A real estate IRA allows investors to use their IRA funds to invest in real estate, among other alternative investments. The name refers to the ability to hold the real estate as an asset of the individual retirement account (IRA). The more common name for a real estate IRA is self-directed IRA.
Investors who are considering using a real estate IRA should be aware that there are certain restrictions. There are various actions which are considered to be prohibited transactions. Prohibited transactions occur when an individual invests their IRA assets in a prohibited investment or engages in a transaction with one or more disqualified parties. For real estate investments, prohibited transactions typically occur because of personal use of the property, renting/leasing to a disqualified party or buying/selling the property from/to a disqualified person.
Some other things real estate IRA holders need to keep in mind is that they cannot contribute personal funds or services to the investment property. So if the roof goes bad, even if the IRA holder is a roofer, they cannot go in and fix the roof themselves. In addition they would not be able to pay for the repairs out of their personal savings. All expenses for the property have to come from the IRA itself, it is therefor important for real estate IRA holders to keep adequate reserves in their real estate IRA account to cover such unexpected expenses.
Real Estate IRAs can offer IRA account holders access to great opportunities though which they can’t find in traditional IRA plans. In addition real estate IRA holders are able to leverage their investments by acquring financing for their investment properties. The main thing to remember here is that the IRA holder cannot personally guarantee the loan, so the loan must be non-recourse.
Claim up to $26,000 per W2 Employee
- Billions of dollars in funding available
- Funds are available to U.S. Businesses NOW
- This is not a loan. These tax credits do not need to be repaid
The IRS permits a qualified, self-directed IRA to own almost any type of real estate, including single and multi-family units, co-operatives, condominiums, apartments, as well as improved and unimproved land. The income and appreciation of a property purchased for an IRA is generally tax-free until such time as withdrawals are made from the IRA. If the property purchased for an IRA is financed, however, there will be a special tax, and only that portion of the purchase that is not mortgaged is sheltered from tax. For that reason, all cash transactions are generally best; a partial interest in property, such as in a Tenants in Common scenario, is a good alternative.
Real estate in a self directed IRA plan has the advantage of potentially higher rate of return, diversification and lower long term risk. A disadvantage to the inclusion of real estate in an IRA is the loss of depreciation.
You cannot include property which you own already in your IRA, nor can you buy property that you rent to yourself or any of your family. This is considered by the IRS as “self-dealing” and is classified as a prohibited transaction.
Real estate IRAs may necessitate in changing of the self-directed IRA custodian, as the majority of banks and brokerage houses don’t permit non-traditional investments. The fees charged in this type of IRA are usually higher than a regular IRA. Once you’ve chosen a custodian who can buy the property on your behalf, it’s as simple as identifying the property and directing the custodian to buy it. Though technically your IRA owns the property, you are still responsible for handling all of the associated property-owner duties. All expenses incurred should be paid out of the IRA; likewise, all rents derived from the property should be directed back into the IRA. Substantial IRS penalties may be incurred if personal and IRA funds are co-mingled.
Sources:
http://www.realestateiraonline.com
http://articles.moneycentral.msn.com/Investing/RealEstate/GroundYourRetirementFundWithRealEstate.aspxhttp://seniorjournal.com/NEWS/GuardWealth/6-06-16-RealEstateCan.htm
