In this business, in client meetings, telephone consultations and seminars, we find ourselves answering the same common questions about Real Estate IRAs over and over again. So we thought we’d compile them here, in one convenient list.
- Is it legal to hold real estate in a Real Estate IRA?
Answer: Absolutely. The U.S. tax code gives taxpayers broad latitude to hold just about anything they want within an IRA. The only restrictions as far as the types of allowable investments are as follows:
- You can’t own life insurance in an IRA.
- You can’t own gems or jewelry.
- Any precious metals you own in an IRA have to meet certain standards for purity and consistency. See our exclusive Guide to Gold and Precious Metals IRAs for more information on this topic.
- You cannot own alcoholic beverages within an IRA.
- What are the benefits of holding real estate in a traditional Real Estate IRA?
If you hold real estate within an IRA, that asset enjoys the same tax and asset protection benefits that any other asset held in an IRA enjoys. Specifically:
- Deferral of any income taxes due – such as on rental income.
- Deferral of any capital gains taxes on any assets sold at a profit.
- Creditor protection against seizure of IRA assets up to 1.25 million (does not apply to inherited IRAs).
- Can I hold real estate in a Roth Real Estate IRA?
Indeed you can! When it comes to real estate, both property values and rents tend to grow over time. In a Roth IRA, both your rental income and property values can grow tax-free.
- Can I finance properties within a Real Estate IRA? I heard it’s illegal for IRAs to borrow money?
It is, indeed, quite possible to find financing for real estate deals held within IRAs and Roth IRAs. And it is quite legal for your IRA to borrow money – provided it borrows on a non-recourse basis. That is, in the event of a default on the loan, the lender may only have claim to the asset they financed. They cannot claim your personal assets outside the IRA or any other assets within your IRA.
At present, lenders are usually willing to lend about 65 percent of the value of a real estate investment within an IRA. Which means you would have to come up with about 35 percent, minimum, as a down payment, plus transaction costs.
Any mortgages, interest and other expenses would have to be paid for out of IRA assets.
- Can I have my Real Estate IRA buy property from me? No, you cannot direct your IRA to purchase assets directly from yourself. Buying property from yourself is a prohibited transaction, under IRC 4975. Your IRA may not buy from, borrow from, lend to or sell to anyone on this list:
- Your spouse.
- Your children, grandchildren or great grandchildren.
- Your parents or grandparents.
- Any advisor who advises you on your IRA.
- Any entity controlled by any of these individuals.
Likewise, no one on the prohibited transaction list may use the property for their own personal benefit, nor for the benefit of any entity they own.
- Can I own foreign real estate in my IRA?
Yes. The U.S. tax code does not care where the property is. You should take care to comply with applicable laws in the overseas country and any possible sanctions, embargos, restrictions on investment and the like that may apply.
Visit us at www.americanira.com, where you can access much more information via our extensive online resource library, or call us today at 866-7500-IRA (472).