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Real estate is widely considered to be among the top alternative investments. Many investors transfer or roll over funds into self-directed accounts because their current custodian either won’t allow real estate holdings or because they have little experience with the asset when held inside tax-advantaged accounts. Perhaps you’re wondering if owning real estate inside a retirement account is right for you.
If you decide to invest in real estate with self-directed retirement funds, seek a custodian with the experience and solutions available to provide the best service before, during and after the investment process. Founded by a successful real estate developer and investor, Kingdom Trust is well-versed in real estate investments.
Below are five common questions to ask when considering real estate investments.
What due diligence should I perform?
While custodians may provide general information on IRS guidelines and walk you through processes, timelines, and potential tax implications of an investment, keep in mind we’re not tax professionals or investment advisors. Does the investment align with your long-term goals? Do you risk creating a prohibited transaction? Should you choose a Traditional or a Roth account? These due diligence questions are among several to ask your team of professionals.
Is investment income really sheltered?
By investing in real estate via a Self-Directed IRA or other retirement plan, returns can be sheltered from taxes. Whether tax-deferred (Traditional) or tax-free (Roth), the profit won’t be as devastated by capital gains taxes.
May I manage the property myself?
Technically, this is allowed, but only when it comes to making decisions about the property. Since you may not personally benefit from a property-related transaction, any repairs, improvements and so on must be performed by a non-disqualified person or entity. All expenses must be paid by the retirement account, and all income must go into the IRA (both proportionate to the account’s ownership percentage). It’s best to have a non-disqualified third party manage the property.
May I use the property myself?
Absolutely not. According to 26 U.S. Code § 4975, this would be considered a prohibited transaction. More specifically, this would be an indirect furnishing of goods, services or facilities between the IRA and a disqualified person. As the account holder, you’re considered a plan fiduciary and, thus, a disqualified person. IRA assets are to be used for investment purposes only.
What if I don’t have enough funds to purchase the property in full?
One of the beauties of self-directed investing is the numerous options available to you. Your IRA isn’t required to purchase an entire property outright. For instance, you could finance through a non-recourse loan, or your IRA may partner with another entity or entities. You could also choose to invest in real estate crowdfunding opportunities and own a smaller percentage of a property.
For more information on real estate investing, download our complimentary eBook. Also, check out our recent article on three little-known facts about real estate investing. Perform the research and ask the right questions to ensure you make the right choice for your investing goals.
Of course, finding a custodian providing impeccable service and solutions is key to ensuring your investment is made without a hitch. The experienced Kingdom Trust team is here to help you along the way! Simply contact us or schedule a call today for assistance.