Things to Know When Using Your SDIRA to Invest in Real Estate
There are several advantages of using a self-directed IRA to invest in real estate, and we’ve talked in length about all of them! For example, a piece of property bought with a self-directed IRA and sold later on with gain appreciation that is generally tax-deferred, but that’s just one of them. Purchasing rental property with a self-directed IRA is a great way to diversify your investment portfolio, but before you get started, there are a few things you should know.
Below we are going to discuss a few important considerations of purchasing a rental property with your self-directed IRA. Of course, you can always give our team of non-recourse loan lenders a call to learn more about how you can leverage your self-directed IRA with a non-recourse loan to invest in real estate. We pride ourselves on providing transparent and relevant information that helps our clients make educated decisions. Give us a call today.
Do Your Research
Before making any serious moves on your investment, it is imperative that you do your research and diligence on the real estate asset your IRA will be purchasing. Real estate can be a complex investment that involves various components, making thorough understanding crucial. Be more than familiar with the specific real estate asset your IRA will be purchasing, like its locality, the costs involved, and any foreshadowed risks.
So You Understand, Your IRA Owns the Property, Not You
The purchase contract to buy the real estate must be in the name of the IRA and the deed to the property will be in the name of the IRA. The IRA funds, including the earnest money deposit, will come from the IRA account. Keep in mind that the IRA owner is not buying the property, so the contract should not be in their personal name, nor should the IRA owner’s personal funds be used.
Plus, any improvement costs and expenses for the IRA-owned property must be paid by your IRA and not personally by the IRA owner. Conversely, when there is rental income on the property, or when the property sells for a gain, then that income goes back into the IRA. But, one of the biggest perks of investing with an IRA is that there is no tax when the IRA makes money. Consequently, the rental income and the income when you sell the property is not taxable.
Know Your Custodian Options
When opening a self-directed IRA, you may find that most traditional banks and financial institutions do not allow IRA holders to buy real estate with their IRA since it does not generate any profit for the institution. There are, however, a wide selection of self-directed IRA custodians throughout the nation that do allow their clients to make alternative asset investments, like real estate, using retirement funds.
When purchasing real estate with a self-directed IRa, an IRA holder generally has two options: “Custodian Controlled” Self-Directed IRA or “Checkbook Control” Self-Directed IRA. “Custodian Controlled” self-directed IRAs allow the IRA holder to direct the IRA custodian to invest the IRA funds into traditional, as well as alternative asset investments. With a “Checkbook Control” self-directed IRAs, on the other hand, a special purpose limited liability company is established that would allow the IRA holder to act quickly when the right investment opportunity presents itself cost-effectively and without IRA custodian delay.
Your IRA Cannot Purchase Property Owned by You or a Disqualified Person
Your IRA cannot purchase a property that you currently own. The IRS doesn’t allow transactions that are considered “self-dealing” and they don’t allow your self-directed IRA to buy property from or sell the property to any disqualified person, including yourself, certain family members, and others.
The IRS lists disqualified individuals as yourself, your beneficiary, your fiduciary, and members of your family, like your spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRa
Your self-directed IRA cannot be used to purchase a vacation home for you to occasionally use, and you cannot rent office space for yourself in a building that your self-directed IRA owns. Your investment in real estate is not intended to benefit you, or any other disqualified person, by providing shelter. If your IRA engages in a prohibited transaction, it is considered an “indirect benefit.”
These are only a few things you need to keep in mind before you consider investing in real estate — we’ll be covering several more in the future! Keep an eye out for the next blog that contains more information about things to know when you use your self-directed IRA to invest in real estate.
One of the best resources you have at your fingertips is our team at First Western Federal Savings Bank! Our team of non-recourse loan lenders will walk you through how you can leverage your self-directed IRA with a non-recourse loan to invest in real estate. To learn more, give us a call.