What You Should Know About Investing In Real Estate Using a SDIRA

Investing in real estate via the SDIRA (Self- Directed IRA) after the collapse of the stock market in 2008 became the safe and lucrative option because real estate is tangible and properties were able to purchased at rock bottom prices. But like any investment you must perform the necessary due diligence before investing. In addition, you must be very familiar with IRS and DOL (Department of Labor) rules to ensure your investment and investment structure is compliant to prevent the disqualification of your retirement plan which includes taxation and penalties. To ensure this process goes as smoothly and as seamlessly as possible, there are some things you and your real estate agent must know prior to entering into contract on a purchase.

As has the real estate market has changed since 2008, so has the screening process by banks and selling agents. In most cases, the offers that are seriously being considered are CASH offers with verifiable funds prior to the offer being accepted. Therefore, it’s very important that the below listed list is reviewed and followed prior to entering into contract:

• Make sure the contract for purchase is entered under the vesting of the Self Directed IRA and NOT yourself as an individual or other entity other than the IRA account.
• Your Self-Directed IRA account should be established and funded prior to entering into contract to avoid a Prohibited Transaction and or cancellation of your contract because the contract cannot be changed at a later date.
• Transfer of the real estate contract and/or property between the retirement plan and Disqualified Persons is prohibited, NO EXCEPTIONS. Seek a real estate agent knowledgeable about how to process a transaction using a Self Directed IRA (obtain references if necessary).
• Be sure to obtain and follow the Real Estate Funding checklist provided to you once your account is established and be sure to provide this list to your agent prior to entering into contract to ensure that IRS rules are followed while putting together your investment transaction.
• Be sure BOTH yourself and your agent communicate with our Real Estate Dept. throughout the process to ensure mistakes are not made or at least to minimize those that could affect your deal.
• Perform your due diligence on the investment by consulting with your real estate agent, CPA and/or attorney prior to investment. Be sure you are familiar with IRS rules relative to Prohibited Transactions and Disqualified Persons (IRC 4975)
• Be aware of the Disqualified Person rules relative to taking possession of the property. The accountholder, spouse, children, grandchildren are prohibited from occupying the property during the period the retirement plan owns the property.
• All loans against the property MUST be a “Non-Recourse Loan” in which the account holder and other “Disqualified Persons” are prohibited from signing and co-signing the loan on the behalf of the retirement plan.

It’s really important that these steps are followed to ensure that you both have a chance at your offer being accepted as well as it closing. Over the past few months, we have noticed that both banks and selling agents are becoming impatient with transactions that appear that would not close and close on time. As a result, they are not accepting offers on such transactions and/or terminating the contract if all terms to close are not met throughout the transaction.