Realtor · Germantown, TN · Member since 2016 · 15 posts · 8 votes
Does anyone have experience buying real estate in a self-directed IRA? I made an offer today to buy a piece of property in my IRA, but still have some questions. Specifically, I am a real estate agent, so am representing myself, but believe that the IRS will not like me being involved? How can I make sure that my commission as the buyer's agent is not considered self-dealing? If I need to defer my commission, I am fine with that, but am I still able to represent myself? Thanks!
Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
9y
You are correct. You should not receive any benefit personally(outside of your IRA) from your IRA investments. I would let someone else receive the commission.
Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
9y
You are correct. You should not receive any benefit personally(outside of your IRA) from your IRA investments. I would let someone else receive the commission.
You should definitely have someone else handle the real estate transaction.
The IRS rules prohibit any direct or indirect benefit between a plan and a disqualified party - in either direction. This means you cannot benefit from the plan by receiving a commission on a plan transaction. Conversely, you should not provide the services of a licensed realtor to the IRA for free.
If you were not a licensed realtor, handling the contracts to acquire or dispose of plan assets would likely not create a conflict. As a licensed realtor you are providing a service of value beyond just executing contracts.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
9y
Is this a Roth IRA? If it isn't, you may want to reconsider using a self-directed IRA to hold real estate.
One of the great benefits of real estate is that it is tax favored. If you do it right, it can be 100% tax-deferred. If you also use 1031 exchanges it can be tax-deferred indefinitely. And, if you die while owning the property, your heirs never pay capital gains.
Take that same property and put it into an IRA and then you pay taxes on the gains when you pull the money out. Plus IRA rule force you to take distributions and you have many restrictions on when / where you can use the money. I'm not sure you can do things like build a house on land owned by your IRA.
A Roth IRA is a bit different because you pre-paid the taxes. Still, I've been pulling money out of IRA's, paying the taxes, and then investing in real estate. I find I have great freedom, flexibility, and I can use the cash whenever I want.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Heather, since you are self-employed you qualify for the truly self-directed Solo 401k plan. Comparing to SD IRA this is way superior alternative. Here are just some of it's advantages:
- Does not require a custodian, this means you can eliminate custodian fees and gain checkbook control over your retirement funds
While it may seem aggressive, as long as you do not receive compensation for serving as the real estate agent of the property, it will not be deemed prohibited in my experience in working with regulators surrounding IRAs and solo 401k plans.
Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
Both were created by congress for individuals to save for retirement;
Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
Both allow for Roth contributions;
Both are subject to prohibited transaction rules;
Both are subject to federal taxes at time of distribution;
Both allow for checkbook control for placing alternative investments;
Both may be invested in annuities;
Both are protected from creditors;
Both allow for nondeductible contributions; and
Both are prohibited from investing in assets listed under I.R.C. 408(m);
The Self-Directed IRA and Solo 401k Differences
In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
To open a self-directed IRA, self-employment income is not required;
In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
The solo 401k allows for checkbook control from the onset;
The solo 401k allows for personal loan known as a solo 401k loan;
It is prohibited to borrow from your IRA;
The Solo 401k may be invested in life insurance;
The self-directed IRA may not be invested in life insurance;
The solo 401k allow for high contribution amounts (for 2017, the solo 401k contribution limit is $54,000, whereas the self-directed IRA contribution limit is $5,500);
The solo 401k business owner can serve as trustee of the solo 401k;
The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
Pre-tax IRA contributions on reported on line 32 of Form 1040;
Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
Roth solo 401k funds are subject to RMDs;
A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
Roth IRA funds are not subject to requirement minimum distributions (RMDs);
The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
At termination, the self-directed IRA is only required to file a form 1099-R.
I agree with George. While the most conservative approach would be to have someone else handle the transaction for your self-directed IRA or Solo 401k, what you describe is not that uncommon in my experience as long as no commission is received.
Realtor · Germantown, TN · Member since 2016 · 15 posts · 8 votes
9y
Thank you all for the advice! I went ahead and made the decision to make an offer and got the house! I am working with Equity Trust as custodian for my IRA and so far am happy with the decision! I understand holding real estate in an IRA is not ideal in every situation, but in this case, it was the only choice I had and I couldn't pass up the opportunity to purchase this property- it is on the same street where I bought my first home (as owner-occupant).