Historically, real estate ownership has given many Americans a stable investment vehicle that provides both income and appreciation. One of the greatest tools available to real estate investors is government-sponsored retirement plans, such as IRAs and 401(k)s.
Few Americans realize that they have the option to “self-direct” their IRAs and other retirement plans into real estate and that they can benefit from the tax advantages those plans provide. IRA investments earn tax-deferred/tax-free profits.
When you combine the advantages of a self-directed IRA with your knowledge of real estate, IRAs allow you to earn tax-free/tax-deferred returns on your investments.
Additional advantages of the real estate IRAs include:
- The power of compound interest
- A reduction of taxable income
- Asset protection
- Estate planning
Thus, if you are a successful real estate investor, or if you’re just looking to diversify your retirement portfolio, the combination of real estate and your IRA can be very powerful.
The rate of return on your investments is based on your knowledge and expertise in real estate. IRA investing is not based on the ups and downs of the stock market. So, as always, real estate investing is not for everyone. Be sure to consult your tax professional, legal professional, and investment professional before investing in real estate.
Here are 7 facts that you must understand about investing in real estate with a self-directed IRA:
- Your IRA Cannot Purchase Property CURRENTLY Owned by You or a Disqualified Person.
- You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRA (the purpose of the IRA is to provide for your retirement at some future date. It’s not intended to benefit you (or any other disqualified person) today). If your IRA engages in a transaction that, in some way, benefits you or a disqualified person, this is considered an “indirect benefit.”
- Real Estate IRA Investments Are Uniquely Titled -You and your IRA are two separate entities. As such the investment needs to be titled in the name of your IRA—not in your personal name. All documents related to the investment must be titled correctly.
- Real Estate in an IRA Can be Purchased without 100% Funding from Your IRA – You can purchase property in more ways than just an outright purchase of the full amount from your account. These other options include using undivided interest and partnering with others.
- IRA Investments that Use Financing Must Pay UBIT (unrelated business income tax) – Your self-directed IRA can purchase real estate using financing as long as the loan is non-recourse. If you do use financing, UBIT is due.
- Real Estate IRA Expenses Must be Paid From Your IRA – All expenses related to property owned by your self-directed IRA (maintenance, improvements, property taxes, association dues, general bills, etc.) must be paid from your IRA.
- Real Estate IRA Income Must Return to Your IRA – All income generated by property owned by your self-directed IRA must be paid into your IRA.
For a more in-depth discussion about investing in a Real Estate IRA, visit Equity Trust Company and go to the “Real Estate IRA” section of their website.
(source: www.trustetc.com)
