A Guide to Using your Self-Directed IRA to Invest in Real Estate

Posted on Apr 5, 2016

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Self Directed IRA to Invest in Real Estate

Real estate investment seems out of reach for most people, but not for you if you have a self-directed IRA. If you look at your bank account and figure out that you cannot indulge in a real estate investment, a look at your retirement funds and the advantages of a self-directed IRA could show you the possibilities that stand before you. With this IRA, there is no need for cash in the bank in order to invest in some real estate.

The Link between Self-Directed IRAs and Real Estate Investment

Even though traditionally retirement funds have been invested in mutual funds, bonds and stocks, it is possible to invest your money in real estate as well. There are people who would rather not invest in anything other than real estate. As such, they choose not to put any of their money into a 401(k) or IRA. What they may not know is that with a self-directed IRA, you have the liberty to invest your money in real estate in order to grow your retirement funds.

Introducing the Real Estate IRA

It is possible to invest your money in physical real estate using cash in a self-directed IRA. As a matter of fact, this is not a new thing. Since the IRA was formed in 1974, the possibility of investing in real estate has existed since then. Not only can you invest in physical real estate but also in related assets as follows:

  • Private mortgages
  • Rental property both multi-family and single family units
  • Fishing rights
  • Raw land
  • Tax liens
  • Timber land
  • Real estate options
  • Industrial and commercial property
  • Farm land
  • Airspace rights

How to Use Your Self-Directed IRA for Real Estate Purchase

The process of doing this is very different from the usual one that entails purchasing mutual funds, stocks and bonds. There are several things you must know in order to take advantage of this opportunity.

How to Invest Your Self-Directed IRA in Real Estate in 6 Simple Steps

  1. Speak to a self-directed IRA custodian to set up your self-directed IRA – The first step is to speak to a custodian who does this kind of transaction. Your current broker may not be conversant or capable of doing this for you.
  2. Put funds into your account – this can be done in several different ways. You can begin contributing to your IRA or you can transfer funds into it from another IRA, or you may also decide to rollover the funds from your 401(k).
  3. Find the property you want to invest in – This is the part where you locate an investment that is ideal for you. The assumption is that you are an expert in real estate investment or, at least, working with the guidance of an expert.
  4. Don’t append your signature anywhere – It is important that you do not do this because you will not be listed as the property owner. Instead, your IRA will own the property and will, therefore, need to sign on the dotted line. The IRA will put in a purchase request and sign all the necessary paperwork.
  5. Closing – This will be exactly like closing on a personal property with the exception that the IRA will be buying the property. It is important to ensure that you have all the required funds in your IRA including closing fees.
  6. Maintenance – Your IRA now owns the property and you can begin enjoying the benefits of the purchase. You will need to take care of the maintenance items as covered below.

Rules and Restrictions of Self-Directed IRAs Investing in Real Estate

  • You are not allowed to put previously owned real estate into your IRA – This is a prohibited transaction. The investment needs to be new and from a 3rd party.
  • Prohibited transactions – You need to be very careful about these. These occur when you have broken one of the self-directed IRA rules that could cause the investment to be seen as a distribution, immediately attracting taxes as well as penalties. These taxes and penalties tend to be very high and should be avoided at all costs. It is recommended that you work closely with a professional who is well versed in real estate IRAs.
  • Disqualified Persons – This is a person who is not allowed to personally benefit from the property investment in your IRA.
  • It is possible to be taxed on the investments you make – It does not happen often but occasionally does. Work closely with a financial advisor to know how this can affect you.
  • Alternative investments that are allowed – You are allowed to invest in almost any asset using your IRA except collectibles, S-Corps and life insurance.

In order to invest in real estate using your IRA, you need to find a financial advisor who is experienced in handling these types of transactions. Speak to us today to know more about how you can use your self-directed IRA to invest in real estate.

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