Here are five things to keep in mind when considering investing in land or real estate through a self-directed IRA.
#1: It Takes Time: It’s advised devising a timeline based on the account-opening process, transferring or rollover of assets and finding the actual investment. It normally takes two to three weeks to open an account at a typical brokerage firm, and you’ll need to find a custodian who will hold real estate inside an IRA. The down payment must come from IRA funds, so rollovers may be required.
When a real estate investment is contracted, the IRA account holder reviews and signs the purchase agreement and then the custodian must approve it and release of funds to the title company. All of this takes time, so it’s imperative to learn as much as you can before jumping into a decision.
#2: You Cannot Take Advantage of IRA Investments until you Retire: You can’t use the fund to pay off your mortgage or live in or use the property you buy as an investment in the self-directed IRA.
You buy it because it is anticipated to appreciate in value, plain and simple. You also lose the depreciation tax deduction that you would otherwise receive on an investment property.
#3: Your Spouse, Immediate Families or Companies you Have a 50% Interest in Cannot be Involved: While it is possible for the property to be held as tenants in common, an IRA is an individual account—and you must avoid any conflicts of interest.
Self-dealing or enabling a transaction that is beneficial to you on the other end is strictly prohibited. You also cannot use the IRA as collateral for a loan; it should be treated like other retirement accounts.
#4: It’s a Lot of Work: While there are many highlights and potential benefits, many investors don’t fully appreciate or understand the reporting and administrative requirements involved in using a self-directed IRA to buy real estate. For example, the investor should not be doing the work on the property, especially because he can’t get reimbursed.
All expenses, maintenance, taxes and insurance are paid from the IRA. If there are association dues or golf memberships, those all must be withdrawn from the IRA. Finding tenants and contractors may take time, and every penny in and out must be approved by the custodian. In many instances land investment over an existing home is a better choice when purchasing with a self-directed IRA as no maintenance or dealing with tenants is required.
#5: All Income from the Property is Tax Deferred: That includes rental income and capital gains. If you plan to be in a lower tax bracket at retirement, this is quite beneficial. You can also make tax deductible contributions to the IRA.
To learn more about investing in land or real estate through a self-directed IRA visit http://www.gratiagroup.com or call a member of our land sales team at (239) 333-2221.