Can I hold Commercial Real Estate in an IRA?

Can I hold Commercial Real Estate in an IRA?

All IRA holders should be aware that any type of real estate can be held in an IRA for investment purposes, including commercial real estate. If you haven’t heard about investing in commercial real estate with an IRA before, it’s probably because most IRA accounts are provided by banks and brokerage houses that specialize in promoting traditional securities. Not all IRA providers are created equal so in order to invest in commercial real estate with an IRA, you’ll need to set-up a self-directed IRA account with a provider that allows alternative assets. Learn more about self-directed IRAs by checking out my other blogs.

What types of commercial real estate can be held in an IRA?

All types of commercial real estate can be held for investment purposes in an IRA. Common commercial properties may include:

• Retail stores and strip malls
• Office buildings and complexes
• Industrial buildings and factories
• Movie theatres, arenas, parking structures, and other special use buildings
• Equity holdings in an LLC or other entity structure that hold commercial real estate

Can commercial real estate be financed within an IRA?

IRA accounts can obtain financing for commercial real estate investments however a non-recourse mortgage must be used. A non-recourse loan requires that there be no personal guarantee. The only collateral on a non-recourse loan is typically the property itself. Non-recourse loans generally have higher down payment requirements than conventional financing as well as stricter terms. Since the IRA is the entity acquiring the financing, these loans are not reported to credit bureaus on your personal records.

Consider unrelated debt financed income (UDFI) when financing commercial real estate in an IRA.

When financing commercial real estate in your IRA with a non-recourse loan, take the time to learn about unrelated debt financed income (UDFI) and unrelated business income tax (UBIT) before investing. When leveraging your IRA into a commercial property, the debt financed portion of your profits after depreciation and all other deductions will be taxable. Learn more about UDFI and UBIT.

How do I collect income and pay expenses tied to commercial real estate in an IRA?

When an IRA is the investor on title, all cash flow in proportion to ownership must pass through the IRA account. Expenses are paid from the cash balance available in the IRA and income is deposited directly into the IRA. Other options do apply depending on the investment structure. In many situations, an IRA holder may elect to hire a property manager that specializes in handling all day-day cash flow and maintenance requests.