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Last week, we outlined 10 common Self-Directed IRA misconceptions. Number 6 on the list was the misconception that owning real estate in an IRA is illegal. As long as IRS rules are followed, you can definitely own real estate in a retirement account. Of course, having a custodian who specializes in self-directed accounts is key.
In today’s post, we take this a step further, reviewing three little-known facts about real estate investing in Self-Directed IRAs.
Real estate is one of the most popular assets held in Self-Directed IRAs. However, most IRA and qualified plan participants are still unaware they can hold real estate in a retirement plan. If you’re new to our site, this may even be the first time you’ve heard about this. Why are so many still unaware of this investing possibility?
There are several reasons, but discussing them all is a topic for another day. But one reason, according to the IRS’ IRA FAQs, is the following:
“IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”
So, you may not be able to hold real estate in an IRA at your local bank or trust company. But as a leading alternative asset custodian, Kingdom Trust handles these “administrative burdens” and permits real estate holdings in our accounts.
But even if you knew real estate is permitted in Self-Directed IRAs, you may not be aware of the following little-known facts:
Your IRA may partner with other IRAs or other investors.
Similar to buying fractional shares of certain investments, your IRA may also invest in a percentage of real property. For instance, your IRA may only have enough available cash to purchase 40% of commercial real estate property. The account may partner with another IRA or other investors to purchase the remaining 60% balance. Note all income and expenses must come to and be paid by your IRA according to your ownership percentage. If this method doesn’t appeal to you, then perhaps you can use the method discussed in the next little-known fact.
Your IRA may secure a loan to purchase a real estate asset.
If you don’t have the available funds to purchase 100% of an asset, your IRA may be able to secure what’s called a non-recourse loan. The IRA account holder is not personally liable for repayment of a non-recourse loan. In the event of loan default/foreclosure, the lender must only look to the property as the sole source of repayment and cannot pursue other IRA assets or assets owned directly by the IRA account holder. Note that not all lenders make this type of loan, and those that do often require significant down payment.
Your IRA does not have to sell the entire property in order to take a distribution.
While you may elect to sell a real estate asset for distribution purposes, many investors don’t realize you can distribute just a percentage of the asset instead. This is often how real estate investors will fulfill IRA required minimum distributions (RMDs). The percentage distributed must be re-registered to reflect the new percentage of ownership held by the IRA holder. Keep in mind that only after you’ve completely distributed the asset may you use the property for personal reasons.
Regardless of how you choose to purchase a property or distribute it, you should consult with your team of professionals on how best to proceed. Your team should outline distribution requirements, prohibited transactions rules and special tax circumstances or burdens related to income-producing assets and debt-financed investments. Investing and account-related decisions should be made only after significant research and due diligence.
Have you found commercial space, farmland or rental property you want to hold in an IRA? Interested in knowing more about the process of owning real estate via a retirement account? Download our Real Estate IRA eBook or contact us today to learn more!