1. An IRA can secure a loan in order purchase an asset.
If you have a property in mind but don’t have the funds in your account to
purchase it outright, the IRA may be able to secure a non-recourse loan. Keep
in mind that not all lenders make this type of loan, and, because the lender
cannot rely on personal assets as collateral, it is common for them to require
a down payment of 30% to 40%. Also, an asset secured using a loan may be
subject to Unrelated Business Income Tax (UBIT). This may sound like a
negative, but needing to pay UBIT means that the investment is making money.
2. Real Estate has always been an allowable asset in an
IRA. This fact, however, is not widely known. In fact, the IRS received so
many inquiries, IRS.gov issued this statement, “…IRA law does not prohibit
investing in real estate, but trustees are not required to offer real estate as
an option.” Because IRA providers are not required to offer real estate, it is
up to the IRA holder to establish an account with a provider that will perform
the administration and bookkeeping necessary for that asset.
3. While an IRA holder can provide brain power for
his/her Self-Directed IRA, he/she is not allowed to perform physical services
for the real estate assets the IRA owns. It is relatively well known that
an IRA holder can’t live in real estate that his/her IRA owns, it is less well
known that sweat equity is not allowed. Many people would like to be able to
have their IRA purchase a rental property and then act as the property manager,
including making repairs and performing maintenance. Unfortunately, the IRA
holder can only contribute some brain power/strategy to the operation of an
IRA-held property. When the IRA holder goes over to the property to paint a
room, do some light plumbing, or some other physical service, he/she is
stepping into a prohibited activity.
4. An IRA can partner with other investors, with other
IRAs, or even with the IRA holder’s personal funds to purchase an asset. In
this scenario, the IRA purchases a percentage of the asset and the partners
purchase the balance. It is important to note that all income and expenses need
to be divided along the percentage of ownership lines. For example, if in a
partnership, the IRA buys 50% of an apartment building, then 50% of all of the
income and expenses come to and are disbursed from the IRA. So, if your IRA does
not have enough money to purchase 100% of a real estate asset, and you don’t
want your IRA to secure a loan, it may be a good idea to think about using a
partnership to acquire the asset you want.
5. A real estate asset held in a traditional IRA does not
have to be sold in order to be distributed to the IRA holder. While it is
certainly allowable for an IRA to sell a property and then distribute the
proceeds, there is another alternative. The physical asset itself can be
distributed, with the obligatory tax on its value. In addition to a complete
distribution of the asset, a percentage of a property can be distributed in a
given year. The way that works is that the real estate is re-titled to reflect
a new percentage of ownership between the IRA and the IRA holder. The IRA
holder would then pay the taxes on the value of the percentage distributed in
that year. In this manner, the tax burden could be spread out over a period of
years while still holding on to the physical property.
