There’s nothing out there that quite offers the unique advantages of direct investment in real estate:
- Tangible value
- Potential for substantial income from rent
- Potential for capital appreciation
- Effective safeguard against inflation
- Extensive availability of leverage
- Ease of borrowing against the asset for other investing
- Effective hedge even against economic collapse
Most mutual fund companies and brokerage houses, unfortunately, don’t support it. They don’t earn commissions from real estate transactions, so they would rather steer you toward stocks, bonds, funds and REITs. They’d rather you didn’t even know you can invest your IRA funds directly in real estate.
REAL ESTATE IRA BASICS
The good news is, though, is that it’s quite easy to hold real estate – actual, tangible real estate – within your IRA, provided you adhere to a few basic rules.
Why might you consider real estate within an IRA?
- Deferral of income tax on rental income
- Deferral of capital gains taxes
- Potential for tax-free income and tax-free growth in the case of Roth IRAs
- Substantial protection against bankruptcy. Federal law protects up to $1 million in IRA assets against creditors, and some jurisdictions provide even more.
You can even employ leverage within your Real Estate IRA. Many people are unaware that IRAs can, indeed, borrow money in order to invest in real estate or meet other liquidity needs. Generally, you can borrow up to 65 percent or so of your real estate’s value provided the mortgage or loan meets the following criteria:
- The loan must be on a non-recourse basis. That is, the creditor can not secure the loan with anything outside of the IRA itself. You cannot pledge assets other than those inside the IRA as collateral.
- The loan cannot come from you, your spouse, your ascendants or descendants, or their spouses.
- The loan cannot come from any entities any of these individuals control.
- The loan cannot come from a fiduciary advising you on the IRA, his or her spouse, nor any entity they control.
The Real Estate IRA is a subset of a concept called the Self-Directed IRA. This simply means that the IRA owner takes on much more control of how the assets in the IRA get used. Rather than delegating control to a fund manager, for example, the owner of a Self-Directed IRA account personally decides what properties to buy and at what price, what to rent them for and whom to rent them to (or what property management firm will take care of that for the owner), when and how to make repairs and withdraw rental income or capital gains, as appropriate.
A Self-Directed IRA such as a Real Estate IRA puts you, not Wall Street, in control.
Considerations for Real Estate IRAs
Like other IRAs, Real Estate IRAs generally come with a catch: Unless it’s a Roth IRA, and you have therefore already paid income taxes on the money, you will have to make required minimum distributions starting at age 70½. Blow the deadline and the IRS could slap you with a penalty of 50 percent of the amount you were supposed to withdraw.
The process is simple:
- Open an account with American IRA LLC and deposit IRA funds, or conduct a trustee-to-trustee transfer from your IRA to American IRA, LLC. Because you aren’t moving funds out of your IRA, there are no taxes on this transaction.
- American IRA will deposit your funds in an FDIC-backed risk-free interest-bearing cash account and await your instructions.
- Identify the property you wish to purchase.
- Notify American IRA, LLC and direct us to have your IRA purchase the property on your behalf. Note: You must name the IRA as the ‘grantee’ on the property deed. We will walk you through the naming protocol when the time comes.)
Have rent checks and any other revenue generated by your property deposited back into your account with American IRA LLC, rather than sent to you personally. That way, you will avoid accidentally triggering taxes and penalties on early withdrawals.
Notify American IRA LLC how you want that reinvested money used – either within the IRA or distributed to you.
The IRS enforces a few simple rules designed to prevent self-dealing and A few simple rules to keep in mind:
- You cannot mix personal and IRA assets.
- You cannot use the property for your personal convenience.
- You cannot direct the Real Estate IRA to use a company you own for maintenance or property management services.
- You cannot rent the property to yourself, your spouse, ascendants or descendants or their spouses.
- You cannot direct the IRA to hire any of the above to provide goods or services, nor can you direct the IRA to hire any entities the above individuals control.
You can, however, borrow against your property using a non-recourse loan in order to fund additional acquisitions.
You can rent a property held within a real estate Roth IRA for generally tax-free income (however some income may be taxable under unrelated debt income tax rules if you have borrowed money from outside the IRA to purchase the property. See IRS Publication 598 for more information on unrelated debt financed property and income tax).
You can defer taxes on capital gains on property held within Real Estate IRAs.
Want to learn more? Simply attend one of our free online seminars, at no obligation and no cost to you. We offer several of them per week, where we’ll cover all the basics. Select one and sign up here. We work with investors anywhere in the U.S.A.
Thank you for your time. We look forward to working with you.
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