An IRA is a great option for those wanting to invest in real estate. Making sure you use a real estate IRA allows you to accumulate rental income tax-deferred, or even tax-free if you have the asset in a Roth IRA. It can make a lot of sense to leverage a self directed IRA to purchase real estate.
If you are planning on purchasing real estate inside a self directed IRA then following these best practices can really make sure you get the most out of your investment and IRA.
Having real estate in your IRA can sometimes make you want to add more money to your IRA. You may run into some repairs and renovations that can add up quite quickly. Just like any IRA you can only add the maximum contribution limit for that year. For 2013 the maximum contribution is $5,500. You cannot add any more personal funds then that. If you have to make repairs that are more than the contribution limit then you will have to pay for it from your IRA. This is where the next tip comes in…
Have Some Cash
It is very wise for you to have cash inside your IRA when investing in real estate. There will more than likely come a time when you need to make repairs. While you could use the money that you have contributed over the years as regular contributions to pay for the repairs, but what if the cost is higher than that? Having an emergency lump sum of cash inside of your IRA will allow you to pay for these repairs. The only other possible way would be to transfer monies from another IRA that you have.
It can be very easy to accidentally do a transaction that is prohibited and cancels your IRA. One prohibited transaction to remember is that you can't lend money to your IRA personally. No matter the reason for needing money back into your IRA
Know What Constitutes a Distribution
You need to be very aware of what could constitute as a distribution. For example, if you are finally retiring and decide that you would like to sell your real estate inside of your IRA that is fine, but make sure the money from the sale goes back into the IRA. If you take the money for yourself and don't put it back into the IRA it will count as a distribution. If you decide you would like to live in your home because you sold it and got the money from it, you can't, unless you want it to be a distribution and don't mind being taxed on the full value of what was in the IRA. If you do handle your IRA or rental property incorrectly you could be paying taxes and forfitting your IRA. Make sure you know enough about the rules in order to fully maximize your retirement accounts.
Your IRA can borrow money. It is just that though, your IRA borrowing the money and not you! You can only borrow from non-disqualified individuals and entities on a non-recourse basis. If the loan should ever default, the lender can only go after the IRA to collect. So the assets held within the IRA will serve as collateral for the loan in most cases. Nothing outside of the IRA can serve as collateral.
These are a few of the tips that if done correctly can really help you maximize your self directed IRA while purchasing real estate. If you need more information feel free to contact us as we are here to help.
Author: Nick Barker