It almost sounds too good to be true. The fact that IRA holders can use their retirement funds before retirement age to purchase real estate without incurring penalties or taxes might be news to some. However, increasing numbers of people are discovering the benefits of investing in real estate with their retirement funds.
Ways to Purchase Real Estate with your Self-Directed IRA
A self-directed Individual Retirement Account (IRA) is similar to other IRAs but allows a broader range of investment opportunities, including real estate and grants the owner the right to make the investment decisions and not a brokerage firm. A self-directed IRA needs to be set up with a custodian who is experienced in administering such an account, such as Advanta IRA.
1. Cash Purchase – If you have sufficient funds in your self-directed IRA to cover the entire real estate purchase, including closing costs, taxes, fees and insurance you may make the purchase outright using your self-directed IRA. All ongoing expenses relating to the real estate investment must be paid out of your self-directed IRA. In addition, all income or gains relating to your real estate investment must be returned to your self-directed IRA.
2. Percentage Ownership – You can multiply your buying power by partnering with others. Just because you don’t have enough cash in your IRA does not mean you cannot buy real estate. All income and expenses would be allocated to the parties in relation to their percentage of ownership in the property.
3. Nonrecourse Loan – This option allows the IRA to borrow money to purchase real estate. An IRA can borrow money, but it must receive a nonrecourse loan. This means the IRA holder cannot personally guarantee the loan, only the property will be used as collateral.
4. Checkbook Control – With a slightly different structure, the IRA is set up as a self-directed IRA LLC. An LLC is created for your money to be held and for you to invest at your discretion. A custodian is not required to execute each transaction.
Know the Rules
• Any property purchased by an IRA is owned by the IRA…not an individual.
• Any money used to purchase a property with an IRA must come directly from an IRA, not an individual.
• You cannot be reimbursed by your IRA.
• Any expenses or repairs must be paid directly by the IRA. An IRA custodian can assist with this.
• Any income generated from the property must go back into the IRA.
• Purchases made with an IRA need to be for investment, not personal use.
• The real estate you buy must be an investment property(personal use is prohibited).
• An IRA cannot do business with family members which includes you, a spouse, parents, children, grandparents, grandchildren and great-grandchildren.
• Use of an LLC custodian is required by the IRS since you are unable to personally renovate or actively manage the property yourself.
For those interested in investing retirement funds in real estate, the great news is there is something for just about everyone. The opportunities to invest in real estate right now are incredible…especially when you combine this with the ability to use a self-directed IRA.
We at Absync Realty are uniquely positioned to assist you with this investment strategy. We have personal experience in purchasing, renovating, leasing and selling IRA investment properties. Our property management arm allows you to use this unique and profitable investment strategy without any of the headaches often associated with real estate. We handle everything and ACH the funds directly into your IRA each month.
Give us a call at 239-963-4811. We are anxious to share with you the benefits and personal success stories from self-directed IRA real estate investing.