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Real Estate Investing In Self-Directed Retirement Accounts

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Real Estate Investing in Self-Directed Retirement Account

 

Don’t overlook IRAs, Roth IRAs, and retirement plans for real estate and related investments like mortgages, notes, and tax liens. The key is finding a trustee who offers true self-directed accounts and insuring that transactions flow properly through that trustee. The trustee has to take title to the property, furnish all funds from earnest money through closing costs directly from the account, collect rental income, and disburse all expenses.

If you don’t have enough in your account to buy property outright, you can buy a fractional interest in a property, combine funds from multiple accounts to form a “family bank” or contribute account assets to an LLC to buy property.

       Example: You have $40,000 in an IRA and $40,000 in cash. You find a property for $80,000, buy half in your IRA, and buy the other half individually.

You can finance property inside your account, but you can’t personally guarantee the note. If you finance property, any net income or gain above $1,000 (after deducting regular expenses, including depreciation) attributable to the debt-financed portion is taxed as unrelated business taxable income (“UBTI”).

Example: Your IRA borrows $50,000 to buy a $100,000 property. Half of the income above the $1,000 exemption is taxed at ordinary rates. If you sell the property, half of the gain is taxed at capital gain rates.

You’ll also have to avoid specific “prohibited transactions” intended to prevent self-dealing. You can’t, directly or indirectly, buy, sell, exchange, or lease; lend money or extend credit; or furnish goods, services, or facilities between a plan and a “disqualified person.” (These include you and your spouse; your ancestors, descendants, and their spouses; and corporations, partnerships, trusts, and estates of which you own 50% or more.)

The prohibited transaction rules are quite specific. For example, you can manage or renovate property you direct your custodian to buy in your plan—but you can’t draw a salary or other income for doing so. However, the Labor Department can grant prohibited transaction exemptions (“PTEs”) that it finds administratively feasible and in the interests of plan participants. (In one case, a homeowner used his IRA to buy the mortgage on his own home—then kept making deductible interest payments directly into his account!)

 

 

 

 

 

 

 

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