Self-directed IRAs and rehab

[Ryan Daulton]

I will soon be purchasing my first property with a self-directed IRA. Am I allowed to use personal funds to do rehab on it? Or does everything need to come from the IRA?

[Dmitriy Fomichenko]

@Ryan Daulton, you are not allowed to use personal funds to pay for the rehab of IRA-owned property. IRA must pay all expenses related to the investments it owns.

[Ryan Daulton]

Do I need to purchase all furnishings from the IRA? (I will make this an MTR, so I need to furnish all rooms).

[Chris Seveney]

@Ryan Daulton

Not a specialist in this but I was told I could not spend a penny of my personal money or sweat on this whether it be furniture, a light fixture or anything and that seems to be in line with the comment above

[Dmitriy Fomichenko]

Ryan, all expenses related to the investment of an IRA must be paid by the IRA.

[Ryan Daulton]

Thank you!

[Brian Eastman]

@Ryan Daulton

It sounds like a conversation with your IRA plan provider is in order.

Perhaps this will help. YOU are not purchasing the property using IRA money. The IRA is purchasing the property as an investment.

Because income to the IRA is tax-sheltered, you must keep it distinctly separate from yourself or close family members. Any kind of self-dealing or co-mingling of funds can void your IRA, with severe tax consequencees.

[Ryan Daulton]

@Brian Eastman

I just learned that when buying houses from Self-directed IRAs, we cannot depreciate?  Or receive any of the tax benefits.  Is this true?  If so, what are the advantages of buying real estate to stocks with IRAs?

[Dmitriy Fomichenko]

@Ryan Daulton,

Correct. You (personally) don't own the property, your IRA is the owner - so, you can't expect any tax benefits from a property that you don't own.

[Denice Contreras]

@Dmitriy Fomichenko if you don’t get any tax benefits like depreciation, what are the main advantages of using SDIRA or solo 401K for real estate purchases?

[Dmitriy Fomichenko]

@Denice Contreras, most people turn to real estate for cash flow and appreciation. Unlike the stock market, you can also use leverage, which could significantly increase your ROI.

The bottom line is that you can get better returns investing in alternatives (real estate or otherwise) and more control investing in real estate (you have zero control over the stock market). You are investing in tangible assets that will not disappear or lose their value like stocks could. 

The question about depreciation is completely irrelevant here. What you need to ask yourself is whether you should leave your IRA investments in the stock market or invest in alternative assets. If you have more faith in stocks - stay where you are. Otherwise, SD IRA can be the tool for you to accomplish your goals.