IRA to invest in real estate is simple. By law, all IRAs are required to have a custodian who holds title to the real es- tate assets for the IRA owner. In recent years, the market- place has seen an increase in the number of custodians, adminis-
tion rules (IRC 4975), with which investors should be familiar to
erty-related expenses. For any rental properties, investors would need to hire a third party to provide property management services. Your IRA may obtain a loan, provided it is a non-recourse loan, which may generate unrelated business income tax (UBIT). Talk with your custodian in advance, as most have resources for third-party non-recourse lenders. You may also get creative by partnering with other nonrelated investors, but again, discuss this with your custodian in advance and consult your trusted tax adviser for guidance. If you do not have sufficient IRA funds available to cover these costs, you may have to make annual contributions within the federal guidelines, rely on a federal exemption for loaning funds within strict guidelines to your IRA, or withdraw the property from the IRA and pay possible tax penalties. SUMMARY As an investor, you already know that real estate is a popular and time-tested investment vehicle for building wealth and withstanding market fluctuations. With a self-directed IRA, your real estate investing skills can potentially yield extraordinary returns toward your future retirement. • DISCLAIMER: Self Directed IRA Services Inc. acts only as a passive IRA custodian and does not sell or promote investment products or provide tax, legal or investment advice. Investment products: Not FDIC insured. No bank guarantee. May lose value.
avoid self-dealing. Primarily, you can- not buy real estate for your direct use or benefit through an IRA.
trators and other promoters offering self-directed IRAs. While it may seem confusing, the bottom line is this: Only custodians are directly regulated by state or federal bank regulators, while admin- istrators and promoters are middlemen that are not directly regulated. Using an administrator or promoter may pose more risk to your retirement funds. Start by comparing several self-direct- ed IRA custodians and make sure the custodian permits the type of real estate investing you want to do. Fees among the various self-directed IRA providers will vary, so do your homework. Choose a custodian that best fits your needs. Most custodians will have a checklist and forms for you to follow to make the process easier. As the investor, you will locate the investment property and perform the necessary due diligence, fund the account with a direct transfer or rollover from another retirement account and direct your custodian to make the purchase. Before making any investment deci- sions, you should consult with your tax or legal professional. He or she can help guide you through the process to avoid
The property your self-directed IRA buys cannot be owned, occupied or in any way used by your spouse, children, grandchildren or companies in which you have a substantial interest. You also cannot personally perform any maintenance or make improvements to the property, called “sweat equity.” Selling, leasing or exchanging prop- erty to the IRA, as well as accepting compensation for managing property held by the IRA, can also be deemed as prohibited transactions. Additionally, using an IRA or IRA-owned investment for security on a loan is also considered a prohibited transaction. Prohibited transactions come with significant consequences. You risk the loss of the tax-deferred status of your retirement account and may incur sub- stantial penalties and taxes. This would disqualify the account and erase any Remember that all funding should come from your IRA, so be sure you have enough in your IRA to cover the investment in its entirety. Your self-di- rected IRA would need to maintain funds available to pay for maintenance, insurance, annual taxes, homeowner association fees and all other prop- gains that you may have earned. CRUNCH THE NUMBERS
breaking any IRS rules. PLAY BY THE RULES
As with any IRA investment, there are rules, called Prohibited Transac-
BY KELLI CLICK
Kelli Click is President of Self Directed IRA Services Inc., a Texas-based IRA custodian and subsidiary of Horizon Bank, SSB. The firm is regulated by state and federal banking authorities and has over $1 billion under custody in real estate and other alternative investments for more than 25,000 investors across the United States. Click has been actively involved in the retirement industry for over 25 years and serves on the board of Retirement Industry Trust Association. Her articles have been published in REALTOR Magazine, Texas REALTOR Magazine and other publications that focus on real estate and other alternative investments in self-directed IRAs. 866-928-9394 | www.sdiraservices.com
6 THINK REALTY INVESTOR REVIEW
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