Using your Self-Directed IRA to Invest in Land and Real Estate

Self-Directed-IRA

When using a Self-Directed IRA for buying investment land there are a number of ways you can structure the transaction:

  1. Use your Self-Directed IRA funds to make 100% of the investment

If you have enough funds in your Self-Directed IRA to cover the entire land investment purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Self-Directed IRA.  All ongoing expenses relating to the real estate investment must be paid out of your Self-Directed IRA bank account.  In addition, all income or gains relating to your real estate investment must be returned to your Self-Directed IRA bank account.

  1. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Self-Directed IRA to make a real estate purchase outright, your Self-Directed IRA can purchase an interest in the property along with a family member (non-disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague.  The investment would not be made into an entity owned by the IRA owner, but instead would be invested directly into the property.

For example, your Self-Directed IRA could partner with a family member (non disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague to purchase a piece of property for $150,000.  Your Self-Directed IRA could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property.  Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property.  Based on the above example, for a $2,000 property tax bill, the Self-Directed IRA would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

  1. Borrow Money for your Self-Directed IRA

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Self-Directed IRA.  However, two important points must be considered when selecting this option:

Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage).  However, if the IRA purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction.  A non-recourse loan only uses the property for collateral.  In the event of default, the lender can collect only the property and cannot go after the IRA itself.

Tax is due on profits from leveraged real estate – Pursuant to Code Section 514, if your Self-Directed IRA uses non-recourse debt financing (i.e., a loan) on a real estate investment, some portion of each item of gross income from the property are subject to Unrelated Business Income Tax (UBTI).  “Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income).  In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold).  There are some important exceptions from UBTI: those exclusions relate to the central importance of investment in real estate – dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI.  Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

For example, if the average acquisition indebtedness is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI.

To learn more about land investment and purchasing land through a Self-Directed IRA, contact a member of the 9 Core Realty Team at (239) 333-2221.

Calling All British Investors! Invest in United States Land Parcels Through a Self Invested Personal Pension (SIPP)!

The United States is featuring many lucrative land investment offers to foreign investors and British land investors are snapping up many ideal land parcels through self invested personal pension (SIPP) purchases.  A SIPP is a personal pension option that allows the contributor to decide exactly where their investments are placed.  Gone are the days of a broker or financial advisor deciding where your money is invested (usually in equities and funds).  SIPP’s put the individual investor in the driver’s seat as far as their pension is concerned while being entitled to complete and full tax relief.  Additional benefits of purchasing land with a SIPP include:

  • Tax relief on contributions up to 40% (for cash investments only)
  • No taxed dividends
  • No UK Capital Gains Tax
  • Inheritance tax benefits are possible
  • Almost all types of pensions are accepted for SIPP
  • All legal expenses associated with land purchase can be covered under a SIPP

Keep in mind that to use your SIPP to purchase property for sale in the United States you must work with an approved SIPP provider.  Your financial advisor or institution will be able to help you make an informed decision when locating a provider.  Be sure to tell your advisor that you plan to use your SIPP for land investment purchases as some SIPP providers specialize in only stocks, shares and equities.  To speak to a US land investment specialist for further details about SIPP land purchases contact 9corerealty.com at (239) 333-2221.

Buying Land through a Self-Directed IRA

Difficult economic times have spurred non-traditional methods to save for retirement, and many people are using a self-directed IRA to purchase non-traded assets like land and real estate.

A self-directed IRA is the lesser known of IRA options and requires account owners to make active real estate investments or other types of investments on behalf of the plan.  To open one, an owner must hire a trustee or custodian to hold the IRA assets and be responsible for administering the account and filing required documents with the IRS.

Similar to other IRA accounts, owners can invest in stocks, bonds and mutual funds, but they can also invest in things that investment houses like Charles Schwabb, Fidelity and Vanguard don’t offer, like small businesses, boat slips, storage units, parking lots, land and homes.

Investors may still be leery of investing in land for sale but it can be a good long-term investment and generate higher returns than the stock market.

Investing in real-estate also provides a lot of options. Owning real estate can be very rewarding, especially for people who are investing in what they know.  But the process of using a self-directed IRA to jump into investing in real estate requires preparation and caution.  The move can make sense in certain circumstances, but only when the investor fully understands both the positives and negatives and the requirements involved.

Interested investors should seek legal advice, as well as input from an accountant and real estate agent for a well-rounded picture. They should also be familiar with the rules for the type of IRA they’re using. Whether it is a Simple IRA, Roth or Traditional IRA, SEP or Solo 401(k), contribution limits still apply, and there are penalties for early withdrawals.

For a no hassle consultation regarding purchasing land through a self-directed IRA and to learn if this land purchase method can work for you contact a member of our 9 Core Realty team at (239) 333-2221.

Tips for Buying Land through a Self-Directed IRA

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.