Are you interested in holding Real Estate in your IRA but just aren’t quite sure where to start? Well, look no further. Here are all the questions and answers you may have when setting up a Real Estate IRA with Midland IRA.
What types of property can I purchase with my Midland IRA account?
You can purchase any type of investment property in your IRA. Some examples would be Single family and multi-unit homes, Apartment buildings, Co-ops, Condominiums, Commercial Property, Vacant Land, and the list goes on.
How do I acquire real estate within my Midland IRA account?
Real estate can be purchased by your IRA account. The first step would be to set up an account with Midland IRA and fund it. In order to first fund the IRA, you would need to transfer funds from an existing IRA, roll over from a qualified plan or contribute to your IRA personally. You can then start putting in offers on properties and begin the investment process. Please view the contribution limits for each type of IRA.
How is the title held on property in an IRA?
Since your IRA is buying the property rather than you as an individual, the title must be held in the name of Midland IRA LLC FBO Account Holder’s Name, IRA Account #. Therefore, the contract, title commitment, deed, liability insurance, etc. must be titled accordingly.
What is a prohibited transaction?
IRS Code Section 4975 defines a prohibited transaction as a transaction between a plan (your account) and a disqualified person. Generally, disqualified persons are defined to be the Account Holder, other fiduciaries, certain family members (lineal descendants and spouses of lineal descendants) and business under the Account Holder’s (or disqualified person’s) control. Essentially, the prohibited transaction rules prohibit an IRA or Qualified Plan from acquiring a piece of property which will be purchased from or used personally by the Account Holder or other disqualified persons.
Can I use the property held within my Midland IRA account?
The property must be purchased for investment purposes only. Neither you nor any other disqualified person can have any personal use or benefit of the property while it is held in your retirement account.
If I decide I want to use the property in my account, how do I take possession of the property?
You may withdraw the property from your account as an in-kind distribution (at the current market value) and pay taxes and/or possible penalties if you are under age 59½. You will need to provide Midland IRA with a completed and signed Distribution Form, a Fair Market Value Form and a deed prepared for Midland IRA’s signature that conveys the title of the property from your account to you individually. An updated appraisal or broker’s price opinion must also be provided at the time the distribution.
How is earnest money handled?
The earnest money deposit must be funded by your Midland IRA account. You cannot use personal money for the deposit and then be reimbursed later. You will need to send a copy of the contract or purchase agreement to Midland IRA along with a Real Estate Purchase Authorization form, for Midland IRA to send the specified amount of earnest money from your account to the Title Company or closing attorney. The contract or purchase agreement must list Midland IRA Trust, LLC FBO Account Holder’s Name, IRA Account # as the buyer. You (or other disqualified persons) cannot be listed as the buyer and then later assign the contract to your Midland IRA account.
Can my Midland IRA account borrow funds to finance a real estate purchase?
Yes, but only within an IRA. Midland IRA will hold debt-financed property in an IRA only with the use of a non-recourse promissory note issued by a lending institution or by the seller of the property. The non-recourse promissory note cannot be personally guaranteed, and the lending institution can only look to the property securing the note as collateral. Important: Debt-financed property may generate Unrelated Business Taxable Income (UBTI), and any taxes due must be paid by the account. For more information regarding UBTI, please consult your tax advisor.
Can my Midland IRA account purchase a portion of a property along with other investors?
Yes. The deed must be registered to “Midland IRA FBO Account Holder’s Name, IRA Account # as to an undivided ____% interest.” The exact undivided interest must be provided. Also, keep in mind that all expenses paid out and all income must be divided per the percentages listed on the deed.
May I sell property that I currently own to my Midland IRA account?
No. Property that you or a disqualified person has ever owned is not eligible to be purchased by your Midland IRA account since this would be a prohibited transaction.
How are expenses and/or improvements handled for real estate held in my Midland IRA account?
All earnest money deposits, insurance premiums, taxes, debt payments or other expenses of the property (including any improvements) must be paid by the account to an unrelated third party. Since Midland IRA requires your written authorization to pay invoices, it is important that you use your mailing address when setting up utilities, etc., so that bills are sent directly to you (or your property manager) for your approval. A copy of the invoice or tax notice must then be sent to Midland IRA along with the Expense Payment Authorization form or your written authorization to pay the expense from your account. You may not pay for an expense on a credit card and remit the statement for payment. Midland IRA will not process payments to a credit card issuer.
Does rental income have to be deposited in my Midland IRA account?
Yes. All rental income must return to your Midland IRA account along with a Deposit Coupon.
What should I know about selling property within my Midland IRA account?
Once you have an offer that you would like to accept, you will need to submit the contract for signature after you have reviewed and initialed each page along with our sell direction letter. We will then sign the contract on behalf of your IRA and issue closing instructions to the title company. Once we receive the closing documents, we will forward them to you to review and initial as “Read and Approved”. Midland IRA will then execute the closing documents and return them to the Title Company or closing attorney to complete the transaction. The Title Company or closing attorney will then remit the proceeds of the sale to your Midland IRA account.
When I sell the property within my account, can the account seller finance the transaction?
Yes. Once the property is sold, you may carry the note and deed of trust/mortgage within your account. The principal and interest payments will be deposited into your Midland IRA account, and you can reinvest the cash however you choose.
If you have any more questions about Real Estate IRAs or any other assets you can hold within an IRA, please feel free to call our offices at 239-333-1032.
DISCLAIMER: Midland IRA does not offer investment, tax, financial, or legal advice nor do we endorse any products, investments, or companies that offer such advice and/or investments. All parties are strongly encouraged to perform their own due diligence and consult with the appropriate professional(s) licensed in that area before entering into any type of investment.
*All investments involve risk. There are no guarantees that alternative asset investments will increase returns and minimize losses. Like traditional investments, there are inherent risks of investing in alternative assets and many hold the opportunity to lose most or all money invested.