Buying 1st Home in New City (SDIRA)

General Real Estate Investing
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Buying 1st Home in New City (SDIRA)

JP P.
Signal Engineer · Houston, TX · Member since 2015 · 42 posts · 13 votes

Hi All,

I'm looking to get into the real estate investing with my very first home purchase in a new city, and I've heard of this Self Directed IRA (SDIRA) form of investing tax free.

I'm purchasing a home with my Roth IRA (5,500 max p/year @ "X" amount of years) for the downpayment. I would live in this home for at least 1 year maybe 2 max. But after that I am renting it out. I've been to some seminars and have read that you can you a Custodial IRA brokerage to purchase investment properties, but I've also read I cant have an IRA purchase a personal resident because if I have part of the property financed through personal lending. I'm a little confused and looking for some clarification.

My thought process was/is:  I could purchase a home with my Roth, live in it for 1-2 years until the high market for rent, rent the place out and then use the profit from the high rental market to put back into my Roth tax free.  I would move out the house and purchase my next place to live in.

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Doreen Chaisson
Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
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Additionally, taking your personal use out of the equation, if your Roth IRA purchases an investment property, using money down from the IRA and securing a non-recourse loan for the balance, your IRA will be subject to at tax called Unrelated Business Income Tax (UBIT). Basically whenever you use leverage to make an IRA investment, the percentage of the net income attributable to the financing is subject to this tax. If your IRA puts 60% down, and finances the other 40%, roughly 40% of the net income, after deductions, will be subject to this tax.

The only way it's tax-free is if your Roth has enough money to purchase the property outright, as well as to pay for any property taxes, repairs, insurance, etc. In this scenario, rental income flows back to your Roth IRA, and then is untaxed income when taken as a distribution in retirement.

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
    11y

    You cannot make personal use of an IRA-owned property. This is a clear prohibited transaction.

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    11y

    @JP P.

    If Roth IRA money is in any way associated with the property, you do not live there. Period.

    IRS rules prohibit any comingling of funds, or any benefit between a plan and a disqualified party in either direction.  

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  • JP P.
    OP
    Signal Engineer · Houston, TX · Member since 2015 · 42 posts · 13 votes
    11y

    Thanks,

    That's what I thought.  I was given the terms qualifying and disqualifying and wasn't real clear on the distinction aside from your family/friends couldn't live there.

    With that being said, I would have to do this property the "old fashion" way and be subjected to paying taxes.

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
    11y

    Additionally, taking your personal use out of the equation, if your Roth IRA purchases an investment property, using money down from the IRA and securing a non-recourse loan for the balance, your IRA will be subject to at tax called Unrelated Business Income Tax (UBIT). Basically whenever you use leverage to make an IRA investment, the percentage of the net income attributable to the financing is subject to this tax. If your IRA puts 60% down, and finances the other 40%, roughly 40% of the net income, after deductions, will be subject to this tax.

    The only way it's tax-free is if your Roth has enough money to purchase the property outright, as well as to pay for any property taxes, repairs, insurance, etc. In this scenario, rental income flows back to your Roth IRA, and then is untaxed income when taken as a distribution in retirement.

    1Reply
  • JP P.
    OP
    Signal Engineer · Houston, TX · Member since 2015 · 42 posts · 13 votes
    11y

    @brian Eastman and @Doreen Chaisson

    I saw you two in a different post on issues.  I greatly appreciate it.

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  • JP P.
    OP
    Signal Engineer · Houston, TX · Member since 2015 · 42 posts · 13 votes
    11y

    Doreen Chaisson and Brian Eastman

    I saw you two in a different post on issues. I greatly appreciate it

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    11y

    @JP P. Glad you got some good info from Brian and Doreen. Buying this house "the old fashioned way" is the way to go if you are going to occupy it. If you have the ability to purchase an investment home with your Roth IRA as a completely separate transaction, that could be great too. Self-directed retirement account investing is really powerful, it just needs to be done correctly (as with almost anything else).

    0Reply
  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    11y

    @Jp P.

    To learn about the IRA prohibited transaction rules, see following link:

    http://www.irs.gov/Retirement-Plans/Plan-Participa...

    1Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    What you can do is buy your own home and use it for your personal use out of your own funds. Use it for 2 years then sell it for a profit.  IRS allows you to take a profit on the house tax free with certain conditions.

    http://www.irs.gov/taxtopics/tc701.html

    The great thing is that you can keep doing this by moving every couple of years and pay NO tax on the gain, until they change the tax law.

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