There are about 49 million households in the US who have a traditional IRA and there's an additional 20.3 million people who have Roth IRA's. Many American's don't know they can use their IRA and turn it into a self-directed IRA. This means that you can invest it in something that you choose. As long as it meets the government's requirements. This can be confusing so I did some research and thought I would share what I found. I am not a tax professional or IRA custodian so speak to your professional team before you do anything.

Let’s start off with what you can invest in. You can invest in rentals, flips, REITs and private placements. You will need a custodian who specializes in whatever strategy you decide to go with.

What you can’t invest in

Now there's a lot that you can't invest. You can't purchase your own property. This would be considered self dealing. There are limitations to who you can invest your IRA with. Disqualifying people are yourself, your beneficiary, your fiduciary, spouse, ancestor, lineal descendant and any spouse of a lineal descendant.

You can’t have indirect benefits from property that is owned by your self-directed IRA

You can't buy a vacation property and live in it occasionally. I know, if you planned on using your self-directed IRA to buy a vacation rental and stay in it a few weeks out of the year, you are out of luck. You can't rent an office space for yourself in a building that your self directed IRA owns. There are also rules in place that prohibit you from receiving gain today. This means that all income that is made from your IRA goes back into your IRA. This is because IRAs were designed to be for retirement only.

You can’t perform work on real estate purchased in your IRA

If you planned on buying a flip and then doing the work yourself, think again. You can’t perform sweat equity on the investment. However, you can do “desk work” associated with the investment.

In regard to Title, the IRA investments can’t have anything else connected to it

You and your IRA need to be two separate entities. The investment needs to be titled in the name of the IRA and not you personally. Now if the investment isn't owned outright, that is a different story. Talk with your IRA custodian more about that.

Unrelated Business Income Tax

I know, more taxes... Unrelated Business Income Tax, also known as UBIT, is something that you need to be on the lookout for when it comes to investing with a self directed IRA. You are only taxed on the LTV of the property. For example:

If the property is worth 100k

LTV = 75%, in dollars that's 75k

So you would be taxed on the 75k.

When it comes to depreciation, you can write it off as well as other operating expenses on a percentage basis.

Expenses must be taken from the IRA account and income must go into the IRA

When you get expenses or income related to an investment property held by your IRA, the expenses must be paid by your IRA. Your custodian will need to handle this. Now when someone invests in a syndication using their IRA, the percentage that you invested will need to go directly into your IRA account. If you got a loan using the IRA and the loan is non-recourse, it is possible to write off that proportion of expenses and depreciation of the property on your tax return.

Here’s some good news…

Real estate can be purchased without 100% funding from your IRA

You can use undivided interest (the ability to have ownership in something with multiple people while no one person has exclusive rights to the property). Each person owning a portion of the property is proportionate to the percentage of funds contributed. Once you receive profits, your IRA would receive them directly.

In conclusion, your self-directed IRA can be a great tool in your tool box. You can take the earnings out once you are 59.5 years old and your IRA has to season for at least 5 years. What we are seeing a lot of people do is invest their IRAs into syndication. Syndication can be a great strategy for someone who wants to be passive and get mailbox money. But that is something that you will have to look into yourself. And before you do anything, be sure to talk to your custodian and tax professional before doing anything in the above article.