Can my self-directed IRA purchase real estate?
Yes, your self-directed IRA can purchase real estate. One of the main advantages of a real estate IRA is that you can apply your knowledge and invest in assets like raw land, single family homes, apartments and much more. However, please be aware of the following limitations that are considered prohibited transactions:
- You may not purchase a property or interest in a property which is presently owned by a disqualified person (this includes yourself, spouse, ancestor, lineal descendant and any spouse of lineal descendant).
- Your self-directed IRA can't purchase real estate that you own presently.
- Your self-directed IRA may not purchase real estate owned by your corporation, partnership or LLC.
- You may not live or work in a property that your self-directed IRA owns such as your personal residence, retirement home or office.
- You or disqualified individuals cannot perform work on the property. All work must be done by a third party.
How do I title my investment?
When investing in residential real estate with your IRA, you must ensure the correct titling of the supporting documentation. The correct titling is: Equity Trust Company Custodian FBO Account Name/Account Number IRA. If not titled correctly, the processing of your investment could be delayed.
I plan on purchasing a property with my self-directed IRA that will generate rental income. What happens with the rental income and what happens when I sell the property?
All income generated by a property or the sale of a property owned by your IRA must return to your IRA to retain the tax-deferred or tax-free status of the investment.
Rental payments are sent to Equity Trust Company for the benefit of your IRA. The checks or money orders are titled, "Equity Trust Company Custodian FBO Account Name/Account Number IRA." Once received, the checks or money orders are deposited into your account. All checks must be sent directly to Equity Trust Company and include a payment coupon.
To sell a property, you need to request the original documents from Equity Trust. This is done by completing a Sale Direction of Investment form. Once the property has been sold, all funds from the sale must be sent directly to Equity Trust for the benefit of your IRA. This ensures maintenance of the tax-free/deferred environment. These funds will need to be sent with a payment coupon stating what asset the payoff is for.
What if I don't have sufficient funds in my self-directed IRA to purchase the property?
Generally, you have two options if you can't purchase a property outright with your self-directed IRA.
- First, you can use debt-financing in the form of a non-recourse loan, which means if your IRA fails to make payments, the lending institution can only come after the property, not the IRA. Please note: With debt financing your IRA may incur unrelated business income tax (UBIT).
- The second possibility is purchasing an undivided (or proportionate) interest in the property.
May I use funds from my self-directed IRA to renovate property and sell it at a higher price?
Yes, you can use funds from your self-directed IRA to renovate property and sell it at a higher price. However, your IRA must pay all expenses associated with a property that it owns, including the renovation of the property. Furthermore, all proceeds associated with the sale of your IRA's investment in a renovated property must be sent to Equity TRust, for the benefit of your self-directed IRA. Note: If your IRA owns a percentage of the property, all the income and expenses are split proportionately (e.g. If your IRA owns 50% of the property, it receives 505 of the revnue and pays 50% of the expenses).
What's Next?
Keep in mind that you need to keep your personal funds separate from your IRA investment, whether depositing funds for paying expenses.
All income must be submitted with a deposit coupon. In addition, a Bill Pay DOI, Recurring Bill Pay DOI or eVANTAGE Bill Pay Wizard must be used to pay expenses related to your IRA investments.
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Frequently Asked Questions About IRA Investing
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