The Real Estate IRA
RealTrust Self-Directors invest in real estate for a variety of reasons:
- to diversify their retirement plan holdings
- hedge against economic cycles
- realize positive cash flow from rental income
- realize tax-deferred capital gains with quick-turn rehab opportunities
- structure longer-term hold strategies to fit their personal investment objectives
There are many types of properties your retirement account can own, including:
- Single family and multi-unit homes
- Apartments and Condos
- Commercial Property
- Improved and unimproved land
- International holdings
Structuring Techniques: There are many ways to purchase real estate with your IRA or 401(k). One can acquire the property with all cash or by putting a certain percentage down in cash and debt-financing the balance of the purchase price. Another option is to bring partners into the deal and share the expenses and income on a pro rata basis with the co-investors. You can even partner with your own taxable money and split cash flow and profits between your IRA and yourself, personally. Careful planning and management is required, of course.
Debt Financing: If you choose to leverage your IRA to purchase real estate, the financing must be obtained on a “non-recourse” basis. Non-recourse means that the lender can only realize against the property pledged as collateral for the loan in the event of a default; the lender cannot reach into your IRA to recover against other assets held therein. The rules preclude the IRA Holder from personally guaranteeing the obligation, so the lender, generally, cannot go after your personal assets either. When using debt-financing, the property serves as collateral for the loan, and funds used to repay the underlying debt must come from income generated by the secured property, new contributions to your IRA/401(k) or other assets held in your retirement plan. Annual income and capital gains realized on a leveraged investment may be subject to debt-financed income tax (DFTI). Be sure to consult your tax advisor for guidance with respect to this issue.
Real Property Administered through IRA Account: Keep in mind that the acquisition, holding, and ultimate re-sale of the property must flow through the IRA or 401(k) Account. The purchase and sale agreement must reflect the IRA as purchaser. The escrow must be opened in the name of the IRA account, not that of the IRA Holder.Title to the property will vest in the name of RealTrust for the benefit of (fbo) the IRA (unless an LLC strategy is employed as discussed in the Check Book IRA LLC section). Any rental income and/or capital gains must flow back into your retirement account and will do so on a tax-deferred or tax-free basis (depending on the type of account). The funds in your IRA may be used to pay earnest money deposits, down payments, improvement costs, and ongoing expenses, for example. When the property sells, the transaction is also processed in the name of the IRA and, in general, the proceeds will be returned to the IRA account on a tax-deferred or tax-free basis.
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