There are a lot of real estate investment rules when you are thinking of investing with your IRA, but we are here to help you every step of the way. Here are our top dos and don’ts of real estate.
DO purchase real estate for investment purposes.
Adding real estate to your retirement plan is a great way to diversify your portfolio; however you must keep in mind that it must be for investment purposes only. This means you are not able to live in it personally or use it as a vacation home. The IRS wants you to benefit from it at retirement, not now.
DON’T buy or sell from a disqualified third party.
Disqualified parties include: you and your spouse, any business of which you have a majority interest in, your parents, your children and their spouses, your grandchildren or any fiduciary to the IRA. Your siblings are not disqualified so you are more than welcome to sell or buy a property from your brother or sister as long as the property is bought or sold at Fair Market Value.
DO make sure you use the proper title when putting an offer in on a property.
It is much easier to close if everything is done correctly from the beginning. Proper title should read:
Midland Trust, LLC FBO Jack Smith IRA #1234567
DON’T sign closing documents personally.
Your IRA is the owner of the property; therefore as your IRA administrator, we (Midland) should sign ALL legal documents. Once you have identified the property you wish to purchase and your offer has been accepted, simply fill out our Real Estate Purchase Authorization form and we will take care of getting in contact with the title company. We do have you review and initial all documents, but we take care of signing them.
DO have rental income sent back to your IRA.
One of the benefits of owning property in your IRA is that if you decide to rent out the property, all of the income comes back to the IRA tax free. It is important that it be deposited directly into your IRA account and not into your personal bank account. Everything must flow through the IRA in order to be within IRS regulations.
DON’T pay for expenses personally.
Just as all income must come back to the IRA, any expenses must be paid for out of the IRA. Because the IRA is the owner of the property, it is responsible for any and all expenses associated with the property. All bills, whether it be a tax bill, utility bill, insurance bill, plumbing bill or lawn maintenance bill must be paid for by your IRA and not you personally (or with a credit card). This is important to remember because if you do by mistake pay a bill personally, the IRA is unable to reimburse you because that will look like a distribution to the IRS.
DO rent the property to a non-disqualified third party.
If you decide to rent the property you buy with your IRA, please keep in mind that you cannot rent it to a disqualified party (as defined above).
DON’T take personal receipt of sale proceeds.
The IRA was responsible for signing all documents for the purchase and sending funds in order to close so when it comes time to sell, the IRA will again sign all closing documents and take receipt of sale proceeds. If you wish to take some or all of the funds out of the IRA as a distribution, you may do so AFTER they have returned to the IRA.
DO have the IRA listed as either primary insured or additional insured on any insurance policy.
All other bills (such as water, electric, cable) can be put in your name personally; however insurance is the only thing that must reference the IRA. Regardless of which name it’s in, keep in mind that ALL bills must be paid for by the IRA.
DON’T forget about your tax bill.
While the IRA is responsible for paying all bills including the tax bill, it is important to keep in mind that we are not property managers. It is up to you to make sure the tax bill gets paid every year. If you move, make sure to change your address with the tax collector. If you receive the bill, make sure you send it in to us with authorization to pay and make sure you have enough funds in the account to pay it.
There are a lot of things to keep in mind when you are thinking of investing in real estate with your IRA, but we are here to help you every step of the way. Remember to have fun with it and always invest in what you know best!
To learn more about real estate investments using an IRA, contact Midland Trust today.