FOR USA INVESTORS ONLY
What are Real Estate IRAs?
A real estate IRA is technically no different than any other IRA (or 401k). The government created the IRA to allow investments to grow tax-free or tax-deferred compounded over time to maximize growth. The IRA can also qualify for yearly tax-deductions (depending on the account), provide asset protection and assets can be passed to future generations.
A real estate IRA is unique because it allows investments in real property.
Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly self directed IRA custodian, such as Equity Trust, allows that type of investment in addition to any type of real estate investment, such as, residential real estate, commercial real estate, raw land, and mobile homes, etc.
Real Estate IRA Advantages
- True Investing Diversity: With a self-directed IRA you can diversify beyond the market into real property. You don’t have to be limited to stocks or mutual funds that hold real estate investments – you can own the actual property in your retirement account.
- Tax Advantages = Lasting Wealth: Investing over time in a tax-advantage account like a self-directed IRA (tax-deferred/tax-free profits, plus the possibility of large tax deductions) can have a tremendous affect on future wealth (see chart below)..
- Secure Hard-Earned Assets: Self-Directed IRAs are afforded protection under federal bankruptcy laws to ensure assets are secure.
Provide Wealth for Your Future Generations: Certain self-directed IRAs allow the passing of assets to beneficiaries after death with little or no tax, allowing you to stretch wealth over generations.
Real Estate IRA Rules
Seven Things You MUST Know about Investing in Real Estate IRAs
1. Your IRA Cannot Purchase Property Owned by You or a Disqualified Person.
One of the most common questions about real estate IRAs is: “Can my IRA purchase a property that I currently own?” The answer is always no.
IRS regulations don’t allow transactions that are considered “self-dealing,” and they don’t allow your self-directed IRA to buy property from or sell property to any disqualified person, including yourself.
2. You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRA.
Can your self-directed IRA purchase a vacation home for you to occasionally use? Can you rent office space for yourself in a building that your self-directed IRA owns?
The purpose of the IRA is to provide for your retirement at some future date. It’s not intended to benefit you (or any other disqualified person) today. If your IRA engages in a transaction that, in some way, benefits you or a disqualified person, this is considered an “indirect benefit”.
3. IRA Investments Are Uniquely Titled.
You and your IRA are two separate entities. As such the investment needs to be titled in the name of your IRA—not to you personally. All documents related to the investment must be titled correctly to avoid delays.
The correct title for most real estate IRA investments is:
“Equity Trust Company Custodian [for benefit of] (FBO) [Your Name] IRA”
4. Real Estate in an IRA Can be Purchased without 100% Funding from Your IRA.
You can purchase property in more ways than just an outright purchase of the full amount from your account. These other options include using undivided interest and partnering with others. You can also finance an investment with your IRA, but it must be structured properly.
5. IRA Investments that Use Financing Must Pay UBIT.
Your self-directed IRA can purchase real estate using financing as long as the loan is non- recourse. If you do use financing, unrelated business income tax (UBIT) applies.
6. Expenses Must Be Paid from Your IRA.
All expenses related to property owned by your self-directed IRA (maintenance, improvements, property taxes, condo association fees, general bills, etc.) must be paid from your IRA.
7. Real Estate IRA Income Must Return to Your IRA.
All income generated by property owned by your self-directed IRA must be paid into your IRA.
Please Note: This information presented above for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and accounting professionals.
Real Estate IRA FAQs
What are the differences between buying real estate for myself, personally, and purchasing a real estate investment for my IRA?
There are four main differences between purchasing real estate for yourself and for your IRA:
Title – When purchasing an asset for your IRA, it must be properly titled to your IRA. Specifically, it must read “Equity Trust Company Custodian FBO [Your Name] IRA.” Equity Trust will not accept any investments that are not properly titled.
Funding – When purchasing an investment (or any portion of an investment) for your IRA, funds must come directly from your IRA. Equity Trust will send the funds directly to the title company/closing agent/attorney per your instructions.
Expenses/Income – Any expenses associated with your IRA investment must be paid from your IRA and any income received must be returned to your IRA.
Signatures – Documents pertaining to your IRA investments must be signed by Equity Trust, serving as custodian on behalf of your IRA.
Can my IRA purchase real estate that I currently own?
No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person (this includes you and family members of lineal descent).
Can my IRA purchase real estate that my corporation, partnership, or LLC owns?
No. This would also be considered a prohibited transaction (see IRC 4975).
May I live in or work in a property that my IRA owns (e.g., personal residence, retirement or vacation home, office)?
No. This is considered a prohibited transaction (see IRC 4975).
How do I pay funds to the seller?
You complete an investment form that instructs Equity Trust where to send the funds from your account. Typically, funding to purchase real estate is sent to a title company, attorney, or escrow agent. Funds can be sent by check, cashier’s check, or wire.
I plan to purchase a rental property with my IRA. Does the rental income have to go back into my IRA?
Yes, all income generated by an IRA-owned property must return to your IRA. This ensures that you retain the tax-deferred or tax-free status of the investment.
How does the rental income actually get into my account?
Rental payments are sent to Equity Trust for the benefit of (FBO) your IRA. The checks or money orders should be made payable to:
“Equity Trust Company Custodian FBO [Your Name] IRA #xxxxx.”
Once received, the checks or money orders are deposited into your IRA. All checks must be sent to Equity Trust with a payment coupon.
Can my IRA invest in a newly formed entity (e.g., limited partnership, limited liability company, C corporation, land trust) that will invest in real estate?
Yes. Investments in newly-formed private entities are not prohibited under the Internal Revenue Code, with the exception of subchapter S corporations.
Can my IRA purchase an interest in a subchapter S corporation?
No. IRAs are not qualified as investors in subchapter S corporations (please see IRS Letter Rulings).
May I use funds from my IRA to renovate property in order to sell it at a higher price?
Yes. However, your IRA must pay all expenses associated with a property that it owns, including renovations. Further, all proceeds from the sale of the renovated property must be deposited into your IRA.
How do I sell a property owned by my IRA?
When you’re ready to sell a property that’s owned by your IRA, you need to request the original documents from Equity Trust. This is done by completing an investment form.
Once the property has been sold, all funds from the sale must be deposited into your IRA. These funds must be sent to Equity Trust with a payment coupon.
When I sell a property owned by my IRA, may I keep a portion of the proceeds and send the remaining portion to Equity Trust?
No. All income generated from the sale of a property owned by your IRA must be deposited directly into your IRA.