The Ultimate Cheat Sheet on Self-Directed Real Estate IRAsPosted on September 2, 2014 by
Self-Directed Real Estate IRAs are a powerful tool that allow for tax-free and tax-deferred profits. In some cases, capital gains taxes can even be avoided when investing within an IRA. Still many people are still unclear on how to transition from investing in real estate outside their IRA into investing in real estate within their IRA. We’ve compiled a cheat sheet summary in this article to serve as a reference tool.
First and most importantly, you need to open and fund a Self-Directed Real Estate IRA. This involves simply filling out an application which is quick and easy with American IRA [Hint: The American IRA staff will be standing by to help with this]. The second and most important part is to fund your new account. You can fund an account by making a contribution, transferring funds from another IRA, rolling over funds from another IRA, and/or any combination thereof. When transferring from another IRA, it is important that you follow up persistently with your prior custodian to make sure they move your funds in a timely manner [Remember: You are moving money “away” from them so they are in no hurry.].
Once your account is open and funded, you are ready to find deals on those assets that you want to purchase. Before making an offer on that asset, make sure you review the list of prohibited assets to ensure that the asset you want to purchase is permitted. Prohibited assets include: life insurance, certain kinds of precious metals, art, alcoholic beverages, and collectibles. You also need to make sure you are not purchasing the asset from a prohibited individual including: yourself, your spouse, your descendants, your ascendants, nor their spouses or entities they own or control.
“Before” committing to a purchase, make sure you have worked with the appropriate professionals to protect your interest. For instance, when purchasing real estate, make sure you have had the appropriate inspections completed, that you have had a qualified realtor involved, and that you have consulted with your attorney and/or CPA. You also need to make sure your professionals check zoning and local ordinances to ensure that you can use the property in the way that you intend to. Once your professionals have provided you with their findings and/or advice, then you are fully qualified to make an informed decision on purchasing the asset.
Purchasing Your Asset
You are now ready to complete a “Buy Direction Letter” which will direct your IRA administrator to work with your professionals to purchase the asset on behalf of your IRA. [Remember: You can “not” sign any paperwork. Your IRA administrator will sign on behalf of your IRA after you have “read and approved” all documents.]
After the Purchase
Once the purchase is complete, your IRA will own the asset. You now need to make sure that you and/or your prohibited individuals do not provide services to that asset and/or do not gain any current benefit from the assets within your IRA. This includes performing maintenance, property management tasks, and using the asset (for instance you can’t stay in an apartment purchased within your IRA). All income and expenses also need to flow into and out of your IRA, so you will need to work with your IRA administrator to make sure this happens.
Your IRA is allowed to borrow money provided the loan is non-recourse. Keep this in mind if you ever need additional funds. Also, remember that in some circumstances this can generate tax due on the borrowed portion. The best thing to do is to contact your IRA administrator so that they can explain the process to you and they may even have a list of non-recourse lenders that they can share with you.
Want to Learn More?
Contact American IRA for a no obligation, free consultation, with their Senior Vice President, Sean McKay.