Surprisingly, few investors realize that the IRS has since the 1970s permitted real estate to be held within IRA retirement accounts. You, as an investor, don’t have to invest in bank CDs, mutual funds, or the stock market.
With a Self-Directed IRA LLC, real estate investments have been permissible under the Employee Retirement Income Security Act of 1974 — ERISA for short.
Additionally, IRS rules permit investors to engage in most real estate investment types as long as they do not involve a disqualified person (see below).
This post examines:
- The advantages of using a Self-Directed IRA LLC to purchase real estate
- Tax advantages of buying real estate with Self-Directed IRA LLCs
- The types of real estate investments permitted
- A few strategies, rules and regulations when using Self-Directed IRAs for real estate purchases
- And the process to invest in real estate with a Self-Directed IRA LLC
If you are unsure of using a Self-Directed IRA LLC for real estate investments, or you’re unfamiliar with the term “checkbook control,” the best thing to do is consult with an attorney experienced in such matters. It can get confusing.
Income produced by an IRA generates tax-differed/tax-free profits. When using a Self-Directed IRA LLC to purchase real estate, the IRA earns tax-free income/gains and you pay taxes at a future date, not in the year the investment produces income.
(If it’s a Roth IRA the income/gains are always tax-free. See why it’s worth consulting with an attorney experienced with Self-Directed IRA LLCs and “checkbook controlled”? So many nuances.)
In addition to gains being
- There is no time limit for holding property
- Positive cash flow is
- There’s potential to earn a larger rate of return on invested capital
- The IRA can borrow money
Instead of paying tax on returns the year gains are generated,
Note that Self-Directed IRA real estate investments are usually made when an investor is earning
Types of Real Estate Investments
Below is a partial list of real estate investments that can be made with a Self-Directed IRA LLC. If you have questions about a particular type of real estate investment, consult an experienced attorney. Questions always pop up — like air space and water rights.
- Residential homes
- Condos and town homes
- Mobile homes
- Vacation rentals
- Offshore properties
- Commercial property
- Real estate notes and purchase options
- Tax liens certificates
- Tax deeds
There are several real estate strategies available with a Self-Directed IRA, including but not limited to:
- Partnering: If an investor doesn’t quite have the funds, he or she can partner their Self-Directed IRA with other people, or other IRAs.
- Leverage: An investor can obtain a non-recourse loan from a bank or lending institution.
- Options: An investor can buy and sell real estate options.
Rules & Regulations
- Prohibited Transactions: There are rules regarding who an investor can and cannot buy from and sell to with a Self-Directed IRA. Those people are called “disqualified persons.”
- Disqualified Persons: You and your spouse; your lineal ascendants/descendants and their spouses; investment advisors and managers; anyone providing services to the IRA; any corporation, partnership, or other entity in which you own a 50 percent or greater interest.
How does an investor set up a real estate IRA transaction?
Laura is in her
Laura loves real estate and is always pulling out her phone to check on available properties and prices no matter what city she’s in. She figures a retirement strategy that includes real estate is good for her because she’s already interested in and will stay engaged.
This itself can be a separate post, but for
Laura can find the right attorney or administrator, but she can’t do any investing until she
Funding the Account
Laura can use her Self-Directed IRA LLC funds to make 100 percent of the investment — if she has enough funds.
As noted earlier, Laura can partner with family, friends, and colleagues as long as the partner is not considered a
Laura may obtain financing through a loan or mortgage to finance a real estate purchase using a Self-Directed IRA LLC. However, two important points must be considered: The loan must be
Laura can also fund her account with a cash transaction or by rolling over the funds from an existing retirement account. Laura is not unlike other investors who are in their mid-30s and later. Chances are she may have an abandoned 401(k) (or two) with previous employers that she can roll into a real estate IRA.
As noted above there are many types of real estate opportunities that can be funded via a Self-Directed IRA LLC. All of this requires more research, due diligence, and patience — which Laura figures will not be a big deal because of her interest in real
Partial to homes, Laura decides her first investment will be a single-family rental home.
Buying the Property
Laura fills out a form directing her administrator to purchase the single-family rental home with cash from her Self-Directed IRA LLC. When the transaction is complete, the IRA owns the property. She can collect rent and the funds will go directly into the retirement account.
(Of course, Laura is obligated to manage the property, and this is where talking with an attorney familiar with Self-Directed IRA LLCs and real estate purchases comes in handy. What can she do and not do with the IRA?)
Assuming all goes well, Laura over the years watches her rental property and Self-Directed IRA grow with taxes on the earnings deferred.
Perhaps at some point, there is enough profit from the first investment that Laura can purchase a second property.