Copyright (c) 2014 Joseph M. Maas
For many years now, people have been using non-directly owned real estate in their IRAs and other retirement plans. These intangibles are investments like REITs and real estate mutual funds. But most people don't know they could use their retirement plans to purchase directly owned real estate such as raw land, commercial building, condos, residential properties, empty lots, trust deeds, or real estate contracts.
In general, the internal revenue code (IRC) section 408 does not prohibit the holding of real estate in an IRA, provided the transaction is not prohibited under IRC Section 4975. Code section 4975 explains which transactions are prohibited between an IRA or retirement plan and a "disqualified person." Generally, "disqualified persons" are defined as the account holder, other fiduciaries, certain family members, and businesses under the account holder's control. Simply put, the property must be used for investment purposes only and cannot be used personally while maintained in the IRA. In addition, properties individually owned outside the IRA cannot be transferred or purchased by one's individual IRA.
The IRS will not let you use your IRA to purchase your home or a vacation home. Nor will they let your business lease property from your IRA. You cannot have personal use or benefit from the property. If you did, it could be very costly in taxes and penalties. There are a number of other details to know about using your IRA to purchase properties that are not presented here because this material is unnecessary to the purposes of this book. What is important to recognize is that there is a multitude of ways to use investment planning, properties, and rules to your estate's advantage, and by seeking the counsel of a trained financial professional, you can make the most use of the tools available to you to accelerate and retain your estate's wealth.
The first step to investing tax-deferred or tax-exempt in real estate is to open a self-directed IRA with any one of the many independent IRA custodians that allow real estate investments. A self-directed IRA is an IRA in which you are in control of your investment options and are not limited to only stocks, bonds, mutual funds, and other traditional securities. In a self-directed IRA, you have access to all of these traditional investments plus real estate and other alternative asset classes.
Because fees and other services may vary, it is wise to investigate a few independent IRA custodians to select the best one fitting your investment needs, or have your financial planner do the research for you.
Once you've established your self-directed IRA account, the next detail is to fund the account. In, 2013, the IRA and ROTH contribution limit is $6,500 for individuals over the age of 50, and $5,500 for those under 50. We all know that six or seven thousand dollars is not enough to buy a rental house, so how else can we fund the IRA?
One very popular method, if eligible, is to roll over your 401(k) plan into a new self-directed IRA, or use a self-directed 401(k) that is allowable by both the IRS and the IRA custodian.
In many cases, the IRA holder will have sufficient funds to cover the real estate purchase, but what if a great investment property for your IRA is discovered, and your retirement account simply doesn't have adequate funds? Fortunately, there are several ways you can make the purchase and still keep the transaction legal and profitable.
2. Tenancy-in-Common (TIC)
3. Limited Liability Companies (LLC)
We'll continue this discussion in part 2 of the article.
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Did you know you could use your IRA to purchase property investments? If you follow the relevant IRS regulations, it is possible. Learn more about this at Synergetic Finance in author Joseph M. Maas' book "Exit Insight: Getting to Sold!" available at Merrell Publishing
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