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For more than 30 years,
savvy real estate investors have used Individual Retirement Accounts
(IRA) to purchase virtually any kind of fee-simple investment real
estate, including:
- Raw or developed land
- Single & multi-family homes
- Condos, co-ops & townhomes
- Apartment buildings
- Commercial property
To do so, investors must
open a Self-directed IRA with an IRS-approved Administrator,
Custodian or Trustee and then have their retirement plan funds
transferred or rolled over to their new account. Self-directed
investing is regulated by state and federal banking regulations and
IRS tax law. The term ‘Self-directed’ investing simply means that
the investor chooses the specific asset to invest in, unlike
purchasing a mutual fund, where assets are chosen by fund managers
and other entities. Self-directed IRAs are no different than
conventional IRAs, except that they allow investment in
non-traditional assets, such as real estate and other investments.
With a Self-directed IRA
funded account, individuals can invest in real estate in many ways.
If the Self-directed IRA has sufficient funds, the IRA can purchase
the property outright; the asset is held in the IRA. As owner of the
land, the IRA must have sufficient funds to pay property tax, etc.
Investors can also ‘partner’ with themselves or other qualified
persons to effectively extend their purchasing power. Imagine having
personal funds and IRA funds to effectively purchase the property
such that each share would own “an undivided interest” in the
property, which means they share all expenses and profits based on
that pro-rata share. Similarly, investors have used legal entities,
such as a Limited Liability Company (LLC) and Limited Liability
Partnership (LLP) to invest in real estate. Finally, investors can
direct their IRA to actually take out a mortgage to purchase rental
property. These are called ‘non-recourse’ loans which are procured
from specialized lenders and the loan’s repayment must come from
contributions to or income from the property in the plan.
Self-directed IRAs offer
substantial tax advantages that have made many millionaire
investors. The greatest advantage is that IRA investors pay no
capital gains tax when the property is sold by the IRA. In addition,
because the profit from the sale is deposited back into the IRA with
no tax on gain or growth, the investor enjoys the power of compound
interest to invest in the next real estate deal. Although IRS 1031
exchanges can be used to fund partial IRA investments in real
estate, Self-directed IRAs do not have the same limitations and
holding periods, thus are much more flexible. Finally, if you’re
like many investors who are tired of poor-performing investments in
stocks, bonds and mutual funds, Self-directed IRAs offer true
portfolio diversification; i.e., in real estate, to help build
wealth via tax-deferred or tax-free income-generating assets!
Your first step in
purchasing real estate is to have a trusted Realtor who is
knowledgeable in finding your ideal property. Purchasing real estate
with your IRA is very similar to conventional means, but IRS
regulations must be observed. As with any investing, it’s always
appropriate to have competent advice from tax and legal advisors.
Beyond that, the best remedy to avoid problems with the IRS is to
become an educated investor by reading or attending a workshop or
seminar on buying real estate in an IRA offered by your local
Self-directed IRA Administrator.
For more information on
Self-directed IRA investing, contact Julian Acosta, Director,
Business Development for Entrust Administration Services in South
Florida. Call 954-331-8072 or toll-free: 866-561-4472 or email at:
jacosta@entrustfl.com.
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