Below is a question answer session provided on
the subject of real estate investment in IRAs. Don Dickerson is a licensed broker specializing
in investment properties.
If you currently are a successful real estate investor or just looking to diversify your retirement portfolio, the combination of real estate and your IRA can be very powerful.
Here is a partial list of real estate investments that you can make within your IRA.
- Raw land
- Single family homes
- Apartments
- Mobile Homes
- Commercial Property
- Real Estate Notes
- Mortgages
- Tax Lien
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. They let you invest in the financial products they sell. However, there are a number of trustee/custodians that allow true self-directing.
2.) 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 with your IRA, with a few exceptions. Once your account has been established with us and properly funded, clients instruct the trustee/custodian to purchase the specific investment property in the name of your IRA. To make the investment, a Real Estate Direction of Investment (form) must be submitted to trustee/custodian. Information included 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 what documents the custodian requires for your IRA.
3.) What are the differences between buying real estate for my self personally and purchasing investment real estate for my IRA?
When purchasing Real Estate for your IRA, there are 4 main differences
between when you buy Real Estate for yourself and your retirement account.
1. Title: When purchasing an asset for your IRA it is imperative that it is properly titled in your IRAs name: Custodian’s Name, For the Benefit of (FBO) Your Name IRA. Your custodian will not accept any investments which are not properly titled.
2. Funding: When purchasing an investment for your IRA, needed funds must come directly from your IRA. Thus, your custodian sends funds directly to the title company/closing agent/attorney per your instructions.
3. Expenses/Profits: Any expense or income associated with an IRA investment must be originated or remitted to your IRA
4. Signatures: Documents regarding IRA investments must be signed by your custodian acting on behalf of your IRA.
4.) Can I have funds remitted directly to a Seller?
Yes, by completing a Real Estate Direction of Investment, you will instruct
Entrust where to remit funds. Typically, funding to purchase Real Estate is sent to a title company, attorney, or escrow agent. Funds can be remitted by check, cashier’s check, or wire.
5.) I need to close a deal tomorrow. How fast can I close a sale or purchase?
The normal processing time for an investment is approximately 3 business days. Checks are then sent via regular mail to the address specified by the client on their Real Estate Direction of Investment form. Most custodians offer the option of having funding sent overnight or by wire. If you need to close a deal tomorrow, some offer same day service--for an extra fee.
6.) 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, you can choose to transfer all or portions of your retirement funds to self direct them in investments where you have knowledge and expertise.
7.) In regards to rental property, does the rental income have to go back into my IRA? If so, how does it get back into my account?
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. Rental payments are remitted to “Your trustee/custodian for the benefit of your IRA”. The checks or money orders are made payable to “Your custodian FBO Your Name IRA #xxxxx.” Once received, the checks or money orders are deposited into your account. All checks must be remitted with a payment coupon.
Checks may be mailed directly to us, or they can be mailed to the property manager for record-keeping purposes before being forwarded to your us. If several checks are to be remitted per month, mailing them in one envelope will save time and postage but they must include a separate payment coupon for each check.
Please note: As the investment is owned by the IRA all rental checks must be made out the IRA with proper titling “ Your Trustee/Custodian FBO Your Name IRA”.
8.) 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 yourself and family members of linear descent.
9.) 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).
10.) 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.
11.) 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 that are associated with your IRAs investment in a renovated property must be remitted to us for the benefit of your IRA.
12.) What if I do not have sufficient funds in my IRA to purchase a property outright?
In general, IRA investments can be bought outright or debt financing may be utilized. With debt financing you may incur Unrelated Business Income Tax (UBIT). 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 UBIT.
13.) 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 your 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 Your Trustee/Custodian for the benefit of your IRA. This ensures the Tax Free/Deferred environment. These funds will need to be remitted with a payment coupon stating what asset this payoff is for.
14.) When I sell a property owned by my IRA, may I keep a portion and send the remaining portion to my custodian?
No, all income generated from the sale of a property owned by your IRA must return directly to the IRA.
What kind of retirement funds am I able to use
It is possible to use funds from most types of retirement accounts:
Traditional IRA
Roth IRA
SEP IRA
Keogh
401(k)
403(b)
And others
It must be noted that most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
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