REAL ESTATE IN AN IRA—WHAT’S IN YOUR RETIREMENT STOCKING?

By Don Dickerson

  Why hasn’t my broker or advisor mentioned this?  In his or her defense, maybe they’re not aware.  Maybe they don’t sell these financial products.  Maybe their firm isn’t set up to administer investments in real estate and other diverse assets.  Although the concept of self-directing is not new, there is a major misconception that you can only invest in stocks, mutual funds, bonds and certificates of deposits.  In fact, IRS rules allow investment in most assets with the exception of collectibles, works of art, antiques and life insurance.  The IRS requires an approved custodian to hold your IRA’s real estate investments, and most financial institutions only act as custodian for the investment products they sell.  However, these custodians are readily available.  Companies like The Entrust Group, Equity Trust Company and Pensco Trust Company specialize in the administration of investments in real estate and many other diverse assets.  They allow you to invest in assets that you know—maybe assets that you actually enjoy investing in.    The need for trusted advisors like Realtors, CPAs, attorneys and financial planners doesn’t go away, but you take charge with true self-directing.
  What types of real estate can you invest in?  Improved or unimproved land, single-family homes, apartments, condos, mobile homes and commercial property are just a few of the types of real estate investments that you can make with IRA or 401(k) dollars.  Some other allowed real estate related investments include trust deeds and mortgage notes, secured or unsecured loans, leases and lease options, tax lien certificates, real estate options and preconstruction contracts.  Also, your IRA can invest in a LLC, limited partnership, c-corporation or land trust that invests in real estate.  What will you put in your retirement stocking?

  How does all this work?  If the present under the tree is a train set, we’ve got to unwrap it and make it run around the track.  Right?  Whether you’re an experienced real estate investor or more of a novice with a trusted advisor, it is important to know that it all functions very similar to making the investment outside your IRA—with a few exceptions.  You direct your trustee/custodian to sign all necessary documents and remit funds for closing or making the investment.  The investment is titled in the name of your IRA:  Custodian’s name, For the Benefit of (FBO) Your Name IRA.  All money for the investment and expenses comes out of the IRA and all profits, including rents, interest and profits from a sale go back into your IRA.  You are the beneficial owner of the IRA and in true self-directing, the conductor and engineer of your own financial future.
 
  If using retirement dollars to invest in real estate is on your wish list, you’ve got to know the naughty and nice.  What can you do and not have the IRS send you lumps of coal?  There are rules, and all investments have to be for the benefit of your IRA.  Prohibited transactions (see IRC 4975) include buying property from or selling property to disqualified persons, which includes yourself and family members of linear descent.  Firms and individuals providing services to your IRA may also be disqualified persons.  Although your IRA can’t buy property you presently own, it can buy property from siblings and most unrelated parties.  All transactions have to be at arm’s length and must be for the sole benefit of your IRA.  You cannot get a current benefit, and remembering that will prevent those ghostly visits from transactions past.

  Does it seem too complicated or restrictive?  If you’re looking for a pre-lit and pre-decorated tree, this may not be it.  Any type of investing requires due diligence, diversification, trusted advisors and work.  When you first look at this concept, it seems daunting and prohibitive.  It may even sound too good to be to be true.  However, the reality is just the opposite.  True, the tax codes do set guidelines, but making real estate investments with your IRA is much more limited and restricted by lack of imagination, creativity and real estate knowledge.  Your IRA can invest in many types of property and real estate related investments.  In general, IRA investments can be purchased with cash, or debt financing.  Although a portion of the profits may be subject to unrelated business income tax (UBIT), debt financing can beutilized to greatly accelerate earnings.  If leverage is used, all loans must be on a nonrecourse basis, meaning that if your IRA fails to make the payments, the only collateral the lender can come after is the property itself—not you personally or the IRA.  In addition to borrowing, partnering is a key option.  If you don’t have enough money in your IRA to pay cash and you don’t want to borrow, you can partner with yourself at the initial time of purchase.  You can even partner with other individuals or their IRAs.  These and the many other possibilities can help bring dollars and joy to the hearts of IRA owners everywhere.
  Why would our government place such a wonderful gift under the tree?  We live in a world of downsizing, outsourcing and forced early retirement.  You may be concerned about the status of Social Security or the demise of your company’s defined benefit pension.  In this competitive world, big government and big business may have made promises they can’t afford to keep, and this is a major concern for Americans of all age.  So how do we keep the retirement season bright?  With several trillion dollars already in IRAs and baby boomers set to roll their 401(k) retirement funds into IRAs, buying real estate in your IRA may be one of the major gifts under our tree.

Done