A real estate IRA is no different from any other type of 401 (k) self-directed or IRA. The use of real estate as part of a retirement plan is a legitimate way of investing your retirement funds.
All the same benefits apply to a real estate IRA, such as tax deductions, tax-free profits, estate planning and asset protection. You can make tax-free investments on the things you want to invest in.
3 Most Popular Ways to Invest in a Self-Directed IRA Using Real Estate
Although a truly stand-alone IRA does not prohibit you from trading other than those prohibited by the IRS, here is one of the most common ways to invest in a real estate SDIRA:
1. Direct purchase in cash
2. Partner with a partner, family or friend
3. Make the investment with borrowed funds
The simple and direct method – Cash
If your self-directed IRA can cover the purchase price, taxes, insurance, closing costs. and any other expenses, you can buy the property entirely from your IRA. If you incur additional expenses or make a profit, the money will be deducted or returned accordingly to the account.
Partial interest in a property
What if you find a property that you think would be a good investment, but your SDIRA does not have the money to buy it? It is perfectly acceptable to buy an undivided interest in the property.
So suppose the property costs $ 200,000, but only 30% ($ 60,000) of the purchase price available on your account. You can ask a friend, family member or business associate to provide the remaining 70% ($ 140,000).
Overtime If the property incurs expenses, your retirement account will be responsible for 30% and your partner for 70%. As an example, suppose the property needs a new $ 2,000 air conditioning unit. You would pay $ 600 and your partners $ 1,400.
It is also used to make profits. If you collect $ 1,000 rent each month, your partner will receive $ 700 and your self-directed IRA will collect $ 300.
Borrow money for your retirement plan
You may decide to obtain a loan for your investment, but you must follow these two guidelines:
1. According to the regulations of the IRS, the loan is without recourse. You can not use the IRA as collateral, but you can use the property as collateral. This means that if you lose the property, the only thing the lender can collect is the property and can not go after your IRA.
2. If your real estate IRA has got a loan on investment, you may have to pay a profit tax. This tax falls under "Unrelated Corporate Tax" or UBIT.
If you are thinking of investing in a real estate IRAthese three methods of obtaining the investment are an excellent starting point. Of course, you should always consult your passive custodian about paperwork and commercial transactions to make sure the rules and regulations of the IRS are followed correctly.