We would like to convert our IRA into one that allows us to use the funds to invest in real estate. Please share any personal experiences you have had doing this, and companies you would recommend.
I have heard of doing this as well. Interested in responses.
It is possible. I've used Sterling Trust Company, which turned into Equity Trust, which turned back into Sterling Trust. I currently use IRAservices with an IRA LLC I set up some years ago with Guidant Financial. Guidant's IRA LLC business was sold to iDirect Law.
I think owning real estate inside an IRA is not the best idea. There are multiple reasons why.
1) Financing is difficult. Not impossible, but it must be non-recourse financing. That means only a few lenders and large down payments. No personal guarantees allowed.
2) Financing triggers UDFI (unrelated business debt financed income). That's a special form of UBIT (unrelated business income tax) that applies to most income generated inside an IRA. Rental income is excluded from UBIT as long as there's no debt. If the property is financed, the fraction of the property that is debt financed is subject to UDFI. This tax escalates very quickly and is 39.5% on income above $12,300. No, I didn't miss a digit there. There may be an exclusion for the first $1000 of income.
3) You cannot do any work on the property yourself. I've been advised by the attorney I worked with that managing properties held by an IRA is OK. Some folks here disagree. You definitely cannot work on the property. So even a minor issue that you could easily deal with yourself requires hiring someone. And that someone can't be a disqualified party.
4) All money coming and going has to be with the IRA. So, you MUST keep sufficient cash reserves in the IRA to handle any problem. If you have some major problem and don't have the cash in the IRA and can't borrow in the IRA (remember, no personal guarantees) then you're stuck.
5) With many custodians getting money in and out is a hassle. With the Sterling account I was making loans, and even these were a hassle to get done in time. You must submit requests for checks well in advance. So, you need a plumber to unclog a drain and he's going to wait two weeks to get a check. That's why I ended up doing an IRA LLC, though I've since gotten out of the direct loan business and this is less of a factor.
6) No active businesses. Any active business, such as fix and flipping or wholesaling, is fully subject to UBIT.
There are other real estate related investments that I think make more sense in an IRA. Notes in particular, which will not be subject to UBIT.
If you use a s elf-directed solo 401k to invest in real estate, title to the properties is taken in the name of the solo 401k and as long as you are not flipping real-estate inside the solo 401k UBIT may not apply.
On the other hand, if you want to flip properties the rollover as business startup (ROBS) plan may be a better fit.
Originally posted by @Nadine Massarelli : We've used self directed IRA for real estate for years. Used it to make loans, flip properties, buy notes.... Never had a UBIT problem because of deal structure. Challenge we had @ the beginning was with slow custodians (Equity Trust). We almost lost some deals because they were so slow. They may be better now but working w/ Equity put us in the check book IRA camp. We have some funds w/ Guidant which now uses I-direct to establish the LLC. You may also check w/ @Dmitriy Fomichenko for some guidance on self directed IRAs
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