Ways to invest in Real Estate with your IRA

When investors say they want their IRA to invest in real estate, that can mean many things. While most account holders think of real estate investing as purchasing rental homes, Self-Directed IRAs can participate in real estate in a number of different ways. Knowing and understanding the vast array of options can help you make the best decision possible for your retirement goals.

The most common means of investing in real estate with a SDIRA is for the account to purchase and own property outright. This is usually done by account holders who are able to fund the full purchase price of the real estate from their account or apply for a non-recourse loan. If your account does not have enough funds to purchase a property outright, and you do not wish for your IRA to take out a non-recourse loan, there are several options available. Your IRA can partner with other entities, such as other IRAs, the account holder’s personal finances, other individuals, or a company(LLC, C-Corp., etc.), to fund the purchase of the real estate. The IRA would then be considered a “tenant-in-common” with the other entity or entities.

SDIRAs can also invest in real estate indirectly. Your account can buy private stock in an entity which purchases and owns real estate. Another available option allows you to make real estate loans via promissory notes to individuals or entities to purchase property. SDIRAs allow you to use your expertise and experience to make the real estate investment that is right for you.

An SDIRA can offer the flexibility of investing in all different types of real estate. Your IRA can purchase residential real estate, from single-family homes to apartment buildings. If you are more familiar with commercial real estate, you can use your expertise to invest in office buildings and other properties. If your background lies in agriculture or development, your IRA can purchase farm land or raw land.

One of the final variables in real estate investing involves your overall strategy for the property once it is acquired. This is one more area in which you as the SDIRA holder have many options. The property can be acquired and rented to tenants to generate rental income for the IRA. The account holder may also buy real estate to fix-and-flip or fix-and-hold properties in need to improvements. Real estate can be purchased for wholesale, raw land may be developed, and properties can be held for appreciation in value.

For individuals who want to incorporate real estate investing into their retirement plan, a Self-Directed IRA can provide a wide range of possibilities. From purchasing rental property to developing raw land, your SDIRA allows you to use your expertise and decide which real estate strategies are the best for you. New Direction IRA is here to offer the education and resources that can help you make the best decisions for your retirement investing.

Real Estate IRA Investing FAQ

Can I buy real estate in my Retirement Plan?

Yes, the IRS actually places very few limits on what you may buy with your IRA retirement funds. It is your IRA custodian who has put those limits on your retirement account. Truly self-directed IRAs allow you, the investor, to choose your investments.

Can I borrow funds to buy real estate in my IRA? Can my IRA get a mortgage?

IRAs can invest in all types of real estate!

Yes, many banks have discovered the demand by IRA owners to finance real estate purchases in their IRAs. Banks continue to develop products specifically for IRAs and other plans. You’ll need a non-recourse loan, which tend to have higher down payment requirements than those for personal homes, but these loan types are available at many banks.

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. Your IRA can purchase a property in the very same way as you would personally. This is the most common way real estate is purchased and in this situation the property is simply titled to your IRA.
 
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 or any other broker. However, using a broker that is familiar with this process may be helpful buy it is not required.
 
Can I repair the property myself?

You may not personally do any work on the property and neither can any other disqualified persons (IRA holder, his spouse, his parents and grandparents, children and grandchildren, their spouses, certain fiduciaries and any entity owned or operated by a disqualified person. Work can be done by anyone else and you still have control over what you want them to do. For instance, you can’t personally paint the walls but you can tell the painter how you want the house painted.
 
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. The percent of ownership cannot be changed once the investment is made.
 
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.

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 percent in your possession, you are free to use the property as you wish.

Unrelated Business Income Tax (UBIT): What is it and Why you should embrace it

UBIT may be an indicator of investment profits

If there ever was a subject that will stop an accountant is his or her tracks it is UBIT, which stands for unrelated business income tax. Many investors shy away from certain IRA investments out of fear that UBIT will take out a big chunk of their earnings. But the truth is that these investors are misinformed about the tax.

To start, UBIT was initially placed on some taxpayers to “level the playing field” for certain businesses. The best example of how UBIT is used is for the competition between a non-profit and a for-profit enterprise. The college bookstore sells books to students and others within the structure of their “non-profit” umbrella. The college bookstore, because it is non-profit, is not taxed the same way as a for-profit enterprise. A non-profit does not pay taxes on most operations and therefore can afford to sell books at a lower cost than the for-profit store across the street. Since both the college bookstore and the for-profit bookstore are competing for the same customers, the college bookstore has the advantage of being treated differently for tax purposes and the advantage of this preferential tax treatment may allow the college bookstore to sell their books for less, thus attracting customers away from the for-profit store.

This is where UBIT comes into play. The government has placed a tax burden on the non-profit enterprise for running a business, i.e. selling books, under the main business of running a college. This same philosophy and set of rules is applied to an IRA’s investment in real estate when there is debt related to the purchase of that real estate. So what is bothering the accountants among us?

• The tax rate for UBIT is high, ranging from 26% to 34%.
• Calculation of this tax is, for those not familiar with the rules, complicated.

These issues are resolved, however, when the investor realizes that the tax allows for greater for overall gains because the account is allowed to use debt-leverage. A good Self-Directed IRA provider will be able to clear up any questions about calculating UBIT and make the process easy.

When debating the pros and cons of using leverage within an IRA to purchase an income property, the questions should never be “How do I avoid UBIT?” but rather “How much will the IRA grow using debt leverage and paying UBIT?” and “What is the resulting rate of return within my IRA?” The other due diligence items such as physical condition of the property as well as questions on the ability of the cash
stream to service the loan and pay expenses, including UBIT, should also be taken into consideration.

Dismissing an investment because of the potential payment of taxes should never be a deal killer. Consult with your legal and tax advisors regarding investments involving potential UBIT within your IRA.

For information or videos about UBIT and other self-directed IRA issues, visit www.newdirectionira.com.