Real estate investing within an IRA can be a surprisingly easy method for savvy investors to supercharge their retirement returns. Many families are familiar with real estate investing outside of a tax-advantaged account, and in many ways, the process of investing with such an account is quite similar. Most retirement investors do not know this, partly because they are unaware that an IRA can invest in real estate, and also because many IRA providers do not allow it regardless of investor knowledge. New Direction Trust Company (“NDTCO”) was founded over 16 years ago as a direct result of our co-founders' real estate IRA investments and from their desire to offer a similar opportunity to others. Along the way NDTCO has helped thousands of clients hold real estate assets within IRAs, HSAs, Solo 401(k)s, and more.
Perhaps the best reason to invest in alternative assets within a tax-advantaged account is to take advantage of compounding tax savings. Investors who are already knowledgeable and confident in making real estate investments often find they can utilize their expertise to significantly 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.
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. Preparing a contract in this manner for an asset that's intended for your IRA is a prohibited transaction.
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, as trustee, 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. However, we strongly recommend you consult a tax, legal, or real estate 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:
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 asset. NDTCO has over 16 years 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!