Real Estate Investing with your IRA or 401K

Real Estate Investments

Investing your IRA or 401K in Real Estate

This  topic is for people that wish to purchase Real Estate Investments using their IRA or 401K. This type of IRA is called a Self Directed IRAs and  have been in existence since the mid 70s. Most of us are familiar with IRAs or 401Ks which can be offered either by your employer or for business owners who fund these themselves. We are also familiar with the investments that most IRAs or 401K are comprised off, typically stocks, bonds or other similar investment products. However, there are no IRS rules that prohibit you from utilizing other investment choices. Enter real estate as an option.

As a note: I wish to emphasize the keyword “invest” as this is related to real estate that you will be using for investment purposes and not for personal use or use by a disqualified person (more on this in a moment).

Why would you want to consider:

  • It provides you a new source of capital
  • Tax deferral / Tax Free investing
  • Provides you more control over your investments and possibly a higher return on what you had invested using the tradition products like stocks and bonds

How this works:

There are up to 4 parties involved.

  1. Self Directed IRA Custodian – this is a company that manages the IRA similar to what you would expect from companies like Fidelity or Wells Fargo. They do not offer investment advice but provide the record keeping required by the IRS.
  2. Buyers – yourself, multiple buyers or an LLC
  3. Real Estate agents – to assist in finding the investment properties
  4. Sellers

Steps involved.

  1. Open up an account with a Self Directed IRA Custodian (Advanta as an example)
  2. Move funds into the IRA from either an existing IRA, 401K, Roth
  3. Find investment properties
  4. Close the transaction like any other real estate purchase

Things to consider:

  • All expenses and income have to be either paid or received into the IRA
  • This provides for tax free income. Until the time when you wish to start receiving disbursements.
  • The title on the deed is either your IRA or an LLC if you created one in advance
  • The rules associated with an Self Directed IRA are no different than a traditional IRA or 401K

Real Estate Investments – what can you invest in:

  • Raw Land
  • Commercial
  • Rehabs/Flips
  • Timeshares
  • Residential
  • Condos
  • Duplexes

What are disqualified persons or parties

Disqualified persons are as follows. You can not directly benefit from the investment. What this means is that you can’t use your Self Directed IRA to purchase real estate that you would use. You also can’t sell, lease, rent to nor can it provide a benefit for your spouse, son, daughter, mother, father or grand children. Before you invest in a property using a self directed IRA please check to insure that you understand these IRS rules. The IRA Custodian that you elect can assist with qualification questions based on your investment intentions.

There are also rules associated with who can provide improvements or repairs.  This needs to be structured as a pure investment where income comes from other than disqualified sources and expenses can’t be paid to disqualified sources. There are exceptions to what is a disqualified source related to which family members are deemed disqualified.

What is the Cost ?

Other than the normal costs associated with the purchase and sale of real estate investments the only other cost is related to the fee the IRA Custodian charges. A nominal initial setup fee is required along with a yearly fee per account related to the record keeping and filing of documents with the IRS.

If you wish to understand more how this works please contact us to discuss.

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