SEP IRAs And Real Estate

Looking to own real estate in a tax-deferred vehicle? The Self-Directed SEP IRA is a compelling choice. Like the Traditional IRA, the SEP IRA offers the advantage of a current year tax deduction for contributions and the deferral of income and capital gains taxes*

What sets them apart from their Traditional IRA account cousins is this: A much higher allowable contribution limit. For 2015, that means up to $53,000 per year, or 25 percent of compensation, whichever is less. (For self-employed individuals, the calculation is somewhat different because of the effect of self-employment taxes on applicable income. If all income is self-employment income, you can expect a cap of about 20 percent of compensation rather than 25 percent).

The SEP IRA is one of two IRS-recognized retirement plans for small-business owners, the other primary option being the 401(k). For the sole proprietor or those with only one full-time employees, or businesses that are run by a married couple, the usual alternative to the SEP IRA is the “solo 401(k)” or “individual 401(k).” Each has advantages and disadvantages, of course.

SEP IRA Advantages:

  • Contributions are tax-deductible to the contribution individual or business.
  • Businesses pay no tax on investment earnings.
  • Individuals/beneficiaries pay no income tax and no capital gains tax until distributions (except for unrelated debt-financed income tax on income attributable to outside leverage, if applicable. Call us for more information on UDIT taxes and real estate SEP IRAs).
  • Plan sponsors are not locked into specific annual contributions.
  • Business owners/plan sponsors have full control over whether they make contributions and how much to contribute.
  • You may qualify for a tax credit of up to $500 per year for the first three years of putting a plan in place.
  • Low administration costs and overhead compared to traditional pension plans and 401(k) plans.

Who Should Have a Self-Directed SEP IRA?

Whether you choose to self-direct your SEP IRA and route your investments into real estate or not, the SEP IRA generally works best in the following circumstances:

  • You have significant income from a closely-held business with 25 employees or fewer, or from self-employment.
    • Sole proprietorships, S corporations, C corporations, partnerships and LLCs are all eligible
  • You can contribute significant amounts to the SEP IRA.
  • You expect not to need income from the SEP until age 59 ½ or later.
  • You want to defer taxes on gains and income.

Employees of SEP IRA sponsors must meet these requirements to participate:

  • Be age 21 or older
  • Work for the business during any three of the past five years
  • Have earned a minimum annual required compensation of $500.

Note: If you have employees, all eligible employees must participate in the plan, including part-timers, seasonal employees, and deceased employees who died during the plan year.

For Real Estate

SEP IRAs allow you to make much larger contributions each year than traditional or Roth IRAs. There are also no income restrictions on SEP IRA contribution eligibility. This allows those who use real estate SEP IRAs to fund much more substantial down payments, repairs and renovations with new contributions than are generally available within traditional IRAs, except where money can be rolled over into the IRA from another source. For example:

Suppose you own an investment property within a self-directed account and you discover it needs a new roof that will cost $30,000 to put in. If you own it in a traditional IRA, at best you can only contribute $5,500 in new money – and depending on your income, you may well not be able to contribute at all. You will have to buy the whole roof by freeing up money from within the IRA, by rolling over qualified money from outside the IRA, or by borrowing – and potentially generating UDIT tax liability down the road.

Owning it within a SEP IRA allows you to potentially buy the new roof with cash, get a tax deduction for it since it’s still a SEP IRA contribution, and you still have up to $23,000 in potential contribution eligibility on top of that.

Overall, it is a much more flexible vehicle for real estate investors with significant income from a business or self-employment than a traditional IRA. The same liquidity issues also apply to Roth IRAs, too, though the tax treatment is different.

American IRA, LLC is a leading national expert on the use of SEP IRAs to invest in real estate. For specific information on how you can get started, call us today at 866-7500-IRA(472), or visit us on the Web at We have an extensive library of resources to peruse for the serious real estate investor available for free download.

We look forward to serving you.

*Note: SEP IRAs are potentially subject to unrelated debt-financed income taxes on income or profits attributable to leverage. Call us or speak with your tax advisor for more information.