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Purchase Real Estate with your IRA

Tired of watching your retirement savings disappear on Wall Street? There are other options that your stock broker will probably not tell you about..

If you’re like many people, the level of uneasiness and satisfaction with Wall Streets performance of your retirement account has about peaked. Look at the facts; the stock market has not performed very well over the last few years, with most people losing thousands, even hundreds of thousands of dollars that they may not be able to re-earn, due to their age or employment situation. The volatility and swings in the market have many wondering if their IRA or 401K is safe at all. They’re not sure it will it even be there when they’re ready to start drawing from it; this is a retirement plan? Interest rates are historically low, and will probably remain so for some time to come so the cash and bond markets do not make much sense either; so what are we supposed to do?

How come more people don’t know about purchasing real estate with their IRA?

The reality is that most people don’t realize they can purchase real estate with in their IRA without having any tax implications. This is not an accident; the traditional IRA custodians that hold and manage your IRA are banks, brokerage firms, or insurance companies, and they’re not in the business of selling anything other than what they offer. Therefore, they do not permit nor will they recommend that you invest your funds in anything but what they have to offer, which is not real estate (kind of like going to a restaurant with a limited menu). For them to recommend that you diversify your stocks, bonds, mutual funds etc., into real property assets would create huge losses as well as control for them. Not only that, they’re often in direct competition with the growing number of self directed IRA custodians that do offer such flexibility and control. There has really been little written or said about buying real estate with in an IRA. Why? Again, it’s not in the best interest of the people managing these accounts, just open up any investment publication; you will quickly see that most of the advertising revenue comes from large brokerage firms and traditional investment institutions. Better yet; when you go to transfer your funds out of these “traditional” IRA custodians to a self directed IRA custodian; watch them argue with you about your money trying to dissuade you because they see their commissions walking out the door.

The facts

Internal Revenue Code (Section 408) permits individuals to buy real estate with in an IRA or other qualified plan, and has since the advent of IRA tax related law over 30 years ago. In fact, you can buy just about any kind of real estate you want with few exceptions. Residential, commercial, raw land, income producing, even foreclosures are allowed. If your current IRA custodian does not permit real estate transactions, and most don’t, consider changing to a self directed custodian where you will have more control of how your money is invested. There are an increasing number of excellent self directed IRA custodians that are easy to locate online; try Googling “purchase real estate with your IRA”, or “buying real estate with your IRA”. These self directed IRA custodians help their clients by educating them on what can and can’t be done, so as to avoid non complying transactions which would result in penalties from the IRS. Once you set up an account with a self directed IRA custodian you then have what is called a “trustee to trustee” transfer of your funds. This moves your funds from your current IRA custodian to the new one with out having any penalties, as you still haven’t actually touched any of the money. You can transfer any amount or percentage you wish into a self directed IRA, and as previously mentioned this is a non taxable event.

What can you do with your self directed IRA?

There are a number of things you can do with your IRA once you actually have control over it in one of these self directed IRA custodians; the menu just grew by ten fold! As mentioned above you can now purchase single and multi family income producing properties (rentals), town-homes, condos, improved or unimproved land, commercial property, foreclosures, and more. You can also direct your IRA to sell properties and even owner-finance them to really increase your profits. All proceeds have to remain in your IRA, deferring tax liability until distribution. Purchase real estate using your IRA funds as a down payment if you will, then borrow the rest if you don’t have enough for the transaction; you must use a non recourse loan, these types of loans usually require that they hold a 30% equity position or 70 percent LTV. You can also “pool” your IRA money with others to purchase, each owning an undivided percentage interest. You can partner with family, friends, business associates, anyone you are comfortable with. Buy your retirement home at today’s prices, and then take the property as a tax free distribution using a Roth IRA. Ensure tax deferred status by avoiding “prohibited transactions”. The possibilities are almost endless as you now have control over your money instead of some stock broker!

What you can’t do with your self directed IRA;

It is important to know what you may and may not do to ensure compliance with IRS guidelines, thus avoiding any potential penalties. There are a number of “prohibited transactions”, and they must be avoided, so a tax consultant and IRA custodian experienced with IRA held real estate is a must!

It’s really not so difficult; you should know that you may not use your IRA to purchase property for personal use, not even a second/vacation home. In fact, the IRS tax law states that you may not use or personally benefit from your IRA held property at all, at least not until distribution. You cannot place property that you or your disqualified family members own, or have ever owned, into your IRA; you also cannot lease property back from your IRA for business purposes. Internal Revenue Code (Section 4975) defines “lineal descendents” and disqualified persons.

When purchasing real estate with your IRA funds you cannot buy the property personally, the funds must come from the IRA; option money, earnest money, money for home inspections, everything must come from the IRA that is needed to complete a transaction (no commingling outside money and IRA money is allowed within the IRA). All money must come from your IRA and title must be taken by your IRA; you do not own it personally, your IRA account does. When contracts or purchase agreements are written, they are written as follows; “ABC trust, custodian FBO (for benefit of) John Doe”. All funds associated with the income and purchase must flow to and from the IRA directly. All expenses, including property taxes, insurance, property management fees and repairs must be paid by your IRA. It is very important to maintain enough resources within your IRA to cover these expenses; income flowing to the account and allowable contributions to the plan can also help support that need. If the IRA runs short on money to cover such expenses, you would be forced to withdraw the property from your IRA which could be very costly with the tax implications.

Also; using an IRA to buy real estate isn’t for everyone. If you have an employer sponsored plan that won’t allow you to self direct or transfer funds, this won’t be for you for obvious reasons

Once you are ready to actually take possession of the property from the IRA:
You may withdraw real estate from your IRA and use it personally once you reach 59 ½ or older and avoid penalties. However, you will pay income taxes based on the value of the property unless it was held by a Roth IRA, in which case it is a tax free transaction; this makes the ROTH IRA very attractive in some cases. The other option is to direct your IRA to sell the property, and then take the funds personally. In that case, all applicable income taxes would be due; as always, please consult your tax professional.

Selecting a property manager familiar with self directed IRA custodians is also an important step and one that will be required for any income producing properties. Their role will be to receive funds from prospective tenants, handle any maintenance issues and to distribute funds into the IRA. (Must also be non related)
You may also sell property held by your IRA, but not to yourself or any other disqualified person. Once your property has sold/closed, the proceeds immediately go back into the IRA, ready for the next investment. You may also owner finance your property held within your IRA; this can often boost returns more than if you were to lease them, as you wouldn’t have the normal liabilities associated with owning the property, such as property taxes, insurance, HOA dues, maintenance etc., In these cases all of the buyer’s payments would go directly into the IRA helping it grow until you are ready for distribution.

Getting started

Some of this may seem a bit overwhelming at first, but it really isn’t, it’s actually very easy, particularly if you assemble the right professionals from the start. Here’s how you would go about it:
First; you will need to select a self directed IRA custodian; if you don’t already have one they are easy to find online, or I can provide you a list of references that I have used on other clients transactions. You may transfer some, or all of your funds into such an account as a tax-free event. Second; select an experienced, reputable real estate professional familiar with not only investment property transactions, but one who is also familiar in working with the self directed IRA custodians. Third; select a professional property management company (if buying income producing property) experienced in working with IRA custodians and their process.

As having experience doing these types of transactions, I’m very familiar with the process of getting people set up to do them. Once set up, I can easily guide you through the maze of not only finding the properties that will allow you to obtain your goals, but help guide the transaction along smoothly, then into the actual leasing and management of the property. If you would like more information on how to go about purchasing real estate with your IRA simply e-mail me at , or call me direct at (936) 494-5441. Thanks for reading.