Advise on leveraging a Self-directed IRA to purchase real estate

[Maria Jeanette]

I am considering using Equity Trust to set up a self-directed IRA to purchase properties. Any advise? What are pros and cons or restrictions?

[Nate Herndon]

Hi @Maria Jeanette, that's a great question. I had a response on a previous post this year about what the private lending restrictions will be here --> https://www.biggerpockets.com/forums/22/topics/1174919-bough...

Here's a re-post of that information though:

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I do have a DSCR lender who can assist with a limited recourse loan that will close in the name of a self-directed IRA. I have been able to do this for both purchases and cash-out refinances on multiple deals for clients of mine.

Typically your max loan-to-value will be 75-80% LTV, but this specialized program will limit you to 10% LTV/LTC less than what you can traditionally do. For a purchase or rate/term refinance, that would be 70% LTV; for a cash-out refinance, that will be 65% LTV. 

I have had the "limited recourse" language vetted by attorneys representing our clients. It passed muster upon close inspection from their entity formation team. As mentioned by others, you cannot personally guaranty the loan and the limited recourse aspect navigates that requirement.

[Brett Synicky]

@Maria Jeanette Educate yourself on the difference between Checkbook IRA and Custodial IRA. I believe Equity Trust does both. They are a reputable company. Understand the difference between owning RE personally versus in a retirement plan. It can make more sense to do PML's in the IRA instead of rentals, particularly if you use leverage since the IRA will incur UDFI on that portion of the income derived from the mortgage. Also Solo 401k is exempt from that tax if you qualify instead of using SDIRA.  

[Jake Baker]

@Maria Jeanette

Tax Advantages: Income and gains grow tax-deferred (or tax-free if using a Roth SDIRA).

All Costs Through the IRA: Expenses (repairs, taxes, etc.) must be paid from the IRA, so ensure it's well-funded.

You might also want to consult a CPA or attorney experienced with SDIRAs to ensure compliance with IRS rules and maximize benefits.

Best of luck!

[Ryan Irwin]

Quote from @Maria Jeanette:

I am considering using Equity Trust to set up a self-directed IRA to purchase properties. Any advise? What are pros and cons or restrictions?

Thanks for posting this.  I recently opened up my SDIRA thru Equity Trust and am trying to decide which direction makes the most sense for me; purchasing a fix & flip property through it or dedicating the funds for PML to other investors.  

[Aaron Zimmerman]

The main negatives are UDFI (unrelated debt financing income), but that applies when there’s income. 

In addition, real estate is already tax advantaged, so you’re losing the tax advantages of owning real estate.

Personally, I think real estate notes are better suited for self directed IRAs personally because you can get decent returns and notes not held in IRA is not tax advantaged.

[Chris Seveney]

Quote from @Maria Jeanette:

I am considering using Equity Trust to set up a self-directed IRA to purchase properties. Any advise? What are pros and cons or restrictions?

 As mentioned the main downside to using a SDIRA to purchase properties is you get no tax benefit upside (depreciation) and have to pay taxes on UDFI. For me I invest my SDIRA money in debt investments which typically are ordinary income when using w2 income and use my hard earned cash to buy properties. 

[Chris Barrett]

I'm using my SDIRA for PML. 

[Nicholas L.]

@Maria Jeanette

are you experienced or would this be your first property?  if this would be your first property and you're just doing this because you don't otherwise have funds - i would start a different way.

[Bill Hampton]

@Maria Jeanette

Here are some of the downsides of putting real estate into a self directed IRA or 401k.

No tax deductions: You can’t claim deductions for property taxes, mortgage interest, depreciation, repairs, improvements and other property-related expenses.

Property expenses: All expenses, repairs, and maintenance costs must be paid with IRA or 401k funds. You cannot use personal funds.

You must pay others to do repairs and manage the property. You can't even change a lightbulb.

You or your family can't use or live in the property.

You can't sell a portion of a property like you can sell portions of stocks, bonds, mutual funds, etc. You may have to sell the whole property to access the funds in the IRA or 401k when you retire and for required minimum distributions.

If you violate any of these rules you could blow up your IRA or 401k and the IRS could force you to distribute all of the assets in the IRA or 401k. This could lead to a huge tax bill and penalties.

Think carefully before you do this.

Good luck. 

[Ashish Acharya]

@Maria Jeanette Using a self-directed IRA (SDIRA) for real estate investment offers control over asset selection and tax advantages, such as tax-deferred growth (Traditional IRA) or tax-free growth (Roth IRA). However, strict IRS regulations apply, including prohibited personal use and mandatory income and expense management through the IRA, with penalties for violations. Real estate's low liquidity can complicate required minimum distributions (RMDs). Also you might have UBIT taxes. Buying tax efficient assets like RE in retirement in not very tax efficient strategy.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Ashish Acharya]