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Self Directed IRA’s & Real Estate Investment
With historically lower rates on fixed-income investments and a volatile stock market, many investors are seeking meaningful alternatives.
An often overlooked and little understood option for IRA holders is to add investment real estate to their IRA plan. To do this investors need to locate an independent IRA custodian that allows real estate investments.
While there are a number of rules that have to be carefully followed when investing in real estate using your IRA the potential benefit for long term appreciation and investments with attractive cash flow should not be overlooked.
A few of the key areas to consider when using your IRA to invest in real estate are as follows:
You can own virtually any type of investment real estate. This would range from vacant land, residential rental property to commercial and industrial property.
You can use leverage to buy the real estate. The borrower is not the IRA owner but rather the IRA trust.
You cannot live in or lease the property to your business.
You cannot buy the property from a related party (such as a family member) or yourself.
The entire transaction must flow through the IRA account. Only Qualified Plan or IRA funds may be used as good faith deposits, down payments or purchase money.
You can withdraw real estate from your IRA when you reach retirement age (age 59 ˝ or older for a penalty-free withdrawal). It can be done by having the IRA sell the property or take an in-kind distribution of the property. Under this arrangement the IRA custodian assigns the title to the property to you.
The tax consequences of your withdrawal will be dependent on the type of IRA you held the real estate in. Each plan has its plusses and minuses. Below is a brief summary:
Traditional IRAs let you deduct your annual contribution from your income tax but you will be taxed on distribution.
Roth IRAs give you no deductions on your current contributions but does allow you to withdraw funds tax free on retirement. This is probably the best option if you expect a substantial increase in property value.
SEP-IRA is designed for self-employed individuals and small companies. Withdrawals from SEP-IRAs are treated like those of traditional IRA for tax purposes.
To find an independent IRA custodian search the web for “real estate IRA” or “self-directed IRA”. It is important that you and your CPA carefully review the company you select to be your independent IRA custodian along with any real estate investments you are considering for appropriateness.