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Real estate IRA investing can be a surprisingly easy method for savvy investors to supercharge their retirement returns. Many are familiar with real estate investing outside of a tax-advantaged account. In many ways, the process of investing with such an account is quite similar. Most retirement investors don’t know this, partly because they are simply unaware but also because their custodians don’t allow it. NDTCO was founded as a result of our co-founders’ real estate IRA investments and from their desire to provide similar opportunities to others. Along the way NDTCO has helped thousands of clients hold real estate assets within IRAs, HSAs, Solo 401(k)s, and more.
Ready to invest in real estate with a self-directed IRA? Click here to open a new account today!
Why Invest Within a Tax-Advantaged Account?
A potential reason to invest in alternative assets with a self-directed account is compounding tax savings. Those already familiar with real estate investments often find they can utilize their expertise to increase returns in their tax-deferred accounts as well. Although investors may be required to pay a somewhat misunderstood tax known as unrelated business income tax (“UBIT”) in certain scenarios, the benefits of avoiding annual income taxes or capital gains taxes typically prove to be far more significant.
Real Estate IRA Investing, Step by Step
The overall process of locating an IRA investment property and navigating the negotiation, performing due diligence, and executing the closing phase is virtually identical to the real estate investment process that occurs outside of an IRA. Still, an IRA investor should be aware of seemingly small but important details, otherwise the closing could be delayed.
It all starts at the offer: Your initial offer/purchase contract should list the IRA as the buyer. If your purchase contract is written in your personal name, you’ll need to cancel the contract and start anew.
At NDTCO, your account’s name would be:
NDTCO, Trustee, FBO [your first & last name] [account type]
Example: NDTCO, Trustee, FBO John Doe Roth IRA
Note that “FBO” stands for “for benefit of”, indicating that NDTCO holds the asset for the benefit of your account. This does not mean NDTCO owns the asset; your account owns the asset while NDTCO simply serves as the account custodian.
Due diligence: Each investor starts with a varying degree of real estate investing experience and knowledge. Recognize this and perform your due diligence to make sure your investment property fits your retirement strategy. Determine your return-on-investment, risk, and liquidity needs and consider how these fit within your goals. With persistence, you will find a suitable property to meet your needs. Remember – NDTCO cannot give tax, legal, or investment advice, nor can we determine the suitability of your investment. Consult a qualified professional for advice if you’re unsure about how your prospective property meets these goals.
After the Close
Follow the IRS rules: To maintain your IRA’s tax-advantaged status you must follow the rules laid out in the Internal Revenue Code. Section (4975) covers the people or entities that your IRA cannot transact with. In brief, this means your IRA cannot buy property from, sell property to, or exchange property with a disqualified person. Examples of disqualified persons include yourself and your spouse, children, children’s spouses, parents, grandchildren, or any entity owned/controlled by a disqualified person.
A few other IRS rules to be aware of are:
- Only use IRA money to pay earnest money, option fees, or any other expense for an IRA-owned property.
- Do not put any “sweat equity” into IRA-owned property (e.g. painting, plumbing, electrical work, hardscaping, etc.).
- Disqualified persons cannot use the property or rent the property from the IRA (e.g. you cannot stay there, even for one night).
- Acquisition financing must be non-recourse (e.g. your IRA cannot guarantee loans used to purchase the property).
NDTCO is Here to Help
Working with your IRA custodian: The IRS requires IRA custodians to oversee the investment and ensure the rules are being followed. IRA custodians, such as NDTCO, therefore play a critical role in helping investors achieve a timely and IRS-compliant investment. However, each custodian has its own policies and procedures that must be followed for them to continue to hold your real estate assets. NDTCO has nearly two decades of experience with thousands of real estate transactions varying in nature, from standard rental property and fix & flips to raw land development, lease options, and seller-financed notes. Chances are that if you can do it outside of an IRA, you can probably do it within your IRA!
Don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal if you have questions about real estate IRA investing.
