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Real Estate IRA
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Real Estate IRA
Section 408 of the Internal Revenue Code permits individuals to purchase real estate including land, commercial property, condominiums, residential property, mortgages, trust deeds, real estate contracts or private placements with funds held in many common forms of IRA's, including 401k’s, a traditional IRA, a Roth IRA , and a Simplified Employee Pension plan, or SEP-IRA.
Purchasing the Property
Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.
Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note.
Unfortunately, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you can't have any personal use or benefit of the property. To do so may cost you plenty in taxes and penalties.
There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents, or your children also couldn't have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only "lineal descendents" be disqualified.
Once you've chosen a property, your IRA custodian—not you personally—must actually purchase the property. The title will reflect the name of your IRA custodian for your benefit (such as XYZ Corporation, Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you'll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.
If you have a Self Directed IRA LLC the purchase and title to the property will be in the name of the LLC and you as Manager of the LLC can manage the property.
Operating an IRA Held Property
Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your Self Directed IRA LLC, you'll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your Self Directed IRA LLC account so you can use that money to cover your costs.
If you do not have sufficient funds in your iRA to purchase the property for cash and need to get a mortgage to purchase the property it must be a non-recourse mortgage. A non-recourse mortgage is a mortgage that you do not personally guarantee. You cannot personally guarantee a mortgage on property owned by your IRA. It's also possible to sell properties while they are held by your IRA LLC, so long as the purchaser is not a family member. Once a deal closes, your IRA LLC account now holds the cash proceeds—ready for you to make your next investment. An alternative is to sell an IRA LLC held property with seller financing so that all payments including interest made by the buyers are paid to your IRA LLC.
SelfDirectedIRA.org will set up a turnkey truly Self Directed IRA LLC for you quickly, efficiently, and economically. Please see "Set Up Your Self Directed IRA LLC" or call us toll free at:
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