Anyone used IRA to purchase Real estate?

Question

Has anyone used Self- directed IRA to purchase real estate? Broad Financial said they can help with this? Has anyone been with them? How's your experience

Taylor L. · Answer

I haven't worked with that custodian, but I have had an SDIRA for a number of years. After doing several real estate investments with my SDIRA, I would recommend you dig deeply into what is required to remain in compliance before you do it.

That includes but is not limited to, UBIT/UDFI/UBTI, disqualified persons, and what you are and are not allowed to do regarding the actual deals. There are a lot of aspects to using an SDIRA and remaining in compliance, which are not discussed frequently.

My SDIRA is currently invested in a property and once that sells I will be closing out my SDIRA. My specific frustration has been with UBIT. I understood the other items well before opening my SDIRA, but did not realize how much of a hassle UBIT would turn out to be.

Brian Eastman · Answer

@Anna D.

Investing in real estate with a self-directed IRA is a very popular way to protect and grow retirement savings.  The following may help point you in the right direction as you research this opportunity.

Self-directed IRA's come in several formats offered by different types of companies.  The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity.  Think E*Trade or Fidelity with different paperwork.  All IRA based plans are required to have a custodian to administer and report on the account.  What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets.  Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer.  This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property.  You also need to be aware that custodians are passive in nature and simply process transactions at your direction.  They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio.  It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity.  The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority.  This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian.  These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term.  With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k).  Such plans are available to those who have some form of self-employment  and no full time employees.  As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility.  The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line.  Get on the phone and speak with a few of the providers that are active here on BP.  You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

Chris Seveney · Answer

Yep heard lots of complaints about UDFI/UBIT from IRA investors. We changed our structure to be a C-corp which according to my custodian and another the investors no longer have to worry about it based on our investments.

Alicia Marks · Answer

@Jeremy Hunt

Taylor L. · Answer

Both

Scott Jensen · Answer

@Taylor L.  Was the trouble with UBIT the actual amount of taxes paid or the complications with figuring out UBIT and reporting it correctly?

@Anna D. You can certainly do it and there's a lot of different custodians that can be helpful. BP is a good spot to look. Just make sure you know what you are getting into before diving in. There can be complicated issues with financing, UBIT/UDFI, IRS Reporting, RMDs, prohibited transactions, etc.

Chris Martin · Answer

Lots of people have SDIRA accounts and invest in real estate, either borrowing or buying. Google SDIRA for lots of reading material.

Chris Seveney · Answer

@Anna D.

I have worked with broad financial and have had zero issues

Anyone used IRA to purchase Real estate?

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