "indirect benefits" from this arrangement if the IRS were to ever question the transaction. Be sure to make it an arms-length transaction to maintain the integrity of your Self-Directed IRA.
3. Receiving a Loan for Investment. An IRA may obtain financing for a real estate investment. However, there are two things to keep in mind when utilizing this approach. 1. Loan must be non-recourse -- meaning that the IRA cannot be used to guarantee a loan or used as collateral. ONLY the property is used as collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself. 2. Tax would be due on profits from collateralized real estate. If your IRA used financing on a real estate investment, taxes would most likely be due on profits and is referred to as unrelated business income tax (UBIT). This scenario should be reviewed in depth with your tax consultant to evaluate the value of this approach with concern to your overall retirement plan and goals.

This is just a brief summary of the exciting opportunities available utilizing a Real Estate investment in a Self Directed IRA. A thorough review with your financial advisor/tax consultant should be arranged to determine whether adding Real Estate to your IRA portfolio is an appropriate investment for you. Please use this information to begin a discussion with your financial professionals as they will be able to recommend the best investments for your circumstances.

Please refer to our resources page to obtain links to websites to obtain more information regarding Self-Directed IRAs.