Using A Self Directed IRA To Invest In Real Estate

Updated on August 7, 2020

What is a Self-Directed IRA and a Real Estate IRA?

A self-directed IRA (Individual retirement account) allows the owner of the IRA to make the investment decisions as to where the money is focussed. Traditionally, an IRA is used to invest in publicly traded stocks, bonds and mutual funds. Savvy real estate investors can focus their investments for themselves using a Self Directed IRA (SD IRA). A “Real Estate IRA” is just an SD IRA that primarily focuses on real estate investments. A Self-Directed Real Estate IRA places retirement funds in different types of real estate-related assets.

What Type of Real Estate Can Be Invested in With a Self-Directed IRA

You can purchase several different types of real estate inside of an SD IRA. Here is a general list:

  • Residential – Many self-directed IRAs are single-family homes and multi-family units. Rental income is generated by renting these properties.
  • Commercial property is another great way to generate long term rental income. The real estate investments include a broad range – from a grocery store, an office building to a baseball field.
  • Mortgage Notes are an indirect way to invest in real estate. You are a real estate lender who uses your savings to help others purchase homes while making a profit for yourself.
  • Offshore real estate investments are for investors who want the freedom to invest in foreign real estate markets and to take the tax benefits associated with overseas investments.
  • Real estate owned (REO) properties are foreclosed properties that have been taken back by the bank. You can use your self-directed IRA to buy these properties from the bank or the auctions.
  • Apartment Buildings – you can use your SD IRA funds towards an apartment building that you own outright or that you passively invest in with a syndicate. 

The above is a list of the most frequently purchased but there are several other ways to tackle real estate investing using your SD IRA. Building Bonds, Commercial Paper, Improved or Unimproved Land, Tangible Asset Deeds, Tax Lien Certificates, Trust Deeds – there is a lot of opportunity on the table. 

How to Buy Real Estate With a Self-Directed IRA (SDIRA)?

Investing in alternative assets like real estate with your self-directed IRA is similar to a regular real estate purchase. However, there are certain rules and processes you need to follow to do it correctly. Here’s the process of buying real estate with a self-directed IRA:

  • Open and fund an SD IRA account.
  • Use a qualified self-directed IRA custodian to do this.
  • Find a property to purchase.
  • Do your due diligence and find a property you want to invest in.
  • Give the specifics of the property to your IRA custodian with information of how much money you need, if documents need signing and where to send the funds. You can either fund the entire purchase or a part of it with your IRA.
  • Since the IRA funded the investment, the money, income, and expenses, has to be to and from the IRA.

Benefits of Using Self-Directed IRA to Purchase Real Estate

  • Tax-Free or Tax-Deferred Earning – The largest benefit of an IRA, not just a self-directed IRA is the tax free or tax deferred earning. A traditional self-directed IRA allows you to earn on a tax deferred basis, but your withdrawals are taxed. If you use a self-directed Roth IRA, your contributions are taxed, but your earnings grow tax-free.
  • Diversified Investment Portfolio
  • When you are investing through a self-directed IRA, you have a lot of real estate investment options. You can create a healthy level of investment diversification by choosing between rental properties (both residential and commercial), fix n’ flip opportunities, undeveloped land, mortgage notes, REITs, and many more.
  • Secure Future
  • Investments held in a self-directed IRA are more safeguarded from debt collectors. The rules also allow you to leave the savings to your heirs. So, a successful investment using your self-directed IRA could mean a secure future for you and a significant inheritance for your children.
  • Easy to Get Started
  • All you need to do is open an account and fund it. You can fund your self-directed IRA in these ways:
  • Transfer or rollover an existing retirement account, such as a 401(k), into a self-directed IRA.
  • Make annual contributions to your account regularly.
  • Start investing when you have collected enough to make an investment. If you don’t have enough cash to invest in real estate on your own, you can partner with other investors.

Self-Directed IRA Rules for Real Estate

  1. Rule 1: You cannot own the property. Your IRA cannot buy a property that you or a “disqualified person” owns. Your self-directed IRA can’t sell the property to you or any disqualified person. This is known as “self-dealing,” and is prohibited.
  2. Rule 2: The property must be uniquely titled. You and your IRA are two separate entities. Investments made with your IRA should be titled in the name of your IRA.
  3. Rule 3: Don’t take any indirect benefits – If your IRA is involved in a transaction that somehow benefits you or a disqualified person, the IRS considers this as an “indirect benefit,” which is not allowed. An example of an indirect benefit is renting space in a building that the IRA owns.
  4. Rule 4: Purchase the property with a combination of funds. You can combine your SDIRA funds with your other funds to purchase real estate. Partnerships and undivided interest are two alternatives that exist.
  5. Rule 5: Pay for expenses from the IRA – Any IRA-owned property expenses, such as renovations, utility bills, property taxes, maintenance fees, and building association fees, have to be paid from your IRA.
  6. Rule 6: If finance used, then pay (UBIT Unrelated Business Income Tax) – If any of the IRA investments use financing, they are required to pay.
  7. Rule 7: Income generated must return to IRA – Any income generated through self-directed IRA-owned property must be returned to your IRA.

Self-Directed IRA Tax Pitfalls to Avoid

  • Self-directed traditional IRA allows your investment to grow tax-deferred, whereas Roth IRA investments grow tax-free. However, you need to follow the rules while investing in real estate with your IRA. If the property is bought the wrong way, it can get your IRA disqualified, making you liable to pay taxes and penalties. If your IRA-owned investment property operates at a loss, you lose the tax benefits. Also, you cannot claim depreciation on IRA-owned real estate.
  • If you are planning to purchase a vacation home, think again! With self-Directed IRA, you cannot be involved in self-dealing or carrying out personal transactions. Your family members, too, are prohibited from such kind of transactions. If you buy or sell a property from or to yourself or your family members, you’ll be creating a taxable event.
  • Pay attention to Unrelated business income tax (UBIT) if you are thinking about using a mortgage to purchase the property.
  • When you reach age 72, you must take the required minimum distributions (RMDs) from your traditional IRA. If using IRA money to invest in real estate, make sure there is enough cash left in account to cover RMDs; otherwise, you’ll attract tax and penalties. Roth IRA’s are not subject to RMD’s and this is very important for estate planning.

Self-directed IRA’s allow an investor several alternative investments to choose from. There is certainly more risk to this approach, but it can be an advantage to an investor that can invest in an asset class they are comfortable with, such as real estate. If you have any questions about using a self-directed IRA to invest passively in cash-flowing commercial real estate, please reach out to our team. At First National Realty Partners, we can help you design the commercial investing portfolio that balances potential profits while minimizing investment risks. Our goal is to make it possible for investors like you to get started in these real estate investing opportunities. Contact us any time to learn more about the services that are offered.

Access Our Deals