Step by Step Guide to Acquire Real Estate in an IRA
Step 1 – Open and Fund your Real Estate IRA – It takes New Direction IRA two business days to open your account once your application is in the office. Then you will fund the account with a rollover, transfer, and/or contribution. This may take several weeks, so plan accordingly.
Step 2 – Find a property and make an offer – The offer needs to be made in the name of the IRA (as it is the buyer) and earnest money needs to come from the IRA or a non-disqualified person. Do not use your personal funds to pay the earnest money.
Step 3 – Work with your New Direction Client Representative and Acquisitions Specialist to assemble the paperwork for the purchase. Closing documents must be received by our office at least 3 full business days before the closing date.
Leveraging Real Estate in an IRA
A self directed IRA real estate may acquire a loan to purchase property, but it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for remuneration is the property itself). Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender.
Learn More about Non-Recourse IRA Loans.
When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property's net profits may be subject to UBIT. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the net profits derived from the debt financed percentage may subject to UBIT. UBIT is paid by the Real Estate IRA and does not affect the IRA holder's personal taxes.
Property Management Of A Real Estate IRA
After you have used your self directed IRA to purchase real estate, the IRA holder makes the management decisions. That may include the hiring of a property manager (or other non-disqualified person or entity) to handle the day-to-day cash flow and operations, or you may choose to work directly with New Direction to have vendors and other bills paid. You are allowed to make decisions for your IRA-held asset, but there are limitations that the IRS imposes.
Income generated by the self directed IRA real estate must go back into the IRA. Rent checks are made out to the IRA (or the management company if there is one), not the IRA holder.
You can not pay for any property related expenses with your personal funds on behalf of the Real Estate IRA. All expenses are paid from the IRA.
As the IRA holder, you have the ability to choose tenants, plumbers, repairmen, etc. for your IRA-owned property.
Maintenance and Improvements cannot be performed by the self directed IRA real estate holder or any disqualified person.
Possible Structures For The Purchase Of Real Estate With Your IRA
As mentioned above, there are several ways to have real estate in your IRA:
Hold title to real estate. A real estate contract is written between the IRA (New Direction IRA, Inc FBO (client name) IRA) and the seller. Funds from the self directed IRA real estate are sent to closing for the purchase, and the IRA takes title to the property directly.
Tenants-in-Common with a partner entity. This is one of the ways that an IRA can participate in a real estate asset without necessarily having the entire purchase price. The partner can be a person (even a disqualified person), an IRA, a company, or other entity.
Private Equity in an entity (like an LLC, LP, C-corp., etc.) that then invests in real estate. The asset in your IRA in this case is shares of a private company or private equity in that company. However, the financial return of the investment is based on the performance of the real estate as well as the terms of the agreement with the company.
Loan money to a borrower who uses real estate as collateral. You can think of your IRA as a mortgage lender. Your IRA can lend money to non-disqualified persons and secure the note with real estate holdings and/or other assets if you like. You and the borrower decide on the term, collateral, and the rate.
Learn about New Direction's self directed IRA real estate fees.