Using a Self-Directed IRA to Invest in Real Estate

If you are looking for a way to create a steady stream of income for retirement, then you should consider real estate investing through a self-directed IRA. A self-directed IRA allows you to take more control of your money and how it is invested. However, buying and selling real estate with an IRA can be a bit tricky.

Here are six things to keep in mind before you begin investing.

#1: The IRA Can Secure a Loan

Many people are unaware that the money in a self-directed IRA can be used to secure a loan for purchasing a property. However, you will need to pay Unrelated Business Income Tax (UBIT) for money earned on an IRA-secured loan.

#2: You Can Mix and Match Funding

Although it is possible to pay for the property completely with your self-directed IRA, you do not have to do so. You have many funding options, including using some funds from the IRA and getting other funds through loans or investment partners.

#3: Real Estate Can Diversify Your Holdings

The good thing about investing in real estate with your IRA holdings is that it will help diversify your investments. Real estate is a great hedge on inflation and can keep your IRA earnings high even during times of economic uncertainty.

#4: Be Careful of Indirect Benefits

Real estate purchased through a self-directed IRA cannot benefit you or other disqualified people. This means that you cannot buy vacation property or any other property that you will use on occasion. You can only buy investment properties with IRA money that are not personally beneficial to you. In addition to yourself, other disqualified individuals include:

  • Your spouse
  • Your employer
  • Your children and spouses
  • Your grandchildren and spouses
  • Your parents
  • Your grandparents
  • Custodians or administrators of the self-directed IRA
  • Any business in which you are at least 50% owner

Also, keep in mind that you cannot buy a property with your self-directed IRA that is owned by you or any disqualified individuals.

#5: Pass On Investments

When creating a self-directed IRA, you will be asked to choose a beneficiary. This allows your IRA holdings and tax benefits to be passed onto those you love. One thing to keep in mind is that real estate investments will require more care than ordinary stock investments. Be sure that your beneficiary understands the ins and outs of your real estate business so that after your death the investments continue producing income.

You might also consider putting your IRA holdings into a trust and naming the trust as a beneficiary. Then, your family can be named beneficiaries of the trust. Doing this allows the IRA to go directly into the trust and pass probate fees. The trustee named to administer the self-directed IRA can be someone that understands the real estate investments you have created.

#6: Know the Tax Advantages

When you have capital gains and earned income inside your self-directed IRA, these earnings are tax-deferred. If you use a Roth self-directed IRA, these earnings are tax-exempt. This is because the deposits made into the Roth IRA have already been taxed.

Understanding how a self-directed IRA works with real estate investments will allow you to invest in properties of all kinds including single-family homes, apartments, land, or even real estate investment trusts (REIT). Doing so will help you make your IRA work for you to produce income throughout your retirement years and for future generations. For more information about real estate investing, contact me today.