Utilizing your IRA to Buy and Sell Real Estate

real esteat ireaa

Self-directed IRAs are the less offered and lesser known of the IRA options. That’s simply because they’re seen as needing too much effort to utilize correctly. The truth is that self-directed IRAs aren’t as complicated as they’re made out to be. Especially if you have the right custodian who offers the services you need to successfully run your account.

Similar to other IRA accounts, owners can still invest in stocks, bonds, and mutual funds. They can also invest in things like small businesses, boat slips, storage units, parking lots, land, and homes.

Some investors may be understandably leery of investing in the housing market. But real estate can be a good long-term investment and generate higher returns than the stock market can. But the process of using a self-directed IRA to jump into investing in real estate requires preparation and caution.

The move towards a self-directed IRA can make sense in certain circumstances, but only when the investor fully understands both the positives and negatives and the requirements involved.

Interested investors should seek legal advice, as well as input from an accountant and real estate agent for a well-rounded picture. They should also be familiar with the rules for the type of IRA they’re using. Whether it is a Simple IRA, Roth or Traditional IRA, SEP or Solo 401(k), contribution limits still apply, and there are penalties for early withdrawals.

Here are five things to keep in mind when considering investing in real estate through a self-directed IRA.

Know that it takes time

Devise a timeline based on the account-opening process, transferring or rollover of assets, and finding the actual investment. It normally takes two to three weeks to open an account at a typical brokerage firm, and you’ll need to find a custodian, like Accuplan, who will hold a real estate IRA. Keep in mind that the down payment and all funds must come from your IRA.

When a real estate investment is contracted, the IRA account holder reviews and signs the purchase agreement and then the custodian must approve it and release of funds to the title company. All of this takes time, so it’s prudent to learn as much as you can before jumping into a decision.

You have to wait until retirement

By IRS guidelines, you cannot take advantage of IRA investments until you retire. You can’t use the fund to pay off your mortgage, or live in, or use the property you buy as an investment in the self-directed IRA, because you don’t own the property, your SDIRA does.

There are other restrictions

Your spouse, immediate families or companies you have a 50% interest in cannot be involved in investing in property. While it is possible for the property to be held as tenants in common, an IRA is an individual account—and you must avoid any conflicts of interest.

Self-dealing or enabling a transaction that is beneficial to you on the other end is strictly prohibited. You also cannot use the IRA as collateral for a loan; it should be treated like other retirement accounts because again, you yourself do not own the property, your IRA does.

It can be a lot of work

While late-night infomercials highlight the potential benefits, many investors don’t fully appreciate or understand the reporting and administrative requirements involved in a real estate IRA. For example, the investor should not be doing the work on the property. Especially so because they can’t get reimbursed, that’s considered self-dealing.

Make it a little easier

All expenses, maintenance, taxes, and insurance are paid from the IRA. If there are also association dues or golf memberships, those all must be withdrawn from the IRA. That’s a lot of work on you as the real estate IRA holder. It can take a lot of time for your custodian to get the proper paperwork, or send payments to get repairs done, or taxes paid, so consider opening an IRA LLC with checkbook control. With checkbook control, you don’t have to wait on anyone to approve funds. You will literally have a checkbook or debit card that’s linked to your IRA, so you’re able to immediately pay.

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