If the option of using tax-deferred funds to purchase property sounds appealing, you’ll need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA , and a Simplified Employee Pension plan, or SEP-IRA.
There are three basic ways to purchase real estate with a self directed IRA:
- Purchase with cash
- Partner with family,friend, or business associate
- Borrow money for investment
Imagine not having to pay taxes right away—or ever—on your real estate deals. Instead of paying 25%, or 30%, or even 50% of your profits to the government in taxes, you keep it.
Additional advantages of the real estate IRAs include:
- The power of compound interest
- A reduction of taxable income
- Asset protection
- Estate planning
Seven Things You MUST Know about Investing in Real Estate with a Self Directed IRA
1) Your IRA Cannot Purchase Property Owned by You or a Disqualified Person:
2) You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRA:
3) Real Estate IRA Investments Are Uniquely Titled:
4) Real Estate in an IRA Can be Purchased without 100% Funding from Your IRA:
5) IRA Investments that Use Financing Must Pay UBIT
6) Real Estate IRA Expenses Must Be Paid from Your IRA:
7) Real Estate IRA Income Must Return to Your IRA:
Source: Equity Trust Company, Sterling Trust Company