Investing your in a Real Estate IRA is a great alternative to investing in the stock market. Through a Self Directed IRA you can invest in non traditional investments such as real estate, gold and silver, private placements, loan, and other non traditional investments. Below are some common questions I get from clients wanting to invest in real estate through their Self Directed IRA, also known as a real estate IRA.
Q. Can I borrow funds or get a mortgage through a Self Directed IRA?
A. Self-Directed IRA investors who choose to purchase investment real estate are able to leverage their purchase with a non-recourse loan. Because of the IRS regulations, it would be deemed a violation of the qualified retirement account status to personally guarantee any loan on real estate owned by a self-directed IRA.
Non recourse debt or a Non recourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender. Thus, non-recourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan.
Q. Can I live in the property, earn a salary for managing the property or repair the property myself?
A. Both ERISA and IRS rules prohibit certain transactions between a qualified plan and “disqualified persons.” The purpose of the rules is to prevent self dealing and to minimize conflicts of interest that could adversely affect the plan. ERISA §§ 406-408 and Internal Revenue Code § 4975 detail these rules. Other regulations and notices issued by the DOL and IRS further refine and explain the rules. As a result, you could not live in the property, earn a salary, or do any of the repairs on the property. This could be considered conveying and receiving a benefit from your IRA.
Q. Do I need an LLC to purchase the real estate?
A. You do not need an LLC to purchase the real estate. It is possible for you to purchase the real estate directly through your Self Directed IRA Custodian. When done this way, all rent checks and expenses will be paid to and through the Self Directed IRA Custodian.
If you would like checkbook control over your IRA, meaning you will be the one to collect the rent and pay all the expenses then you need to setup an IRA LLC. Your IRA will become an owner of the IRA LLC and the IRA LLC will be able to purchase the property directly.
Q. Can I partner with my IRA, have my Roth and Traditional IRA partner together, or combine multiple IRA accounts in order to purchase real estate?
A. Yes, you can partner with your IRA. If you decide to put personal funds and IRA funds together to purchase property you need to be careful that everything is structure property. If you are strictly using retirement funds it because easier to control and manage.
The best option when partnering with your IRA is to do so through and IRA LLC. Through the IRA LLC each IRA account will become a partner in the LLC and all profits and expenses will be split per the ownership arrangement.
Q. Can I live in the property after I turn 59.5?
A. Yes you can, at any time, take a distribution of the real estate and have it put in your name. Doing this would trigger taxes needing to be paid. If you do the distribution before 59.5 you will be hit with a 10% penalty. If you do so after 59.5 the real estate will just be taxable to you.
If you have any more questions about Real Estate IRA feel free to contact me.
Author: Ben Barker, Self Directed IRA Professional