Real Estate IRA Investing
Three Most Popular Ways to Invest in Real Estate with a Self-Directed IRA
Self-Directed IRA Rules Guide
1. Purchase with Cash – The Most Straightforward Approach
If you have sufficient funds in your self directed IRA to cover the purchase price, closing costs, taxes, insurance, etc., you can purchase a property outright. All ongoing expenses are paid in total from your Self-Directed IRA, and all income/profits are returned in total to the IRA.
2. Partner with Family, Friend, Business Associate
If you don’t have enough funds for a cash purchase, your Self-Directed IRA can 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 for $100,000. The friend could provide 70% of the purchase price ($70,000), and your self directed IRA could purchase the remaining 30% ($30,000).
All ongoing expenses must be paid in relation to your percentage ownership. In our example, for a $1,000 property tax bill, the friend would pay $700 (70%) of the bill and your self directed IRA would pay $300 (30%).
Likewise, if the property collected monthly rent of $1,000, the friend would receive $700 (70%) and your Self-Directed IRA would receive $300 (30%).
3. Borrow Money (Receiving a Loan) for Investment:
An IRA may obtain financing (loan/mortgage) for a real estate investment. However, you must be aware of two points when considering this option:
- Loan must be non-recourse – Per IRS regulations, an IRA cannot guarantee a loan or be used as collateral (see Prohibited Transactions). A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
- Tax is due on profits from leveraged real estate – If your IRA uses debt financing (i.e., obtains a loan) on a real estate investment, a tax will probably be due on profits. This tax is called unrelated business income tax (UBIT).
Get answers to your questions and learn more about building wealth with tax advantaged accounts.Contact Us