The Smart Investment Strategy of Real Estate in a Self-Directed IRA

Larissa Green, Advanta IRA

Real estate in a self-directed IRA (SDIRA) is the number one strategy of smart investors who choose their own investments to build retirement income. You can do this, too, if you use a self-directed retirement plan. You’ll become part of a growing class of individuals who control their retirement funds and invest in alternative assets to build wealth and diversify your portfolio.

4 Ways Real Estate in a Self-Directed IRA Earns Income

Building tax-sheltered retirement income with real estate in a self-directed IRA opens a considerable number of doors for investors. While the most common asset is an actual piece of property, there are a myriad of other holdings the average individual might not know about.

Investors who are familiar with the ins and outs of any strategy can put their knowledge to work and invest in those assets in an SDIRA to grow wealth for retirement in a few ways.

Property Appreciation

Typically, the value of a good piece of property appreciates over time. Your IRA can invest in different types of real estate (residential, commercial, improved and unimproved land) and hold on to it until the time is right to sell. Additionally, rehab and flip projects present a quick way to upgrade a house and sell it for a profit.

Because your IRA owns the asset, income from the sale is deposited directly into the IRA account and enjoys tax-sheltered status. This creates additional capital you can use to reinvest, make improvements on another asset owned by the IRA, or even take as a distribution if you’re of retirement age.

Rental Income

Rental property—single-family homes, multifamily units, or commercial property—can provide a steady stream of income and tax-sheltered growth in an IRA. You also capture a potential bonus of earning extra income by selling the property during a future peak in real estate price. Again, income is deposited into the IRA on a tax-sheltered basis. Since the IRA owns the property, all expenses must be paid from IRA funds (maintenance, upgrades, property management, etc.). Performing any work yourself is a prohibited transaction you must avoid to protect the tax-sheltered status of your IRA.

Private Mortgages

A private mortgage loan is another example of real estate in a self-directed IRA. While not a tangible asset like property, private mortgages present great potential investment returns. Your IRA extends loans to individuals who need funds to buy a home and earns income from interest and other loan terms. The property is typically assigned as collateral to back the loan. If the borrower defaults, your IRA takes possession of the house and can sell it to recoup the balance of the loan. As the IRA owner, you vet the borrower and determine the interest rate, term of the loan, payment schedule, etc.

Investing in Tax Liens and Deeds

Timely payment of property taxes is critical to the daily operations of governing municipalities. When homeowners and property owners fail to pay these taxes, the local government takes steps to collect the funds by selling tax lien certificates and tax deeds of the properties to the highest bidder. Investors (including IRAs) purchase tax liens and deeds and in turn become the collectors of these debts, gaining income most commonly by attaching interest rates to payments the property owner must make until the debt is paid in full.

Other examples of real estate in an IRA include:

• Rental property (houses, multifamily units, land)
• Single-family homes (developments, performing and nonperforming notes)
• Rehab-and-flips
• Multifamily property (duplexes and triplexes, condos and apartments)
• Commercial property (office buildings, retail outlets)
• Raw land, improved and unimproved land
• Foreign real estate (commercial and residential
• Private lending
• Construction loans
• Trust deeds
• Building bonds
• Real estate investment trusts (REITs)
• Multifamily syndications

How Does Real Estate in a Self-Directed IRA Work?

Real estate has historically proven itself as a viable long or short-term asset since property values have no correlation to the state of the stock market. As an alternative investment to traditional Wall Street offerings, real estate in a self-directed IRA enjoys the tax-sheltered status of your retirement plan along with some additional perks.  Of course, there are rules you must follow to preserve (or protect) the tax-advantaged status of your IRA.

Here are the basics:

1. Income—from rent payments and capital gains on the sale of the property—accrues in the account on a tax-free or tax-deferred basis.
2. You can invest using a real estate IRA LLC. Also called single-member LLCs and checkbook IRAs, these structures give you checkbook control over your IRA funds. This is popular strategy is used by those who like to invest quickly to grab that perfect property before someone else does.
3. All expenses incurred by real estate in an IRA must be paid with the IRA’s funds. Expenses include renovations on fixer-uppers, maintenance on rentals, fees for hiring a property manager, etc.
4. You can partner your IRA with your personal funds, with another person, entity, or IRA to acquire investment property. This makes it easy to invest with limited funds and to share the costs of any expenses incurred by the asset. Income is paid based on the percentage of ownership. Expenses are divvied up the same way.
5. Your retirement plan can borrow funds to purchase rental property using a non-recourse loan. The loan is in the IRA’s name, and you cannot personally guarantee it.
6. You are not allowed to receive personal benefits from the IRA (i.e., vacation in a rental property owned by your plan). Disqualified persons may not enjoy any benefits, either.
7. Prohibited transactions and dealings with disqualified persons can cause penalties, taxation, and even disqualification of your tax-sheltered account. Details can be found in IRC 4975.

Want More Information on Real Estate in an IRA?

Contact Larissa Greene with Advanta IRA if you have questions about this article or want to learn how you can buy real estate in your IRA She can be reached at 727.754.9963 or LGreene@AdvantaIRA.com.

Knowledge is power—and the more you learn how easy it is for you to take control of your investing decisions, the more empowered you’ll become in making that step to secure a successful retirement future. And as a leader in the self-directed IRA services industry, the team at Advanta IRA can help you throughout the investing process.