Self-Directed IRA Growing in Popularity
If you are contemplating adding real estate to your investment portfolio you may want to consider a Self-Directed IRA as a possible financing option. With the recent downturn in the real estate market, values for real estate in some markets have plummeted by as much as 50%, investors are looking at the use of self directed IRAs for a source of financing.
Basics of the Self-Directed IRA
In addition to real estate, a Self-Directed IRA can hold secured and unsecured notes, trust deeds, limited partnerships, private stock and other nontraditional investments. You can also use your Self-Directed IRA to buy a future retirement home, however you can’t live in the home until you retire. You also cannot put a property that you currently own into your Self-Directed IRA nor can your business lease space in property held in your IRA.
An IRS approved Self-Directed IRA Custodian is required to manage financial transactions. Not all custodians offer Self-Directed accounts and may limit your investment choices. The IRA Custodian will purchase the property and ensure title is in the name of the IRA account or LLC and will also handle all of the required IRS reporting and provide quarterly financial statements to the account owner.
Self-Directed IRA Prohibited Transactions
IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:
- Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
- Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
- Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
- Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
All income and expenses such as insurance, repairs, and taxes will be paid from funds in your Self-Directed IRA, so you will need to have funds available in your account.