Want more power in your IRA? Historically, real estate has given many Americans with a stable investment vehicle that offers both income and appreciation. One of the greatest tools available to real estate investors is the Self-Directed IRA – a government-sponsored retirement plan that allows real property investments.
Most investors believe that their only IRA (Traditional/Roth) investment options are bank CDs, the stock market, and mutual funds.
Few Americans realize that they have the option to Self-Direct their IRAs and other retirement plans into real estate—and that they can benefit from the tax advantages those plans provide.
Using a self-directed IRA to purchase real estate investments helps you earn tax-deferred/tax-free profits. Imagine not having to pay taxes right away—or ever—on your real estate deals. Instead of paying 25%, or 30%, or even 50% of your profits to the government in taxes, you keep it.
Top Alternative Asset Class
According to Morgan Stanley, US millionaires view Real Estate as the Top Alternative-Asset Class to own in 2013. Almost 60% of those surveyed expect to add to their real estate investments, whether through a Real Estate Investment Trust (REIT) or direct ownership. Many IRA holders see the same opportunity and decide to join thousands of uDirect IRA Services clients in adding property to their portfolio.
In certain regions of the country, depressed prices due to foreclosures and bank owned property have stimulated the investors due to enhanced cash flow opportunities. Properties that were historically purchased and held for appreciation, now can provide income to the Self-Directed IRA as well. In addition, the unprecedented displacement of families from the economic downturn have increased the demand for rental properties, as few its came on the market during the past eight years
Different types of real estate you hold within in your Self-Directed IRA:
- Raw land: This is land found in its natural state, without basic required such as sewers, electricity, water etc.
- Residential homes: Housing for private residents rather than businesses and other entities
- Commercial property: Property used for business purposes, both profit and non-profit
- Apartments: A self-contained rental housing unit, usually found in apartment buildings
- Duplexes: A two-family house with separate entries for each apartment, residing on a single lot and sharing a common wall
- Condos/town-homes: Owner-occupied self-directed housing units within a building
- Mobile homes: A moveable home that has a place to sleep, to eat, and to perform bathroom functions
- Real estate notes: Promissory notes allowing the lender to put a lien on a property in which mortgage payments are overdue
- Real estate purchase options: Contracts giving the holder a right, but not the obligation, to buy a specific property at agreed terms. The seller cannot sell the property to a third party when the contract is in effect.
- Tax liens certificates: A claim on a property that has had a lien placed on it due to unpaid property taxes. The certificates are usually sold at auctions.
- Tax deeds: A deed giving the government the right to seize and sell tax-delinquent properties. Tax deed sales are usually held as auctions.
Tax Benefits To Using Self-Directed IRA To Purchase Real Estate
A Self-Directed IRA can provide significant tax benefits to owners who hold real estate and follow certain rules. A Self-Directed IRA provides a tax-deferred or tax-free haven on gains and positive cash flows for those who want to passively invest in real estate. You choose the custodian or trustee for your self-directed IRA who is in the business of managing real estate and will do so on your behalf. There is no time limits for holding real estate in your IRA, you have access to borrowing (see below) and you have the possibility of earning high returns on your capital. All expenses are paid by the IRA rather than your pocket.
You can use the cash you contributed to your IRA to purchase real estate. The contributions to a traditional IRA are deductible, but those to a Roth IRA are not. Your IRA can also borrow money from an independent third party via a non-recourse loan to purchase real estate. A non-recourse loan is collateralized by the underlying property alone. In case of default, the lender can seize the property but nothing else from the IRA or the IRA holder. Care must be taken when an IRA borrows money for real estate, because it will likely trigger unrelated business income tax or unrelated debt-financed income.
You can also fund an IRA through an LLC or LP owned by the IRA. In exchange for certain check-writing benefits, you give up certain tax benefits with this method. You should speak with a licensed expert (CPA, attorney, etc.) before heading down this path.
What are the rules to using self-directed IRA to purchase real estate?
IRA rules ban “self-dealing.” In terms of real estate purchase, this mean the following “disqualified persons” cannot benefit directly from your IRA’s real estate
- Certain family members (spouse, ancestors, descendants and their spouses)
- IRA service providers and fiduciaries.
- An entity (such as a partnership, corporation, LLC, trust or estate) of which at least 50 percent is owned or held by a service provider or fiduciary; also a partner holding 10 percent of a joint venture of the entity.
- You can’t buy real estate from or sell it to a disqualified person. You can’t live in the property yourself, nor work for the property (even if unpaid), nor use the property as collateral for a loan. You can’t use the property as a vacation home or rent the space to yourself. If the IRS uncovers self-dealing, it can terminate your IRA – that is, force a taxable distribution of assets retroactively to the beginning of the year – and can slap on penalties as well.
The biggest benefit is that the Self-Directed IRA-owner doesn’t have to pay taxes on the money earned from the IRA-held real estate. Instead, withdrawals from a traditional IRA are added to the holder’s taxable annual income and are taxed at ordinary rates (not capital gains rates). Withdrawals from a Roth IRA are tax-free if you meet the five-year holding period requirement.
In Summary, Self-Directed IRAs provide individuals a unique opportunity to increase their retirement savings via Real Estate with many options and Significant Tax Deferred Benefits.
by Tracy Stein – CEO/President of www.PrimePinnacle.com