IRAs offer way to invest in real estate

IRAs offer way to invest in real estate
By Gary Brey, Broker, Sarasota, Florida

Nothing can make your retirement account grow the way Real State Investments can. A long term, stable, steady growth… sounds like a winner for me, but guess what? It can even be purchased with “Tax Differed” dollars! Yes, you can invest your retirement account into Real Estate.

Traditional IRA’s custodians like most banks and brokerage firms, only allow you to work with traditional financial instruments like mutual funds, annuities, certificates of deposit and stocks; finding a custodian that allows you to invest in real estate will be the task. Allowed by section 408 of the Internal Revenue Code, one can purchase commercial property, condominiums, trust deeds, land and residential property among others, with funds from several common forms of IRA’s including a Roth IRA, Traditional IRAs and Simplified Employee Pension Plans commonly known as SEPA-IRA.

The owner of the IRA account cannot be the custodian of the account; so one should find a custodian knowledgeable in the area, since they will hold the title to the real estate, start a search under “Real Estate IRA” or “Self-Directed IRA”. The custodian should just holder the titles and usually do not service the account, like collect rents, take care of repairs and other similar things, he will charge a service fee, but in addition you, must have someone servicing the properties. Some will do both and, of course, you will be charge accordingly. Whichever way you decide to go, or with whom, just make sure rents are paid into the IRA and taxes are paid by the IRA account. Like everyone says, do your homework and know what you are getting into.

Most custodians allow the purchase of residential property, commercial buildings and even vacant land. These purchases can be made in conjunction with family member, partners or friends in other words you will be buying a portion of the property. According to the rules set by IRS, you cannot occupy the property not even as a vacation home, nor can your business lease an office in the commercial building owned by your IRA. The rule restricts the use of the property and to ignore the rule will cost you plenty in taxes and penalties. The property your custodian will buy with your IRA cannot be property previously owned by your, your wife or children; this is mentioned in section 4975 of the Internal Revenue Code, the “Lineal Descent” will be disqualified.

If you are adding some other funds so the custodian can purchase the property be sure to include that amount in the total due so the title company will reimburse after the closing.
Following the code the title of the property you are buying will show the custodian’s name and your IRA’s.

All income generated from the property must be deposited in the IRA account, this income will pay for all maintenance, repairs, taxes and insurance that are needed to operate de business, all those payment should be drawn from the same IRA account. A property held by you IRA custodian can be sold as long as the proceeds go back to the same account and is not sold to a lineal descent. One can continue making regular contributions into a traditional IRA account or Roth IRA account of up to 3,000 per year or 3,500 if you are age 50 or over.

At age 59 and a half you can have the custodian do a distribution and receive the property then you will have to pay taxes over the current market value of the property. This is applicable to traditional IRA accounts. However, with a Roth IRA account you will not owe a penny, very attractive if you consider that the property will appreciate with time.

Funds from most IRAs are allowed to be invested in Real Estate there are some additional benefits in addition to yield great returns:

A Roth IRA: Will give you no deductions on your current contributions, but since taxes were already taken, your withdrawals are non taxable. So if you are planning to hold Real Estate purchased from this type of retirement account know that the biggest benefit will come from long term purchases in which the property will appreciate.

A SEP IRA: This type of retirement account is designed for small businesses and self employed people. Allows for contributions up to 40,000 per year or 25% of your income which ever is smaller. This option allows for larger contributions and rapid growth to build up a fund that can afford to invest in real estate. Distributions, in this case, are taxed as regular income.

Traditional IRA: Allows for deductions directly from your untaxed income up to 3,000 per year. Distributions are considered an income hence is taxable.

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