Did you know you could buy real estate legally with your IRA? Shrewd investors have been doing it for years. With the stock market in turmoil many people would like to shift investment assets to real estate, and they would like to hold real estate in their IRAs to increase the amount earned, tax deferred.
Placing part of your IRA in real estate may make sense, especially if you have experience in investment property. But doing this the proper way is necessary if you want to avoid these dangerous traps
1. Self dealing. The Tax Court allows you to defer tax in your IRA in order to provide your retirement. If you take steps that can enrich your personally right now, you may have to pay a penalty or even have your IRA annulled.
2. Unavailability of leverage. Most IRA custodians don’t let you borrow money with your IRA assets. However, the biggest profits from investing in real estate comes when you make a down payment and use a mortgage for most of the purchase price. So, how do you dodge the trap? Use my plan:
You must first hold your IRA as a self directed. This is an informal term rather than one found in the Tax Code. It means that you, the IRA owner have greater control over your IRA than is typically the case. With more control, you can access a wider range of investments, such as private companies and real estate.
You must use an IRA custodian that is willing to let you hold real estate in your IRA. Once you have the custodian, you can transfer your IRA to an account there. The Limited Liability (LLC) structure is best used holding real estate in an IRA. An LLC can protect property owner from liabilities that arise from owning real estate. But an LLC can protect you from the self dealing when owing real estate in an IRA. Don’t use the Member Managed LLC. Instead, use the Manager managed LLC.
You can not move a property you already own into the IRA. That is considered self dealing. Instead, your IRA has to acquire the property from an unrelated party. Also, you can not buy a property from your IRA. Buy you can distribute real estate out of your IRA in the same way you would make any other retirement plan distribution. If it is from a tax deferred IRA, you will pay the tax; and if it is from a Roth IRA, you will avoid the tax.
As noted above most IRA custodians don’t let you borrow money with your IRA. To solve the leverage problem, the LLC borrows the money and the loan is secured by the property, not by the IRA. You can use money from your self directed IRA to fund your LLC. Then, the LLC can make a down payment on a property you have chosen.
Generally, your LLC will have to put up at lease 30% of the purchase price. Lenders may be willing to put up the remainder, when secured by the property. You are prohibited from directly buying, selling or renting to or from your IRA. Therefore, you can not put money down on a property from your personal account and then have your IRA involved in the deal. If any of your personal asses touch the deal, it is tainted for your IRA. You can not even personally guarantee the loan if your IRA is investing in the property.
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This publication is issued as a service to our clients and friends. This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for a way to save taxes and avoid the IRS, call me at (702) 642-8953 or write me at isueirs@aol.com. No Exceptions. No Conditions, No Time limit. No IRS.
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