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1.
Why haven't I heard of this before?
2.
Are there any downsides?
3.
How do I purchase real estate with my self-directed IRA?
4.
What are the differences between buying real estate for my self
personally and purchasing
investment real estate for my IRA?
5.
Can I
have funds remitted directly to a Seller?
6.
I have a deal that will close tomorrow. How fast can I transact a purchase?
7.
Can I transfer funds from an existing IRA, 401k, or 403b to a self
directed IRA, for the purpose of investing in real estate?
8.
I plan on purchasing a property with my IRA that will generate rental
income. Does the rental income have to go back to my IRA?
9.
How does the rental income actually get back into my account?
10.
Can my IRA purchase real estate that I own presently?
11.
Can my IRA purchase real estate that my corporation, partnership,
or LLC owns?
12.
May I live or work in a property that my IRA owns (i.e., personal
residence, retirement home, office)?
13.
Can my IRA invest in a newly formed entity (limited partnership, Limited
Liability Company, C-corporation, land trust) that will invest in real
estate?
14.
Can my IRA purchase an interest in a Subchapter S Corporation?
15.
May I use funds from my IRA to renovate property in order to sell
it at a higher price?
16.
What if I do not have sufficient funds in my IRA to purchase a property
outright?
17.
How do I sell a property owned by my IRA?
18.
When I sell a property owned by my IRA, may I keep a portion and
send the remaining portion to the IRA Custodian?
1.
Why haven't I heard of this before?
Because most custodians do not offer truly self directed IRAs. They will
only allow you to invest in their approved list of investment options. If
you have an IRA at a bank, you will probably be limited to CDs and if at a
brokerage firm, stocks, bonds and mutual funds.
2.
Are there any downsides?
There
aren't any downsides, per se, other than the fact that there are certain
types of transactions that you cannot enact through an IRA. For the most
part these prohibited transactions have to do with what is called "self
dealing". Basically, these rules prohibit your IRA from making an investment
into a property where you or certain relatives have prior ownership.
Additionally, no investment (outside of FDIC insured deposits) is
guaranteed. Real estate investing is not for everyone. However, most
successful real estate investors feel that the investment risk associated
with real estate is much less than that of investing solely in the stock
market.
3.
How do I purchase real estate with my self-directed IRA?
The
process of purchasing real estate with your IRA is very similar to
purchasing other conventional investments. Once your account has been
established and properly funded, clients instruct the IRA Custodian to
purchase the specific investment property. To make the investment, a Real
Estate Direction of Investment must be submitted to the IRA Custodian.
Information on the Real Estate Direction of Investment will include:
location of property your IRA is purchasing, the amount needed from your
account, where the funds need to be sent, and the necessary documents
required by the IRA Custodian.
Once
your Real Estate Direction of Investment has been received, the IRA
Custodian will act on your instructions and remit funds to the Title
Company, closing agent, or attorney.
4.
What are the differences between buying real estate for my self
personally and purchasing
investment real estate for my IRA?
There
are 3 main differences between buying real estate for yourself and buying
real estate for your retirement account. Title: When purchasing an asset for
your IRA it is imperative that it is properly titled in your IRAs name
(i.e., ABC Trust Company, For the Benefit of (FBO) Your Name IRA). Most IRA
Custodians will not accept any investments which are not properly titled.
Funding: When purchasing an investment for your IRA, needed funds must come
directly from your IRA. Thus, the IRA Custodian sends funds directly to the
Title Company, closing agent, or attorney, per your instructions.
Expenses/Profits: Any expense or income associated with an IRA investment
must originate from or be remitted to your IRA. Signatures: Documents
regarding IRA investments must be signed by the IRA Custodian acting on
behalf of your IRA
5.
Can I
have funds remitted directly to a Seller?
Yes,
by completing a Real Estate Direction of Investment, you will instruct the
IRA Custodian where to remit funds. Typically, funding to purchase real
estate is sent to a title company, attorney, or escrow agent. In most cases,
funds are remitted by check, cashier's check, or wire.
6.
I have a deal that will close tomorrow. How fast can I transact a purchase?
Normally, the processing time for an investment is 3 - 5 business days.
Checks are then sent via regular mail to the address specified by the client
on their Real Estate Direction of Investment. Some IRA Custodians give
Clients the option of having funding sent overnight or by wire. Fees charged
for same day or overnight service vary according to the IRA Custodian. These
fees are listed in the fee schedule for each IRA Custodian.
7.
Can I transfer funds from an existing IRA, 401k, or 403b to a self
directed IRA, for the purpose of investing in real estate?
Yes.
Most IRA Custodians allow Clients to transfer all or portions of their
previous retirement funds to their self directed IRA.
8.
I plan on purchasing a property with my IRA that will generate rental
income. Does the rental income have to go back to my IRA?
Yes,
all income generated by a property owned by your IRA must return to your
IRA, in order to retain the tax deferred or tax free status of the
investment.
9.
How does the rental income actually get back into my account?
Rental
payments are remitted to the IRA Custodian for the benefit of your IRA. The
checks or money orders are made payable to "ABC Trust Company FBO Your Name
IRA #xxxxx". Once received, the checks or money orders are deposited into
your account.
Please
note: As the investment is owned by the IRA, all rental checks must be made
out to the IRA with proper titling "ABC Trust Company Custodian FBO Your
Name IRA."
10.
Can my IRA purchase real estate that I own presently?
No.
This is considered a prohibited transaction (see IRC 4975). You may not
purchase a property or interest in a property, which is presently owned by a
disqualified person. Disqualified persons would include those listed below:
·
The IRA
owner
·
The IRA
owner's spouse, descendant (e.g., son), or ascendant (e.g., mother)
·
The
Spouse of a descendant of the IRA holder
·
A
fiduciary of the IRA or person providing services to the IRA (e.g., the
trustee or custodian)
·
An entity
at least 50% of which is owned (or at least 50% of the beneficial interests
are held) by a combination of the above (e.g., if you and your spouse own
50% of an LLC, that LLC is a disqualified person with respect to your IRA)
·
A 10%
owner, officer, or director or highly compensated employee of such an entity
11.
Can my IRA purchase real estate that my corporation, partnership,
or LLC owns?
No.
This would be considered a prohibited transaction (see IRC 4975).
12.
May I live or work in a property that my IRA owns (i.e., personal
residence, retirement home, office)?
No.
This is considered a prohibited transaction (see IRC 4975).
13.
Can my IRA invest in a newly formed entity (limited partnership, Limited
Liability Company, C-corporation, land trust) that will invest in real
estate?
Investments in newly formed private entities are not prohibited under IRC,
with the exception of Sub Chapter S corporations.
14.
Can my IRA purchase an interest in a Subchapter S Corporation?
No.
IRAs are not qualified to be investors in Sub Chapter S Corporations.
15.
May I use funds from my IRA to renovate property in order to sell
it at a higher price?
Yes.
Your IRA must pay all expenses associated with a property that it owns
including the renovation of the property. All profits associated with your
IRA's investment in a renovated property must be remitted to the IRA
Custodian for the benefit of your IRA.
16.
What if I do not have sufficient funds in my IRA to purchase a property
outright?
In
general IRA investments should be bought outright as any use of debt
financing might incur the production of unrelated business income tax (UBTI).
If debt financing is used it must be in the form of a non recourse loan,
meaning that if your IRA fails to make payments, the only collateral the
lending institution can come after is the property itself and not the IRA.
IRAs may purchase an undivided (and proportionate) interest in a property,
which would eliminate the occurrence of UBTI.
17.
How do I sell a property owned by my IRA?
When
you are ready to sell a property that is owned by your IRA, you will need to
request the original documents from the IRA Custodian. This is done by
completing a Sale Direction of Investment form. Once the property has been
sold, all funds from the sale must be remitted directly to the IRA Custodian
for the benefit of your IRA. This ensures the Tax Free/Deferred environment.
18.
When I sell a property owned by my IRA, may I keep a portion and
send the remaining portion to the IRA Custodian?
No,
all income generated from the sale of a property owned by your IRA must
return directly to the IRA. |
