5 Tips for Investing in Real Estate with a SDIRA

Investing your Individual Retirement Account (IRA) in real estate can be a game-changer for your financial future, but it's no walk in the park. We chat with folks week in and week out who are itching to diversify their retirement portfolios through real estate. But hey, before you dive headfirst into the world of real estate investing with your IRA, there are some IRS rules and guidelines you gotta know about. Here are five must-knows before you take the plunge:

1. Property Ownership and IRA

Listen up, folks! When it comes to real estate investments with your IRA, the property's gotta be purchased in the name of the IRA, not your own name. That means all contracts and offers need to go down in the name of your IRA. Trying to swing deals under your personal name? Big no-no. You could end up in a world of hurt with the IRS.

2. Source of Funds

Cash flow is king, baby! All funds involved in your real estate deal must come from your IRA account. Forget dipping into your personal funds or trying to get reimbursed from your IRA for expenses. Mixing funds or snagging personal perks from your IRA investment is a one-way ticket to Tax Trouble Town.

3. Correcting Errors

Oops, made a boo-boo? If you goof up and break IRS rules, fixing the mess means scrapping the original contract and starting fresh. Some sellers might play ball, but others might not be so forgiving. So, do yourself a favor and set up that self-directed IRA before you start playing with real estate investments.

4. Financing Considerations

Now, let's talk greenbacks. You can totally finance real estate deals with your IRA, but there are strings attached. Loans for your investment property gotta be non-recourse, meaning the lender can only go after the property if things hit the fan. Forget about personally guaranteeing the loan - that's a major IRS no-no. And be prepared, because financing for IRA investments often comes with higher interest rates and heftier down payments.

5. Tax Implications

Hold onto your hats, because taxes are coming! When you finance real estate investments through your IRA, you might get hit with the Unrelated Debt Financed Income tax (UDFI). This tax could bite into the portion of your investment financed through debt. Better chat with a tax advisor to wrap your head around how UDFI might affect your IRA and keep the taxman at bay.  You can learn about this special tax in one of my recent blogs.

By playing by the rules and understanding the ins and outs of real estate investing with your IRA, you can set yourself up for financial success down the road. Got questions? Shoot me a message.

Invest smart, secure your future!