Buying Real Estate with Self-Directed IRAs

What is a self-directed IRA?

A self-directed IRA allows you to use your retirement fund to invest in such things as stocks, bonds, and mutual funds, but also less traditional investments, like real estate, mortgages/deeds of trust, private placements, tax liens, and other private placements and limited partnerships. It is a common belief that you can only hold CD’s, stocks, bonds, and mutual funds in your IRA. Many don't realize that there are other options. Really, the only two things that are off-limits are collectibles and life insurance, according to IRS rules. As the name suggests, it is simply an IRA account that allows you to manage your own investments, as well as choose the investments you purchase.

Buying real estate

Self-directed IRAs are also known as Real Estate IRAs when used to buy real estate. The real estate you purchase with your IRA must be treated strictly as an investment. You cannot use the property owned by your IRA for personal use, for example, a vacation home, office space, or your residence. This is because the purpose of your IRA is to provide for your retirement in the future, not to benefit you now. Also, real estate property that you already own cannot be placed into your IRA. Your spouse, your parents, or your children also couldn’t have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only “lineal descendants” be disqualified.

Even though real estate held by your IRA cannot be used for immediate personal benefit, the tax deductions are too great to pass up. An IRA is simply a tax-advantaged container for your investments. The profits made from your real estate investments are tax-free, as long as those investments are held by your self-directed IRA.

Setting up a self-directed IRA

The first thing you need to do is find a custodian, or bank, that will allow you to invest in real estate. Some custodians will not let you invest outside the stock market, so do your research and find out exactly what they offer with their self-directed IRAs.

Once you select one, set up a self-directed IRA with your IRA custodian. Finance the self-directed IRA account with funds, or transfer money from either a previously held retirement account or one that an employer is currently funding.

A qualified trustee or your custodian must hold the IRA assets on behalf of the IRA owner. Another option is to set up an IRA LLC. The account holder can then direct the IRA custodian to invest in the LLC, which can be managed by the account holder without the involvement of the custodian. The profits of the LLC are passed on to the IRA with nearly identical tax-favorable treatment.

Overview

Using self-directed IRAs, or Real Estate IRAs, to purchase real estate is one of the best ways to add to your IRA portfolio and to save for your future. With cash-flow and appreciation, real estate has a potential higher rate of return that can accelerate the value of your IRA. Although you cannot use the profits immediately, the profits you make from these IRA investments have huge tax benefits. So find a bank that fits your needs and set up a self-directed IRA ASAP! We recommend it!



Sources: Dax Desai.com, www.daxdesai.com; eHow.com, www.ehow.com; Realtor Magazine, www.realtor.org; Safeguard Financial, www.ira123.com; Wikipedia, www.wikipedia.org.