Many people we talk to are very interested in using a self-directed IRA to own real estate. But they hesitate because they feel they need a larger down payment, or they need more liquidity than they currently have in their self-directed IRA accounts to be able to maintain the property, pay property taxes, and otherwise keep the property functional.
One solution: Partner with your self-directed IRA. Because your self-directed IRA is a legal entity separate from yourself (similar, in this regard, to a corporation), you can potentially get into a property using your self-directed IRA as a partner. This has several beneficial effects:
- You get the valuable tax benefits of a self-directed IRA on at least a portion of the income or gains your property potentially generates.
- You open up your options to a lot more properties than you could own with a small self-directed IRA balance by itself.
- You gain the diversification effect of real estate in your retirement portfolio. This could be value if your retirement income is otherwise very dependent on paper assets like stocks, bonds and mutual funds, and those kinds of investments don’t do well when it comes time to retire.
- You gain access to more potential for leverage than you generally do in other kinds of investments.
If you do choose to partner with your self-directed IRA in a real estate investment, be careful to observe these important rules:
You cannot use any property your self-directed IRA owns for your own personal use, or for your spouse’s use. This is true even if your self-directed IRA only owns a tiny fraction of the property-if it owns a single penny’s interest in your property, you cannot use the property for yourself or your spouse.
The same applies to select family members, including ascendants, descendants, their spouses, and any financial, tax or legal advisors working with you on the self-directed IRA and their spouses.
You cannot personally lend money to or borrow money from your self-directed IRA, nor may any prohibited party described above. Nor may any entities they control. Neither may any prohibited party.
You cannot sell property to, nor buy property directly from, your own self-directed IRA. Nor may any prohibited individual or entity. You also cannot directly provide services to your self-directed IRA, nor may any prohibited party, nor may any entity they control. That means you can’t hire your own company to do repairs on the property, and you can’t hire your son as the property manager to oversee the real estate held within your self-directed IRA.
Your self-directed IRA isn’t limited to partnering with yourself. It can also partner with other people, companies, or even to other peoples’ IRAs. Note, also, that the rules limiting the people who can do business with your self-directed IRA don’t apply to partnering. Your self-directed IRA can partner with your son, your mother, or their IRAs. There are no limits to how many different people you can partner with.
Note, however, that the rules against selling assets directly to prohibited individuals and against prohibited individuals selling assets to your self-directed IRA still apply. In practice, this means that you cannot change the percentage of ownership of the asset with your relative, in-law, or other prohibited individual or entity.
6 Steps to Partnering with Your Self-directed IRA
1. Open a self-directed IRA account with American IRA
2. Formulate a partnership agreement. If you are going to be the sole partner of your IRA, this is theoretically a straightforward process. It is a must, however, if you plan to have your IRA partner with other people or entities.
3. Fund your self-directed IRA account.
4. Identify a property you would like to have your IRA purchase, either alone or in partnership.
5. Provide American IRA with detailed written instructions to purchase the property on your IRA’s behalf.
6. Direct any rental income to your IRA account at American IRA. Do not accept rent payments personally, or the IRS may consider that rent payment to constitute a distribution, potentially subject to taxes and penalties.
To open an account with American IRA, or simply to learn more about the flexibility and benefits of self-directed IRA accounts, including real estate IRAs and IRA partnerships, call us today at 866-7500-IRA(472)