Investing in Real Estate with your Self-Directed IRA: TOP 3 FAQs

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A Self-Directed IRA gives you the freedom to invest your retirement savings in more than just the typical stocks and bonds— to truly take charge of your retirement. One of the most common self-directed investments is real estate. In an increasingly volatile market, more and more investors are purchasing physical property to put their hard-earned money to work and real estate investors, well… they are taking advantage of their expertise.

With so much information out there, it’s hard to know where to start. Here are some of the most frequently asked questions from Real Estate Investors to give you an idea of some of the pros and cons of this wealth-building vehicle.

1. Can I do repairs on my self-directed IRA owned property?

No. You cannot do repairs on a property owned by your self-directed IRA, no matter how small or easy the repair is. You are not allowed to do the repairs yourself, even if you are willing to do it for free or for reasonable fair wage. This is considered "sweat equity", which is not allowed.  Any repair, improvement, or maintenance must be performed by a paid non-disqualified person.  A disqualified person is you or any direct lineal descendants or ascendants, as well as any fiduciaries to the IRA like your CPA, CFP, Custodian, etc.

2. Can I buy a property that I already own with my IRA?

No. Your IRA cannot purchase property you already own. It also cannot purchase property owned by a disqualified person. Doing this type of transaction is considered self-dealing, which is a prohibited transaction. Per Internal Revenue Code Section 4975, disqualified persons (you, the IRA owner, are a disqualified person) are prohibited from engaging in any direct or indirect sale, exchange, or leasing of any property with your IRA.

3. I have a small IRA, how can I buy real estate?Real Estate IRA FAQ Download

You have a couple options to purchase real estate with your small IRA. You can:

  • PartnerPartnering is one of the common ways an IRA can invest in real estate asset without having enough money for the entire purchase amount. You can partner with any person (yes, even a disqualified person at the time of a new purchase), another person’s IRA, or a company. Your IRA will own a percentage of the real estate. The ownership percentage of the real estate is divided based on the proportionate amount of money the IRA used to invest. All income and expenses are divided the same way. For example: Your IRA partners with your spouse’s IRA to buy a piece of real estate that costs $250,000. Your IRA and your spouse’s IRA each have $150,000, which you decide to put towards the investment, splitting the ownership 50/50. Each IRA will invest $125,000 for the purchase of the real estate. All income and expenses are divided between both IRAs 50/50. If the property is sold for profit, the profit is also divided between the IRAs 50/50.
  • Borrow – Your IRA can get a loan. This is a different type of loan than you would get personally if you were buying a house. Your IRA needs to get a non-recourse loan. The difference between a traditional mortgage and a non-recourse loan is that you are not personally guaranteeing the loan. This means that the lender doesn’t consider your income or credit score as part of the qualification process and they don’t have any recourse against you. The property is the collateral for the loan. Because of this, the loan-to-value (LTV) ratios are a little higher than a traditional mortgage. IRA Resources works with lenders nationwide and has a list of lenders who have worked with clients in the past.  Give us a call and we’d be happy to provide the list and answer any questions you may have.

If you decide to get a non-recourse loan, you will need to understand Unrelated Debt Financed Income (UDFI) and how it applies. When your IRA owns real estate that has a mortgage (this is considered debt financed), the income is taxable to the IRA in the form of UDFI. The amount of income included is proportionate to the debt on the property. Your IRA is only taxed on the debt financed portion and not the entire amount of income.

To learn more about investing in real estate with a self-directed IRA, call us at 888-322-6534.

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