You may have heard the terms IRA real estate investments, IRA LLC, or self-directed IRA. In this article, we help clarify these terms and answer some of the most frequent questions we've been asked about using IRA funds to invest in real estate.
Can I use my IRA to invest in real estate?
You can absolutely put your hard-earned Individual Retirement Account (IRA) into investments beyond the typical stock market equities. This gives you the capital power to enter the real estate market, and watch your investments grow long-term, tax-deferred, or tax-free assets.
However, there are special rules that must be followed, and a deviation from these rules can be a costly mistake. Luckily, USIG has partnered with some of the best accountants and law firms to help properly setup the IRA investment structure that suits you best.
What rules apply to investing in real estate IRA?
Here are a few things you should specifically consider if you think using an IRA to buy investment properties:
1- Your IRA Cannot Directly or Indirectly Benefit You Today
A frequently asked question is if IRA funds can be used to purchase a property you already own, and the answer is no. IRS regulations prohibit transactions that are considered "self-dealing", and you cannot have direct or indirect personal benefits from assets owned by your IRA. This means that the IRA cannot purchase a vacation home for you to use occasionally, an office space to rent out to your business, or any such assets that would benefit you today.
Keep in mind that you and the IRA are two separate entities. The properties will be owned by and titled to the IRA, not yourself directly. The purpose of the IRA is to provide for your retirement at some future date, so just like you cannot personally use IRA funds until you retire at a future date, you cannot personally benefit from the IRA real estate investments today. You can, however, make smart choices about these investments and watch them grow.
2- Expenses Must Be Paid from Your IRA
All expenses related to property owned by your IRA must be paid from your IRA. This includes management fees, repairs, bills, and all other expenses. You cannot intermingle personal and IRA funds to pay for any expenses associated with your IRA investment.
3- Real Estate IRA Income Must Return to Your IRA
Similar to the rule above, and on the flipside, all income generated from IRA real estate investment must be paid to the IRA. This includes rental income, retained security deposits, and profits from selling assets.
How to invest your IRA in Real Estate? Where do I Start?
While these rules may sound hard, they are really simple to follow if you use a credible real estate investment firm, such as USIG, who partners with tax, accounting and law experts in this domain.
We would first help you open an IRA custodial account. You would then transfer cash from an existing IRA account, or possibly 401K, into the custodial account. You now have two options:
- Keep the funds held with the custodian and direct them to pay for every expense, including the purchase of real estate. Properties will be titled to IRA account name.
- Direct the custodian to setup and transfer finds to a self-directed LLC. You can then manage investing the funds held by the LLC. Properties will be titled to the LLC, which, in turn, is fully owned by the IRA.
What is an IRA LLC?
An LLC is a limited liability company. It is a pass-through entity, meaning that it is not subject to income tax - all income is transferred to the owner, which is the IRA. A self-directed IRA LLC is an LLC that is fully owned by the IRA, and assigns you to be its sole director. This gives you a lot of freedom, within the rules, to manage the funds your IRA invested in the LLC.
You would open a business bank account in the LLC's name and receive an account checkbook. This is why it is sometimes referred to as the "checkbook IRA". Paying for expenses is now a matter of writing a check, and rental income gets deposited into this account. You cannot, however, pay for any expenses out of your pocket and reimburse yourself.
Do I have to stick to rental properties, or can I buy and flip?
If you are interested in buying, repairing, and selling a property for profit, you can absolutely do so with IRA funds. There are limits, however, on how many you can do per year. Many of our clients buy properties, rehab, and rent them for a period of time before selling them. Staying within the rules allows all income to be tax-deferred or tax-free until you withdraw it at retirement. This is a fantastic opportunity to grow your IRA and take advantage of those tax advantages.
Please Note: This information presented above for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and accounting professionals. We hope that this article has been helpful in explaining the advatages of using your IRA funds to invest in real estate, what rules apply, and the IRA real estate investment options available for you.