Posted over 9 years ago

Using a Self-Directed IRA to Invest in Real Estate

Most people mistakenly believe that their IRA must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside IRA retirement accounts. Investments in real estate with a Self-Directed IRA LLC are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

In addition, the IRS states the following on their website: “…..IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Income or gains generated by an IRA generate tax-deferred/tax-free profits. Using a Self-Directed IRA LLC to purchase real estate allows the IRA to earn tax-free income/gains and pay taxes at a future date (in the case of a Roth IRA the income/gains are always tax-free), rather than in the year the investment produces income.

With a Self-Directed IRA LLC, you can invest tax-free and not have to pay taxes right away – or in the case of a Roth IRA - ever! All the income or gains from your real estate deals flow through to your IRA tax-free!

Gains are tax free
Positive cash flow is tax free
No time limit for holding property
IRA can borrow money - Leverage your investment with non-recourse financing
Potential to earn a larger rate of return on invested capital

When purchasing real estate with a Self-Directed IRA LLC, in general, all income and gains generated by your pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, leaving the real estate investment to grow unhindered. Generally, self-directed IRA real estate investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Self-Directed IRA LLC:

Raw land
Residential homes
Commercial property
Apartments
Duplexes
Condos/townhomes
Mobile homes
Real estate notes
Real estate purchase options
Tax liens certificates
Tax deeds

Purchasing real estate with a Self-Directed IRA LLC is essentially the same as purchasing real estate personally.

Set-up a Self-Directed IRA LLC
Identify the investment property
Purchase the investment property with the Self-Directed IRA LLC – no need to seek the consent of the custodian with a Self-Directed IRA LLC with “Checkbook Control”
Title to the investment property and all transaction documents should be in the name of the Self-Directed IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager
All expenses paid from the investment property go through the Self-Directed IRA LLC. Likewise, all rental income checks must be deposited directly in to the Self-Directed IRA LLC bank account. No IRA related investment checks should be deposited into your personal accounts.
All income or gains from the investment flow through to the IRA tax-free!

Comments (6)

if I use a Self Directed Roth IRA for rental properties don't I miss out on depreciation in regards to taxes?

Gulliver R., over 8 years ago
Good information. The only thing is that these transactions could be a bit complicated, so investors should work with realtors/professionals having a previous experience in SDIRA real estate investing.

Dmitriy Fomichenko, almost 9 years ago
Excuse me, but the fees for Self-Directed IRAs are outrageous. Set up fees, quarterly or annual fees which can include a percentage of your TAC (total account value). Plus asset recording fees, as in whenever you put on or take off an investment. I would do the the math and see if all those fees still allow you to keep most of of you've made in your RE investments.
Also, can anyone explain why the banks and brokerages that offer Traditional and Roth IRAs don't also offer Self-directed IRAs? If if such a great racket to be in then why don't they offer it?

Craig N., over 9 years ago
1. Craig,
  What is an outrageous fee, to you? I'm the biggest enemy of outrageous fees, and I thought what I paid was totally reasonable & priced well.
  I pay for re-statement of my documents every couple of years (approximately), and beyond that...I really haven't seen any outrageous fees. Now, when my plan makes outrageous gains, I expect I may have to pay my CPA a little more for an extra filing, but not outrageously more.
  I think, and this is just a guess, is that you've looked into these various (generally, larger) national companies where they want to either administer &/or be the custodian of your (supposed) self-directed 401K...is that right?
  Well, that's not self direction, Craig...that's how they make money off of you. Sounds kinda' like Wall St, huh? Like a traditional 401k plan, except they're spinning it to you under the guise of self-direction - oh, but minus the control. And, plus a bunch of fees.
  Uh...."Thank you, guys, but 'No'."
  If you want legitimate, straight-forward, personal attention, contact John Park at PGI Self Directed (pgiselfdirected.com). I'm a literal, walking, talking billboard for John because he's such a great guy, and I get NOTHING for referring clients his way. He's just that good.
  Check out the FAQ's on his blog, it may help answer some of the questions you have in the latter-part of your comment to the OP.
  If all else fails, Vanguard (and many of the low cost brokerages) indeed DO have self-directed plans, you may have missed in doing your research.
  If those options aren't satisfactory or still outrageous.....then I'm tapped-out for suggestions.
  Really, all kidding aside, check with John, he's awesome.
  Good luck ~ Todd
  
  Todd G., over 9 years ago
  1. John Park may have been awesome 4 years ago but be warned now: he disappeared after the initial set up and collecting his fee. There was a mistake in his set-up that needed correcting which he did not fix, and he no longer responds to texts, emails, or phone calls.
    
    David A Cooknot, over 5 years ago
thanks for the valuable info Don

Don Alberts, over 9 years ago