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Options for Funding Real Estate Investments in Your Self-Directed IRA

Options for Funding Real Estate Investments in a Self-Directed IRA

Real estate is one of the most popular alternative assets permissible in a self-directed IRA. When you fund real estate investments in a self-directed IRA you are reaping the benefits of a tax-sheltered account. All income and expenses are tax-deferred or even tax-free. There are many ways to purchase the investment within your IRA. The three most popular ways to do so are by making a cash purchase, partnering funds, and by borrowing money.

When you use your IRA funds to purchase real estate it is considered a cash purchase. If your IRA has enough funds for the entire purchase, it may purchase 100 percent of the asset. Money waiting to be invested inside an IRA account is considered undirected cash funds. Therefore when you purchase any investment it is a cash purchase and has quick turnaround times.

You could also partner funds to make a real estate investment purchase. Your IRA could partner with a friend, family member, another investor, or you personally. When you partner with yourself personally or another individual you would each own a percent of the investment property. Although you cannot rent to, buy from, or sell to any lineal ascendants or descendants, you can partner up with them to make a new investment. For example if your IRA wanted to own 50 percent of a property and your mother’s IRA wanted to own the other 50 percent than you could do so. All rental income and sale proceeds would then be deposited 50/50, half into your mother’s IRA and half into yours. This also applies to expenses such as your property tax bill. All expenses would be divided and paid by percent ownership.

If you don’t have the funds available to purchase the real estate investment property your IRA can borrow money in the form of a non-recourse loan. When using a non-recourse loan, the IRA owner cannot personally guarantee the loan as IRS rules prohibit an individual from using their personal credit for the benefit of their IRA. When borrowing money using a non-recourse loan the property is used as collateral and the lender’s only recourse if there is a default is to foreclose on the property. These loans typically require a larger down payment and owner financing will qualify as long as there is no personal guarantee from the IRA owner.

Keep in mind that when financing your property with your IRA the account may incur yearly unrelated business income tax (UBIT). That is why it is important to consult with your financial advisor or CPA to avoid complications with the IRS and to help determine the best option to make your investment purchase.

To learn how to invest in real estate using your retirement funds please contact Midland Trust at (239) 333-1032.