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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).