Over time, real estate investments have afforded many people with the powerful combination of appreciation and income. The purchase of real estate through a self-directed retirement plan is a popular investor choice for this and other reasons. A self-directed IRA or real estate IRA gives you the freedom to invest in non-traditional assets, such as single-family and multi-unit homes, apartment buildings, co-ops, condominiums, improved or unimproved land (leveraged or unleveraged), commercial property, and more. For over 25 years, Preferred Trust has been providing clients with education and support to put their retirement plan to work for them through real estate investments.
Types of property your IRA can own:
- Single family and multi-unit homes
- Apartment buildings
- Co-ops
- Condominiums
- Commercial property
- Improved or unimproved land (leveraged or unleveraged)
What if I don’t have enough money? If your IRA doesn’t have enough money to pay for the entire purchase, you can finance or leverage any income-producing property. The property is used as the collateral for the loan. Because the property belongs to your IRA, the debt must be repaid from assets within your IRA, whether it’s income from the property, permissible contributions, or other assets in the IRA. All real property is either purchased or sold for your benefit using your Qualified Plan and/or IRA funds.
Purchasing and Selling Real Property. A real property purchase or sale is initiated by executing either a Buy or Sell Direction Letter For Real Estate. Specific instructions for completion of these direction letters are contained on the forms.
Financing the Purchase - You may finance or leverage any property you purchase for your plan. The property is the collateral for the loan. As the property is an asset of the plan, repayment of the underlying debt must come from contributions to or income from the property or other assets in the plan. This type of loan is generally referred to as a non-recourse loan because the IRA holder cannot extend credit to an IRA.
Ensuring the Tax-Deferred Status of the Account - Your entire transaction must flow through the tax-free or tax-deferred retirement account. The escrow must be opened by the account, not in the name of the beneficial owner. Vesting is always in the name of the account. The funds in your IRA may be used as good faith deposits, down payments, or purchase money.
Additional Requirements - When purchased, these properties become assets of your plan or account. In addition:
- You may not personally own property that you intend to purchase with plan funds and you must ensure that your intended purchase is not a prohibited transaction.
- Neither you, your spouse, nor your family members (other than siblings) may have owned the property prior to its purchase by your plan.
- Neither you nor your family members (other than siblings) may live in or lease the property while it's in your plan.
- Your business may not lease or be located in or on any part of the property while it's in your plan.
- You may receive any property as a distribution from your plan as a retirement benefit.
Managing assets does not include property management conducted by the beneficial owner of an IRA or a company owned more than 50% by the beneficial owner of real or personal property in the IRA. Managing assets means managing your IRA portfolio. Management fees may be paid out of your account. A 1099 will be issued to you or other designated asset manager for the year in which such invoices are paid. All income and expenses are for the benefit of the account. This includes all property rental or lease income, taxes, property management and repairs. Invoices for expenses are paid on client approval.
When title and /or escrow companies are involved, proper instructions will be provided to them for all documents for your account. For ease of completion, in many cases facsimile transmission of information is acceptable, followed by hard copy originals.
