Many real estate investors purchase investment properties with a view toward retirement. Real estate investments generate higher returns than many other investments, while also allowing the owner to generate an income during retirement.
But many real estate investors don’t know that investment properties can be purchased with a self-directed IRA, which has many financial benefits compared to purchasing real estate outside an IRA.
Self-Directed IRA Options for Real Estate Investors
A self-directed IRA has many more options than a conventional IRA, including the option to purchase investments like real estate, private mortgages, private company stock, and precious metals.
With a self-directed IRA, a financial institution serves as the trustee/custodian of the IRA’s assets. The institution provides many services, including holding the assets on behalf of the owner, processing transactions, maintaining records, and filing IRS reports. But the owner of the IRA does not have control over the “checkbook”, which can be problematic when desiring to make speedy real estate investments with a self-directed IRA.
The solution is to setup a Self Directed IRA LLC (also known as a checkbook IRA). With this arrangement, the self-directed IRA invests in an LLC, and the owner of the self-directed IRA manages the LLC, which results in the owner of the self-directed IRA having control of the checkbook.
Disadvantages of Real Estate Investing with a Self-Directed IRA
If you are accustomed to living in a property you purchased as a real estate investment, you will not be able to do so when purchasing a property with a self-directed IRA. IRS rules require that investment property purchased with a self-directed IRA be held chiefly as an asset; therefore, the IRA owner is not allowed to live in the property.
Also, the funds required to make a down payment on a property must come from the self-directed IRA. You are not permitted to personally pay the down payment, and have the self-directed IRA reimburse you at a later date.
Furthermore, the custodian of your self-directed IRA must ensure that there is a clear separation between the owner of the IRA and the investment property. Therefore, you will not be able to manage or make repairs to the investment property in your self-directed IRA, which will increase your expenses compared to self-managed real estate investments, unless your property is in a Self Directed IRA LLC.
Advantages of Real Estate Investing with a Self-Directed IRA
There are several advantages to investing in real estate through a self-directed IRA, especially if you have more control by using a Self Directed IRA LLC.
One of the biggest advantages is that you can finance investment property with a non-recourse mortgage. With a non-recourse loan, lenders can only recoup the pledged collateral in the event of default (i.e., the real estate), and can’t go after the IRA or the individual’s personal assets.
Also, taxes can be substantially lower with a self-directed IRA. Taxes paid for IRA-owned properties are at trust tax rates, which could be significantly lower than real estate held privately and taxed at personal federal and state income tax rates.
Note: see your accountant for tax liabilities relating to your specific situation.
After you have a self-directed IRA, you can begin investing in real estate through the IRA. It‘s especially easy to get started if you have a Self Directed IRA LLC and have control over the checkbook, giving you the ability to quickly snatch up properties at bargain prices.
To purchase real estate investment properties in the highly profitable Tampa Bay market, Graystone Investment Group can find properties that meet your investing objectives. Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.