1. I’ve heard that buying and selling real estate in my self-directed retirement plan is illegal. Is this true?
Neither the IRS nor Department of Labor has ever published a list of legal investments. All investments are “legal” unless specifically prohibited, such as collectibles.
There is a list of prohibited transactions, disqualified persons, and collectibles on our site. Real estate and other investments are permitted, provided you follow applicable rules.
2. How long does it take to transact an international real estate purchase in my IRA?
Anywhere from approximately 6 weeks to 6 months depending on the transaction and scenario, all of which are very different.
3. What trends do you see regarding the required paperwork for these international real estate transactions within IRAs?
With the recent financial regulatory tightening of the financial industry, more and more documentation is being required every day.
4. What is a checkbook IRA, or checkbook LLC?
These are very aggressively structured transactions. They cost approx $4,000+ to set up, and has been frowned upon by the regulatory bodies. Global IRA remains conservative with the rules and regulations regarding international real estate transactions.
5. How would an IRA owner begin to take the minimum distributions required?
A fraction of the real estate in the IRA would be deeded over to the IRA holder as a distribution according to their RMD calculation. Now the IRA would own a certain percentage of the real estate, and the IRA holder would also own a small percentage. Any income or gains would be split between the IRA and the IRA holder according to their new pro-rata share of interest.
It is as if you owned 1000 shares of IBM in your IRA and didn’t have cash in the IRA to cover the RMD amount. You would have the equivalent amount of shares distributed to you to satisfy the RMD requirement. This is an “in –kind” non-cash distribution, as shares are reregistered from the IRA to the IRA holder in lieu of cash. However, it satisfies the RMD requirement.
6. As a real estate professional, how can knowledge about self-directed IRA’s put money in my pocket?
For those of you who are investors, you can make other people aware that they actually have more money to invest in real estate than they thought since they can use their IRA’s to buy real estate. In other words, your knowledge of self-directed IRA’s can increase your pool of eligible buyers for your properties. Also, you can help others transfer their retirement funds into a self-directed IRA, then you can borrow those funds to make your own investments – in other words, you can create your own private bank! Finally, you can make your own retirement wealth grow with your knowledge and experience in real estate by buying and selling through your own self-directed IRA.
7. Is it really legal to buy real estate in your IRA?
Yes, absolutely! The Internal Revenue Code does not tell you what you can do with your IRA, only what you cannot do. Besides restrictions on purchasing life insurance and most collectibles in your IRA, nearly everything else is fair game. Unless your IRA is self-directed, however, your custodian may not allow investments in real estate.
8. Can I partner with my IRA or with other peoples IRA’s?
Your IRA can always partner with other people individually or with other people’s IRA’s. Under certain circumstances you personally may be able to partner with your IRA. However the burden of proving that you received no impermissible benefit from your IRA’s participation in the investment will be on you if the IRS ever questions the transaction. The transaction still must be an arms-length transaction, and the investment remains subject to the same restrictions as if the entire investment were in your IRA.
9. I only have a small IRA. How can I buy real estate?
There are at least 4 ways you can participate in real estate investment even with a small IRA. First, you can wholesale property. You simply put the contract in the name of your IRA instead of your name. The earnest money comes from the IRA. When you assign the contract, the assignment fee goes back into your IRA. If using a Roth IRA, this profit is tax-free forever!
Second, you can purchase an option on real estate, which then can be either exercised, assigned to a third party, or canceled for a fee. Third, you can purchase property in your IRA subject to existing financing or with a non-recourse loan from a bank, a hard money lender, a financial friend or a motivated seller. Profits from debt-financed property in your IRA may incur unrelated business income tax (UBIT), however. Finally, as mentioned above, your IRA can be a partner with other IRA or non-IRA investors.
10. Can an IRA buy debt-financed property?
Yes. Any debt must be non-recourse to the IRA and to any disqualified person. An IRA may have to pay UBIT on its profits from debt-financed property. In general, taxes must be paid on profits from an IRA-owned property that is debt-financed, including profits from the sale or disposition of the property, in the same proportion that it had debt. For example, if the IRA puts 50% down, then 50% of its profits above $1,000 will be taxable. Although at first this sounds terrible, in fact leverage can be an extremely powerful tool in building your retirement wealth. The same leverage principle applies inside or outside of your IRA. You can do more with debt-financing than you can without it.
11. Can I sell a property I now own to my IRA?
No. Although the IRS has very few restrictions on the types of investments which are permissible in an IRA, there is a list of “disqualified persons” who are prohibited from dealing with your IRA or benefiting from its investments. The list of disqualified persons includes you, your spouse, your parents, your children, their spouses, certain business partners and key employees and persons providing services to your plan, among others. Interestingly enough, the definition of disqualified persons does NOT INCLUDE non-lineal descendants or ascendants, so if the transaction is an arm’s length transaction your IRA may be able to transact business with your brother or sister, aunt or uncle, cousins, etc. However, you should be aware that there is an element of danger in transacting business with any person in whom you may have an interest which affects your best judgment as a fiduciary of your IRA.
12. Can I receive a fee for managing property owned by my IRA?
No. The prohibited transaction rules are intended to make sure that you receive no current benefit from your IRA other than as the beneficiary of the IRA. Investments must be arms-length and exclusively for the benefit of your IRA.
13. If I am a Realtor, can I receive a commission for property bought or sold by my IRA?
No, for the same reasons stated in the prior answer. Anything that creates a possible conflict of interest with your IRA is likely to be a prohibited transaction. Why take money that is tax-free or tax-deferred and pay taxes on it now anyway?
14. Can I collect rents and do other management without compensation?
Most likely the answer is yes, although this has never been tested in court to our knowledge. An interesting question is how much can you do before your service to your IRA constitutes an excess contribution? In any event all checks must be made out directly to your IRA.
15. Can I buy real estate with a partner using my IRA?
You may have partners, including yourself and any family members, their IRAs, eligible 401(k) s or other qualified plans, when you purchase property using your IRA. Once the property is acquired with your IRA, you may not sell it to yourself or any family members. A family member consists of ascendants and descendants, or spouses thereof.
16. What can I do if I don’t have enough money to buy real estate in my IRA?
There are several options:
• You may partner with yourself or others;
• You make allowable contributions;
• You may obtain debt financing through private sources or financial institutions on a non-recourse basis;
• You may arrange a seller carry back loan; you may sell other assets in your IRA to raise cash to make the purchase;
• You may transfer funds from other IRAs or rollover funds from qualified plans, such as 401(k), 403(b) or government 457 plans you may have had at employers where you no longer work;
• If you have a profit sharing of 401(k)plan where you currently work, you may be able to make in-service withdrawals and roll those to the IRA within 60 days.
17. Can you finance a property that’s held in your IRA?
As noted above, you may have debt-financed property in your IRA. You may not use any asset in an IRA for collateral for a personal loan from which you would receive a current benefit. The IRS code is clear on this subject, and deals with debt-financed property under the Unrelated Business Income Tax rules.
18. Where can I get a loan to purchase real estate in my IRA?
Normally private lenders, seller carry-backs, and mortgage companies may lend to your IRA on a non-recourse basis. Sometimes banks and credit unions may make non-recourse portfolio loans to IRAs.
19. Can I buy property with my kids’ IRA?
Your children’s’ IRA may purchase property, and may do so as partners with your IRA, or any other IRA as noted previously.
20. Is there any liability to my retirement plan when it holds real estate?
You always face liability whether your plan is an IRA or qualified plan, such as a 401(k) plan. If, for example, your plan owns real estate and a person is injured on that property, the plan or IRA would have the same liability issues that you would have to deal with, if the property was owned personally.
You can protect your real estate IRA investment by doing the same things to protect it and your property, such as purchasing insurance, or by having your IRA create a limited liability company that purchases a 100% of the investment properly. Limiting liability for assets in your IRA or plan should be discussed with competent professionals, such as attorneys.
21. How do I know if tenants are making payments on my account?
There are several things you can do:
• If you hold rental property in your IRA, you may receive rental payments from the tenants. To ensure that you do not directly benefit from the rental of the property, and that you IRA does, the checks need to be made payable to your IRA account. You will be responsible for forwarding them to your IRA.
• You may also have a third-party service person, such as a property manager, (other than a disqualified person) receive the payments and forward the funds to your IRA account.
• You may also have the payments are made directly to your IRA account and request monthly statements.
22. What is UBIT?
The term UBIT stands for ‘Unrelated Business Income Tax’. UBIT applies to debt-financed property that you purchase in your IRA and also applies to operating income received from companies owned by IRAs and qualified plans. If you purchase property with your IRA funds, and you finance some of the purchase through a loan, any income you receive is taxable under UBIT rules for the percentage of property that is debt-financed. The details can be found at www.irs.gov.
23. Can a company that I own rehabilitate or “fix up” property that I hold in my IRA or 401(k)?
Neither you nor a company you own, as specified in the prohibited transaction rules on our site, may provide any services to the assets in your IRA, which includes rehabilitating of “fix up” property, unless you first obtain a Prohibited Transaction Exemption from the US Department of Labor. There are private letter rulings that have been obtained in the past, permitting latitude under certain circumstances. Private letter rulings may be obtained by application to the IRS. There are also specific rules regarding taxation of prohibited transactions, which include a 100 percent tax if a prohibited transaction is not corrected in a taxable period, and a 15 percent tax on the amount of the prohibited transaction. Additional rules that disqualify the entire IRA apply to IRAs established by employers.