Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
11y
@Chad Canales
It all depends on your particular circumstance. For example, will you have enough funds to purchase the property under the IRA or will your IRA still need additional financing and thus look into getting a non-recourse loan. If a non-recourse loan is used, it will subject the IRA to UBIT a type of tax that applies to IRAs when debt financing is used. What is more, because the property would be owned by the IRA, all the income has to flow back to the IRA.
If you still want to invest retirement funds in real estate and need to use debt financing, the self-directed solo 401k may be more advantageous over a self-directed IRA because solo 401k plans are generally not subject to UBIT when debt financing is incorporated.
If you are looking at a long term buy and hold situation, a hard money loan is probably not your best option as the rates will make cash flow difficult.
There are distinct advantages and disadvantages to either an after-tax leveraged purchase or a investment into the property with a self directed IRA or 401k. The tax treatment is different and it really becomes more of a question of where you want the income from this property to go - to your today self or your tomorrow self.
Keep in mind, a self directed IRA or 401k may use a non-recourse mortgage, so you have the opportunity to take advantage of leverage in your retirement plan.
There is a lot of good content here on these topics. There is also no one answer and I'm sure you will get a lot of conflicting opinions. Hopefully some of that will trigger what you need to determine what is best for your situation and goals.
After you come to your plan, be sure to discuss with your CPA or other tax advisor before proceeding. Expertise has value.
Bluffton SC · Member since 2015 · 199 posts · 55 votes
11y
@Chad C. are you planning to manage the property yourself? If you are, I don't think using a SDIRA is the best choice. You aren't allowed to "work" inside your IRA. It must be an investment. You can hire a property manager but all expenses related to the purchase, management, maintenance etc. must be paid for from your SDIRA. If you even pay for one light bulb using your own funds (not from your SDIRA) you will be violating the IRS rules and risk forfeiting your tax free status and will be subject to penalties.
Investor · Eagan, MN · Member since 2014 · 86 posts · 58 votes
11y
If you use a self directed IRA, you are not supposed to do any work yourself. It all needs to be hired out, and paid for from the IRA. Otherwise, you are contributing more to the IRA than the law allows.
Use HELOC from your own residence. Or a Mortgage with 25% down. Or just save more money.
if you decide to buy investment property in your retirement account all of the transactions must be 'arm's length' and no personal benefit to you. All of the income from the property must go back into the account, you would not be able to use it personally until you retire.