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Buying Real Estate with a Self-Directed IRA

Buying Real Estate with a Self-Directed IRA

Buying Real Estate with a Self-Directed IRADid you know that you can buy real estate with your IRA? You can if you transfer your current IRA to a self-directed IRA (SDIRA). Buying real estate with your IRA can be a better investment option for those who prefer to not invest in the financial markets. This post provides a brief outline of how to buy real estate with an IRA. Contact a self-directed IRA professional for complete details.

A self-directed IRA is really an IRA that allows the account owner to choose investments like real estate, precious metals, private equity and private lending. Types of accounts that can be transfered to self-directed accounts are: Roth IRA, Traditional IRA, SEP IRA, Simple IRA, HSA and an Individual 401k.

To start the investment process you must first open a self-directed IRA account. You can fund your new account by transferring or rolling over your existing IRA to a new self-directed IRA account. Speak with someone who specializes in self-directed IRAs to get all the details.

What kind of Real Estate can be bought?

Once your account SDIRA account has been funded you can purchase: single family homes, land & ranches (improved or unimproved), commercial properties, rental properties, condos, townhomes, multi-family properties, investment properties and more. The most common type of real estate that I see clients purchase through their IRAs is unimproved land.

Important things to know:

  • Your SDIRA is a totally separate entity from you and you can not sign on behalf of your SDIRA.
  • You can not personally pay expenses on behalf of the SDIRA and the SDIRA can not reimburse you for anything. Any expenses you pay on behalf of the SDIRA becomes a taxable and penalized distribution.
  • There are no restrictions on the types of real estate, how the property is held, the market value or where the property is located.
  • Any violation of the IRS rules that result in a Prohibited Transaction will result  in the distribution of related funds plus IRS penalties.

Purchasing the Real Estate

The easiest way to purchase real estate with your SDIRA is with 100% cash from your IRA account. You can also partner with another IRA or entity. As the account holder you can identify the property to be purchased and perform all the due diligence on behalf of your SDIRA. Once you find a property and are ready to make an offer your broker will prepare the contract in the buyer’s name that is provided by the administrator of your SDIRA. The offer can not be in the account holders name. The earnest money check has to come only from your SDIRA account as well as any other expenses related to the property and the purchase. At closing you, the account holder, can not sign any documents as the buyer or sign in the buyer’s signature or initial lines. You can only “read & approve” the documents and sign in the margins to acknowledge the documents appear correct. The buyers signature and buyers initials on the closing documents come from the administrator of your self-directed IRA.

Prohibited Transactions

The IRS rules prohibits the SDIRA from dealing with certain people, primarily you, the account holder, and your family. People who are disqualified from dealing with the assets in your SDIRA are you, your spouse, your parents & grandparents, your children & grandchildren to name a few. Your CPA and attorney are also people who would be disqualified. Get the complete details from a SDIRA professional.

Disqualified persons can not buy or sell assets to or from the SDIRA. You can not live on the property or rent the property from the SDIRA. Disqualified persons can not use the property personally for any reason or make improvements to the property. You can not keep personal possessions on the SDIRA property or work on the property.

If the SDIRA directly or indirectly benefits or is benefited by a disqualified person, that constitutes a Prohibited Transaction.

Fees

As with anything there are going to be fees associated with opening a self-directed IRA and its transactions. Fees you can expect to see are application fees, transaction fees, annual per property fees, overnight package fees, check fees and wire fees.

A self-directed IRA is a great way to invest your retirement dollars in real estate, although by the IRS rules you do not get to personally use or enjoy the properties your SDIRA owns. The real estate assets in your SDIRA account are strictly investments.

***This post contains general information about buying real estate with a self-directed IRA and is not intended to provide the complete and entire process in every detail. Please consult a professional when considering opening a self-directed IRA.***

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