Everything You Need To Know About Real Estate and IRAs

There are several strategies. Here are the top 3.

1. Direct Purchase. This when you have IRA savings and and your IRA purchases the asset using only money in your self-directed IRA. Your IRA pays all cash for the investment. It is the simplest and quickest way to fund a purchase.
2. Partnering. Bring in other sources of cash to fund the purchase constitutes partnering for your real estate investment. Some common methods of partnering include partnering with other people’s IRAs or with their personal funds or even your own. You divide the investment profits and expenses among investors by their ownership percentage which is based on the contributed amounts of the investors, respectively. At the time of initial purchase, your IRA can partner with anyone, including a disqualified person. But after the transaction is completed, your IRA cannot buy, sell, or transfer to any disqualified person.
3. Non-Recourse Loan/Leveraging. This occurs when your IRA takes out a loan, typically known as a non-recourse loan. This sort of credit is common in IRA real estate purchases but cannot be obtained by going through traditional means. We work with many non-recourse lenders. Contact us to learn more.

To fund a real estate transaction, you’ll need to complete a Real Estate Purchase Offer Review Form. Kindly ensure that your account has sufficient funds before engaging in a transaction.

Alternatively, it is possible to have an IRA-owned LLC or LP purchase the property. In this case, the LLC or LP that purchases the property holds the title. Utilizing an LLC or LP to purchase the property affords greater control (with more responsibility) to the investor, enabling them to sign the closing documents for the purchase and allowing for check-writing privileges. This provides immediate access to funds and diminishes IRAR transaction fees.

This depends on the complexity of the transaction. If the funds are available in your account, IRAR needs three days to process the transactions. For a simple transaction, or, buying one piece of real property without underlying loans, the process may take around five days.

A complex transaction where there are multiple sellers and buyers may take 30 days or more. Note that transferring funds from one custodian to another might take up to seven days. Additionally, you’ll need to make sure to title documents properly so that they are not rejected.

Closing documents are reviewed within three business days. If no corrections are needed, IRAR funds within the following two business days. For an expedited review request, a special handling fee applies. The expedited review time doesn’t guarantee the funding of the transaction if the paperwork is incomplete or changes are required.

Investors are not restricted to one type of real estate property. There are many other real estate investment opportunities apart from residential. You can purchase a variety of investment properties such as commercial buildings, vacant land, condos, mobile homes, storage units, and apartment buildings. You can also invest internationally.

It is highly recommended that you use a title company when purchasing real estate to ensure that the deed is recorded in the name of your IRA. When investing internationally, find out if the land can be held in the name of the IRA. Sometimes an entity is required.

It is not required but highly recommended. The Property Management Agreement is signed by IRAR for the benefit of the IRA at the direction of the IRA account owner. You can hire any third party who is not a disqualified person.

Some of our clients use a property manager for the purpose of consolidating the various expenses. Another advantage when partnering with others, is that your tenants do not have to write multiple rental checks to the various investors. Tenants write one check to the property manager, who then distributes the percentages accordingly.

Property managers send the IRA’s percentage to IRAR for deposit, along with the profit and loss statement. It is preferred that the profit and loss statement be sent monthly. If a property management company is not managing the property, the rental income should be sent to IRAR to be deposited directly to your IRA account, unless an LLC was used to make the real estate investment.

Tip: Do not engage in sweat equity. This means you are personally involved in hands-on work adding value, like doing repair work on the property. See IRC 4975.

Yes. IRAR does permit clients to receive the rental income for record-keeping. However, the checks must be payable to the IRA (not the IRA holder) and sent to IRAR for depositing to the client’s account. The IRA owner cannot deposit the rent in a non-IRAR account.

No. Pursuant to IRS Code 4975 the IRA holder is a disqualified person, and the direct or indirect furnishing of goods, services, or facilities between an IRA and a disqualified person is prohibited.

No, the property is for investment purposes only and not to be used personally.

No, you cannot. However, you can request a distribution to pay for the expenses. Your distribution might be subject to taxes depending on your age and the type of IRA you own.

Not all purchases made in relation to purchasing real estate through an IRA can be deducted. For instance, you cannot bill your IRA for travel expenses for property bought out of state. However, you can request a distribution to pay for the expenses. Your distribution might be subject to taxes depending on your age and the type of IRA you own.

Note that rental income earned through an IRA is exempt from Unrelated Business Taxable Income (UBIT).

No, this is considered a prohibited transaction. Your IRA cannot buy property that you currently own. See IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.

No, because they are disqualified persons. You cannot buy a house or vacation property for you, your spouse, or your lineal ascendants or descendants to use while your IRA owns it. Visit our website for information on prohibited transactions and disqualified people.

No, you cannot rehab the property, whether it be at no charge or at the going rate. This is considered sweat equity, which is not allowed. Any rehabbing must be performed by a non-disqualified person.

Yes, you can distribute a percentage of the property. This is called an in-kind distribution. However, this does not mean that you can live in the property until it is fully distributed.

The property doesn’t have to be rented as long as the IRA has sufficient cash to pay for all the expenses related to the property. Remember that all income goes to the IRA and expenses come out of the IRA. If there are insufficient funds in the IRA to cover the expenses, the IRA holder has the option to rent the property, transfer funds from another IRA, make a contribution, or liquidate other IRA assets to pay for the expenses.

At the time of initial purchase, your IRA can partner with anyone, including a disqualified person. But after the transaction is closed, your IRA cannot buy, sell, or transfer to any disqualified person.

No, using an IRA asset to secure a personal loan is a prohibited transaction and referred to as self-dealing. Everything the IRA engages in must be for the exclusive benefit of the IRA. Self-dealing occurs when an IRA owner uses their IRA for their personal benefit, rather than to benefit the IRA.

In most cases, no. It is not possible to get a personal loan on a property owned by your IRA. This is because using an IRA asset to secure a personal loan is a prohibited transaction and is referred to as self-dealing. Everything the IRA engages in must be for the exclusive benefit of the IRA. Self-dealing occurs when an IRA owner uses their IRA for their personal benefit, rather than to benefit the IRA.

On the other hand, your IRA can obtain a non-recourse loan. The IRA is the borrower of the loan. The loan documents are signed by IRAR on behalf of the IRA at the direction of the IRA account owner.

A non-recourse loan is a loan that is secured only with collateral, which is usually the property. If the borrower defaults, the lender can seize the collateral, but cannot seek out the borrower because the loan is not guaranteed personally by the account holder, even if the collateral does not cover the full value of the defaulted amount. In this situation, the borrower does not have personal liability for the loan. It is not typical to obtain a non-recourse loan from a bank. Borrowers usually have to find private lenders. The IRA account owner must do the research to obtain a non-recourse loan.

Unrelated business taxable income is income received by a tax-exempt entity, like an IRA, that is earned by a business or trade. For example, when an IRA owns a business entity, such as a limited partnership (LP) or limited liability company (LLC), the income produced by the LP or LLC is passed onto the IRA. The LP or LLC could be in any business or trade, from a printing press or a bakery to a daycare center. With some exceptions, the income is likely to be UBIT.

Income that is exempt from UBIT includes rental income, dividends, and royalties, among others. For example, if an IRA owned an apartment building, the rent would not be UBIT. See Publication 598 for information on UBIT.

Cashier checks cannot be issued in the IRA account owner’s name because this constitutes a distribution. Cashier checks must be payable to the auctioneer, county, or third party who is not a disqualified person to the IRA. To fund an auction purchase, you need to complete an Auction Buy Direction Letter.

The key difference is that when an IRA purchases the property, the IRA holds the title; if the LLC or LP purchases the property, it holds the title. Utilizing an LLC or LP to purchase the property also affords greater control (with more responsibility) to the investor, enabling them to sign the closing documents for the purchase and allowing for check-writing privileges. This provides immediate access to funds and diminishes IRAR transaction fees.

The contract must be vested in the name of the IRA, because the IRA and the IRA holder are two separate entities. The IRA account owner (or any disqualified person) should not assign their interest to the IRA because it might be a prohibited transaction. The proper way to handle this is to start a new contract with vesting as follows:

IRAR Trust FBO [account owner’s legal name or plan name], account # [account number].

If there is an error in the vesting, you may be able to provide an assignment or amendment to the contract by changing the vesting as indicated above.

All income and expenses are sent to your IRA custodian for processing. For our IRA account holders, rental checks must be made out to:

IRAR Trust FBO [account owner’s legal name ], account # [account number].

For expenses, complete IRAR’s Payment Authorization Letter and send it, along with a copy of the invoice or bill, to our office.

It is important to note that all real estate expenses, such as mortgage payments, utilities, property taxes, insurance, HOA dues, and repairs and maintenance, must be paid directly from the IRA. You cannot use personal funds to pay for expenses incurred by the asset within your retirement account because it is prohibited by the IRS. If these expenses are paid with personal funds, it could be considered a prohibited transaction.

When you have a bill, you simply instruct IRAR (use a PAL) to pay it on behalf of your IRA. If you use an IRA LLC/checkbook control, your IRA LLC will pay all the expenses and collect all the income.

All real estate expenses, such as mortgage payments, property taxes, insurance, HOA dues, and repairs and maintenance, must be paid directly from the IRA. If these expenses are paid with personal funds, it could be considered a prohibited transaction.

See our forms page for documentation needed to fund a real estate transaction. Initially, we require a Real Estate Purchase Offer Review Form. Please make sure that your account has sufficient funds before engaging in a transaction.

Closing documents are reviewed within three business days. If no corrections are needed, IRAR funds within the following two business days. For an expedited review request, a special handling fee applies. The expedited review time doesn’t guarantee the funding of the transaction if the paperwork is incomplete or changes are required.

No, a living trust is not permitted to hold title on the property. However, you can name the trust as the beneficiary IRA.

Yes, but you cannot receive commission for the transaction. That would be considered a prohibited transaction.

Consult with your real estate professional to assist you with performing the necessary due diligence on the property to fit your individual needs.

Here are a few tips:

• Verify that the title can be held in the name of an IRA.
• Verify that the title company is familiar with self-directed IRA transactions.
• Set a realistic timetable for the transaction.
• Decide on how the property is best acquired: direct real estate purchase, leveraging a non-recourse loan, or through an LLC.
• Find someone local to handle property management.
  
  

No. The policy should be in the name of the IRA. IRAR must sign the agreement on behalf of the IRA.

A real estate IRA allows self-directed individual retirement account (SDIRA) account holders to fund various types of real estate as an investment for retirement. Whether it’s a traditional, Roth, SEP, or SIMPLE IRA, any IRA account type can be self-directed to invest in real estate. However, unlike regular IRA accounts, self-directed real estate IRAs require the account holder to directly pick, buy, and sell real estate assets in the account. Overall, this investment tactic is used to generate greater diversification and control.

Like other types of IRA accounts, real estate IRAs come with certain benefits. For one, the account remains tax-deferred until withdrawals are made. Because it is a self-directed investment account, the account owner is singularly tasked with directing all investments and conducting due diligence. The IRA custodian facilitates transactions according to the desired direction of the IRA holder. They will also take custody of the IRA-owned alternative asset. 

It is fundamental to keep in mind that the real estate purchase can only be used for investment purposes for the IRA holder. Disqualified people— such as you, your spouse, or your lineal ascendants or descendants— cannot be personally involved in a real estate purchase. Disqualified people cannot buy a house or vacation property for you, to use while your IRA owns it. 

It is possible to represent yourself as the agent for the transaction, but you cannot receive a commission for the transaction. That would be considered a prohibited transaction.

Certain transactions are prohibited for real estate purchased through an IRA. For instance, an investment property purchased through an IRA cannot be used as a second home. Similarly, you cannot transfer a rental property you own to your IRA as your IRA cannot buy property that you currently own. 

Sweat equity transactions are also prohibited. The IRA holder or any disqualified person is prohibited from directly or indirectly furnishing goods, services, or facilities between their IRA. This also means that contractors are unable to rehab a property owned by their IRA. Any rehabbing must be performed by a non-disqualified person.

Also, note that cashier checks cannot be issued in the IRA account owner’s name because this constitutes a distribution. This matters for an investor who wants to bid on a property at an auction. In this case, cashier checks must be payable to the auctioneer, county, or third party who is not a disqualified person to the IRA. To fund an auction purchase, you need to complete an Auction Buy Direction Letter.

If you already have a contract in your name and want the IRA to purchase the property, make sure the contract is vested in the name of the IRA. This is because the IRA and the IRA holder are two separate entities. The IRA account owner (or any disqualified person) should not assign their interest to the IRA because it might be a prohibited transaction. Instead, you would start a new contract with vesting as follows:

IRAR Trust FBO [account owner’s legal name]  account # [account number]

If there is an error in the vesting, you may be able to provide an assignment or amendment to the contract by changing the vesting as indicated above.

See IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.

There are some general guidelines to keep in mind when it comes to owning a rental property through your IRA. Let’s take a look:

Tenants. Your investment property can be rented out to tenants or it can remain vacant. As long as the IRA has sufficient cash to pay for all the expenses related to the property, you’re good to go. Remember that all income goes to the IRA and expenses come out of the IRA. If there are insufficient funds in the IRA to cover the expenses, the IRA holder has the option to rent the property, transfer funds from another IRA, make a contribution, or liquidate other IRA assets to pay for the expenses. Rental income should be sent to a property management company or IRAR to be deposited directly to your IRA account unless an LLC was used to make the real estate investment. IRA account holders can directly receive the rental income for record-keeping. However, the checks must be payable to the IRA (not the IRA holder) and sent to IRAR for depositing into the client’s account. The IRA owner cannot deposit the rent in a non-IRAR account.

Property Manager. Once a Property Management Agreement is signed by IRAR for the benefit of the IRA at the direction of the IRA account owner, you can hire any third party who is not a disqualified person. Although it is not required to hire a property manager, it is highly recommended.

A property manager can streamline your real estate investment by consolidating expenses. For instance, for rental properties, your tenants do not have to write multiple rental checks to various investors. Tenants can just write one check to the property manager, who then distributes the percentages accordingly. The property manager then sends the IRA’s percentage to IRAR for deposit, along with the monthly profit and loss statement.

Insurance Policy. The policy should be in the name of the IRA (not your own). IRAR must sign the agreement on behalf of the IRA.