Top 3 Ways to to Invest in RE with a Self-Directed IRA

Top 3 Ways to Invest in Real Estate with a SDIRA

Self-Directed IRAs are great for avoiding taxes on gains, especially for flipping properties. It is recommended that you use the SDIRA for real estate transactions that generate immediate (or almost immediate) taxable income (such as flips or options) and generally not buy and hold deals, that already shelter other income via componentizing.

There are three basic ways to purchase real estate with a self directed IRA:

• Purchase with cash
• Partner with family, friend, or business associate
• Borrow money for investment

1) Purchase with Cash

If you have sufficient funds in your self directed IRA to cover the purchase price, closing costs, taxes, insurance, etc., you can purchase a property outright. All ongoing expenses are paid in total from your self directed IRA, and all income/profits are returned in total to the IRA.

2) Partner with Family, Friend, Business Associate

If you don't have enough funds for a cash purchase, your self directed IRA can purchase an undivided interest in a property.

For example, with your self directed IRA, you could partner with a family member, friend, or business associate to purchase a property for $100,000. The friend could provide 70% of the purchase price ($70,000), and your self directed IRA could purchase the remaining 30% ($30,000).

All ongoing expenses must be paid in relation to your percentage ownership. In our example, for a $1,000 property tax bill, the friend would pay $700 (70%) of the bill and your self directed IRA would pay $300 (30%). If, the property collected monthly rent of $1,000, the friend would receive $700 (70%) and your self directed IRA would receive $300 (30%).

3) Borrow Money for Investment:

Through your SDIRA, you could get financing such as a mortgage for a real estate deal. You must consider two points when considering this option:

a) Loan must be non-recourse - Per IRS regulations, an IRA cannot guarantee a loan or be used as collateral. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.

b) Tax is due on profits from leveraged real estate - If your IRA uses debt financing such as a loan on a real estate investment, a tax will probably be due on profits. This tax is called unrelated business income tax (UBIT).

You can read more about SDIRAHERE