By David Cole
The author has permitted the reprinting and redistribution of this article.
Yes, it’s true you can use your IRA to invest into all types of real estate. All the real estate profits are realized by your tax deferred IRA.
There are no time limits to contend with like you would have in a 1031 exchange. Once you sell a property you can just park the bucks in a money market account or some other type of safe instrument and take your time to find the next deal.
Your IRA has some very strict rules that govern how you can use it and with whom
For example your IRA cannot have anything to do with “related parties” which would be your spouse, son, daughter, mother or father. Watch out! Your brother and sister are RELATED to you for Roth IRA purposes.
Your IRA cannot loan you money nor can you loan your IRA money for an investment or operating expenses.
You cannot use any IRA investment for personal benefit. So, that cabin in the mountains that your IRA owns and rents out, you cannot use it during the off season.
Be very careful you follow ALL of the rules governing your IRA because with one misstep your IRA could be disqualified and that means all taxes, interest and penalties would be due.
Your IRA requires a special type of mortgage called non-recourse. This means that you cannot pledge any of your personal income or assets to guarantee the mortgage. The property must be the sole and exclusive collateral. Oh, and a seller carry back note does not get around this issue.
If you ignore this and sign as the guarantor, should this be discovered by the tax man then your IRA is dead on arrival.
Now here is the biggest, bite you in the backside, didn’t see it coming surprise! When your IRA sells a property with non-recourse financing in place then this results in Debt Finance Income (DFI) which triggers a nasty tax bite called Unrelated Business Income Tax (UBIT).
Huh This means that whatever percentage of profits the mortgage represents that much of the profit will be subject to taxation of up to 35% and your IRA will have to pay that tax for the year the profits were realized.
Now that you are thoroughly discouraged there is a solution that makes many of these problems disappear like a morning mist on a hot summer day. Just a couple of years ago Congress approved this new plan which is an awesome gift for real estate investors.
What is it A self administrated Defined Contribution plan…
This plan allows you to combine ALL of your retirement monies with your spouse into a single specialized checking account that you control 100%.
This plan allows you to loan yourself and your spouse up to $50,000 each for any purpose whatsoever. Many clients are using this feature to fund more foreclosures.
This plan allows you to invest your personal monies into the same property. Now you can achieve cash flow while building your nest egg!
Once you compare this real estate friendly retirement plan to your old, restrictive IRA I have no doubt this will become your real estate retirement plan of choice.
As a real estate investor if you are serious about applying your experience and skills to building massive wealth in your retirement plan, you need to work with a professional who can structure not only a real estate friendly Defined Contribution but a plan that has the right features for your situation.
David Cole is President of Financial Design Group, LLC and for the last fifteen years has advised tax professionals, Realtors and investors on the pros and cons of using retirement monies to invest into real estate. You can visit his website at httpwww.personalinvestorshield.com
If you would like to take advantage of the market and learn how to invest in real estate and you are local to the Dallas Fort Worth area, I know a really great teacher and mentor here in Arlington Texas. Please take a look at his web site: DennisJHenson.com, Dennis has a great Mentoring and training program, I know because I am one of his former students. I learned a lot from his one on one teaching technique. – Michael Harman 817-457-7572 firstname.lastname@example.org