Real Estate IRA
Putting real estate in your IRA LLC can be an excellent way to earn a solid return while having much more control. The requirements of buying, holding, transferring, and selling real estate in an IRA can vary considerably depending on your self-directed IRA custodian. Buying, selling, and transferring real estate through a self-directed IRA custodian typically follows these procedures.
Buying Real Estate in an IRA
1. You would identify an investment property and make an offer with your custodian CFBO, [your name], IRA LLC (as the buyer)
2. You would have a third party (i.e., Attorney, title company, realtor) prepare the purchase documents for your custodian CFBO to sign on behalf of your [your name], IRA LLC
3. You would complete the required form(s) used by your CFBO directing your self-directed IRA custodian CFBO to pay the third party (i.e., Attorney, title company, realtor) for their fees for drafting the purchase documents
4. You will want to make sure the contract is between your custodian CFBO, [your name], IRA LLC, and the seller
5. As part of the process, your will custodian will typically require the following documents for your self-directed IRA custodian to complete the processing
- Purchase agreement
- Settlement agreement
- Escrow instructions
- Copy of the preliminary (un-recorded) deed
- Custodian form(s) to invest in your IRA (i.e., investment authorization or directive)
Once you have completed the required procedures, your self-directed IRA custodian will execute the necessary documents and forward the funds to escrow per your instructions and directives.
Holding Real Estate in an IRA, LLC
After purchasing real estate as an IRA, LLC investment, it is critically important that you keep maintenance transactions at "arms length." Regarding an IRA LLC, "arms length" means:
•Never pay for expenses or repairs out of your personal funds
•Never collect and deposit income into your personal account
•Never personally perform work on the property
•Never put utilities, insurance, etc in your personal name
•Never use the property personally or receive any personal benefit from the property
What to do instead of the above;
• Always instruct the IRA Custodian to pay for expenses out of your IRA
•Always instruct the payee (tenant, buyer, etc) to send rent checks directly to the IRA Custodian
•Always hire a third party to perform repairs or maintenance on the property
•Always keep utilities, insurance, etc, in the name of your IRA or third party
Real Estate IRA Transfers
Suppose you switch IRA custodians while still holding real estate in an IRA. In that case, the transfer process will involve more than a typical in-kind transfer with publicly traded securities.
First, you must initiate an in-kind transfer documentation required by your new self-directed IRA custodian, instructing them to initiate a trustee-to-trustee transfer from the real estate's previous custodial account to your new custodial account under the IRA.
The new IRA custodian will likely contact your existing custodian by sending the trustee-to-trustee transfer form, including a signature guarantee.
Once your old custodian processes the transfer request, they will send assigning the property to the receiving custodian under the IRA.to assign the property interest to the new IRA
Note: There may be a period of time while in transition neither custodian accepts liability for the real estate in your IRA.
Next, the receiving custodian will draft a letter of instruction requesting you to hire a third party (Attorney, title company, etc) to prepare the deeds retitling the property under the new IRA custodian.
You will likely need to submit instructions to the custodian to pay the third-party fees. Your custodian will likely charge fees to pay to the third party.
Once the deeds have been retitled, you or a third party need to take the retitled deed to the County Recorder's Office/Clerk to get recorded.
Once the transfer process is completed, you should provide written instructions to your tenants to make all rent checks payable to the new IRA custodian.
Thinking ahead
Selling IRA Real Estate
Like purchasing real estate in an IRA, selling it through a self-directed IRA custodian will be the reverse of the purchase. You will need to hire third parties to prepare documents, your IRA custodian needs to sign contracts and get deeds recorded, and some fees will be charged.
Flexibility and Checkbook Control
The beauty of real estate investing is the vast amount of available strategies. Most profit is made when you buy the property, not when you sell it. It is critical to put yourself in a position to act quickly. You can expand your investment options by negotiating with banks on forecloses, buying at tax or estate auctions, or exercising real estate option contracts. Unfortunately, most self-directed IRAs require considerable paperwork and restrictions that limit your options due to the delinquency of the turnaround. The above strategies will be unavailable if you do not have the checkbook control or the flexibility to jump on opportunities.
IRA Separation and Protection
One of the drawbacks of holding your IRA with a custodian is that it is very difficult to separate and identify the different accounts. One solution to separating your IRA from other IRAs under the same custodian is by adding the CFBO (custodian for the benefit of) {your name} after your self-directed IRA custodian's name. While this sounds like an easy solution to the problem of separating thousands of IRA investors from each other (sarcasm intended), it is not. Imagine you have a self-directed IRA at XYZ custodian with 50,000 other clients and growing. Suppose one IRA investor buys a property in Maricopa County, Arizona (or wherever) and defaults on the property taxes. In that case, the county will no longer accept an offer to purchase a tax deed. You could hire an attorney, but the county may not accept the explanation. They just recognize that ABC Trust company owes property taxes and won't allow your IRA to be an investor at tax sales.
IRAs involved in a lawsuit could pose a samiliar problem. For example, self-directed IRAs listed with your custodian may be involved in an active lawsuit, bank foreclosures, late insurance payments or property taxes, etc. This is just one scenario where separating your IRA from other IRAs at the same custodian would be beneficial.
Legacy IRA
If holding real estate with a custodian seems problematic, or some of the issues with owning real estate through an IRA custodian aren't practical – there is a solution! You can set up a self-directed IRA LLC. Doing so will allow you to make real estate investments as if you were investing with your own LLC. For asset protection purposes, investors all over the country typically use limited liability companies to hold their investments. Therefore, banks, counties, title companies, etc., are all familiar with and comfortable dealing with limited liability companies.
TRUE Self-Directed IRA LLC
A self-directed IRA LLC is a vehicle that avoids many problems with holding real estate under a self-directed IRA custodian. With a Self-directed IRA LLC, you would make investments under a limited liability company rather than through a custodian, giving you added security, flexibility, and simplicity. With a self-directed IRA LLC, you are holding a limited liability company instead of holding real estate through your IRA custodian. Under the self-directed IRA LLC, you can quickly and easily make real estate IRA transactions without involving a custodian to approve and execute all byansactions. For more information on how to set up a Self-Directed IRA LLC with checkbook control, click here.
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