Investing in real estate with your self-directed IRA isn’t too different from a regular real estate purchase; however, there are important rules and processes that you must follow to do it right. This is why when it comes to Real Estate IRAs, people have lots of questions. We’ve collected some of those questions asked by real and prospective investors. The following questions will focus on investing in real estate with a self-directed IRA:
Q: How can I invest in real estate with my IRA?
A: There are several ways you can approach investing in real estate with your retirement funds. Here are a few examples:
- Direct Purchase – Your IRA pays cash for the investment property and holds the title of the property.
- Partnering – You partner your IRA with personal funds or other IRA funds. You can also partner with other people’s IRAs or their personal funds. You divide the investment according to each investor’s percentage of ownership.
- Leveraging – Your IRA borrows money to purchase a property with a non-recourse loan and the leveraged property is held in your retirement account.
- LLC – Your IRA holds interest in a Limited Liability Company (LLC) or land trust. The title of the property is held in the name of the LLC.
Q: Can I personally use the property that was purchased with my IRA funds?
A: No, you cannot. The property is strictly for investment purposes only. You and other disqualified persons may not receive direct or indirect benefits from an asset that is owned by your IRA, even if the IRA only owns a portion of the investment.
Q: Can the rental income from the property in my IRA flow back to me personally?
A: No, you may not receive direct income from the property; however, you can request the funds in your IRA to be sent to you as a distribution.
Q: What type of properties can I hold in my self-directed IRA? Are there any restrictions on the type of property I can purchase?
A: A self-directed IRA gives you the opportunity to make investment decisions in areas based on your knowledge and expertise. From real estate to private lending, your IRA can hold various investment property types including commercial buildings, vacant land, condos, mobile homes, apartment buildings, and more. You are not limited to residential real estate.
Q: Can I buy the property from my IRA to reside in once I retire?
A: No, you cannot buy a property that is already owned by your IRA, as the IRS has ruled it a prohibited transaction; however, you can take a distribution of the property in-kind by retitling the property to your name when you are ready to take a distribution for the property. Depending on the type of IRA the property is under, if taxable, the fair market value of the property would be reported on IRS Form 1099-R and be includible as taxable income in the year of distribution.
Q: Do expenses like utilities, repairs, taxes, and mortgage payments need to be paid from the IRA account?
A: Yes, any expenses from an asset within your IRA must be received and paid via the IRA. You cannot use personal funds to pay for expenses incurred by the asset within your retirement account because it is prohibited by IRS Code 4975.
Q: Can you talk about the logistics of handling revenue produced by a property? Does a bank account need to be opened in the name of the IRA?
A: If purchasing a property directly using an IRA, the income must come back to the IRA. As an example, property managers who collect rental income from an IRA-owned property are required to send the rent (revenue) to the custodian, made payable to the IRA. Some have the tenants make their rental check payable to the custodian directly as they make monthly rent payments. If it’s an LLC structure, the rent is paid to the LLC. The LLC will need to have a checking account established.
Q: Can I buy a house with IRA funds but use non-IRA funds to help pay for repairs?
A: No, as it is considered a prohibited transaction and will violate the IRS Code 4975; however, if eligible, you can make a cash contribution to the IRA and use the contribution to pay for expenses.
Q: Can I be the property manager on my investment property?
A: No, but Entrust does permit the IRA owner to receive the rental income for record-keeping, but the actual funds must be sent to the custodian for depositing. The IRA owner cannot deposit the rent in any non-IRA account because this constitutes a distribution. You cannot pay yourself income from profits generated from your IRA’s rental property.
Q: How long does it take to make a typical Real Estate IRA purchase?
A: Entrust typically sees escrow close on a simple real estate purchase between 15 to 30 days. Depending on the complexity of the transaction, it could take longer. There are a number of factors that must be considered when timing a real estate purchase in an IRA. Investors must have a funded account before the investment can be made. It is important to note that funding your account is heavily dependent on the custodian that you may be moving funds from. It is wise to have an established and funded account, even before you start searching for a property.
As administrators, we cannot give advice about specific investments and strategies; however, we aspire to provide answers and educational resources, or direction to legal issues, for all inquiries. Do you have any questions of your own about investing in real estate with a self-directed IRA? Or maybe you want further clarification? We want to hear from you.
Find out how you can generate more referrals, leads, and repeat business with your free download of “How to Help Your Clients Invest in Real Estate Tax-Free.”
For more information, please visit www.theentrustgroup.com and our online Real Estate IRA Center.
